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PART C: Information on & Around

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  • RTI and Consumer Protection Act:
The Pune District Consumer Disputes Redressal Forum (Consumer Court) has ordered an educational institution to pay compensation to an RTI applicant, a former employee of the institute, for delay in providing him information he had sought to buttress a case he had filed in the Bombay High Court.

The consumer forum ordered the Information Officer and the principal of Deccan Education Society’s Technical Institute to pay Rs.15,000 to Haribhau Kakade for not providing the information despite a state information commission order to do so. The institute argued that Kakade was not a ‘consumer’ as per the definition in the Consumer Protection Act. The Court panel of president of the forum Anjali Deshmukh and member S. K. Kapse disagreed and relied on a National Consumer Rights Commission order that stated, “In our view, therefore the State Commission was wrong while holding that once the complainant had availed the remedy against which appeal was provided, he could not maintain a complaint under the Consumer Protection Act.” The Consumer Court stated that although it cannot direct the institute to make the documents available to Kakade, it can order the institute to pay a compensation for mental and physical agony faced by him. The Court ordered the institute to pay Rs. 15,000 as compensation and Rs.1,000 as litigation cost. (As reported on 9-12-2011 in Indian Express)

  • MMRDA for furnishing certain information
Information comes at a price, but Thane resident Omprakash Sharma learnt that the cost could be prohibitive when the information concerns public issues and is to be given by a public body like the Mumbai Metropolitan Region Development Authority (MMRDA).

The state-run agency has told Sharma to pay Rs. 50,000 for copies of a study report on transportation strategies in Thane and Raigad districts.

The Right to Information (RTI) Act activist had on November 14 filed an application with the MMRDA, inquiring if the agency had conducted any surveys on the monorail or metro in the Mumbai Metropolitan Region (MMR) area. Sharma offered to pay for the study report.

MMRDA promptly replied to the query on November 26, stating that a comprehensive transportation study for the region was carried out by the agency along with M/s. Lea Associates, and the study report was ready by 2008. Another report, on the proposed master plan for a monorail in Thane and Raigad, was also prepared and is with the MMRDA.

However, Sharma was asked to pay up Rs.50,000 for securing these reports as they are said to be ‘priced reports’. “It shows how innovative they could be in keeping away citizens and activists who seek information using the RTI Act”, Sharma said.

He added that the report is now MMRDA property and ideally it should follow the RTI Rules, which state that the information seeker be charged Rs.2 for every copy which is photocopied.

“Alternatively, the agency could charge me Rs.50 for transmitting the report on a floppy or disc” Sharma said.

  • Statement on RTI in Rajya Sabha:

Minister of personnel, public grievances and pensions, V. Narayanasamy replied in the affirmative on a query in the Rajya Sabha regarding concerns raised by Ministers on the RTI Act affecting the Government’s functioning.

When asked about bureaucrats expressing apprehension about putting their view on controversial issues because of the Act, the Minister said:

“Some concerns have been expressed that the improper use of RTI Act and indiscriminate and impracticable demands for disclosure of sundry information unrelated to transparency and accountability in the functioning of public authorities may adversely affect the efficiency of administration.”

On a separate question, he said the Central Information Commission has a pendency of 20,232 cases as on 1st September.

  • Non-refund of deposits by the college:

In the elation of securing admission to a college of their choice, students often forget to check that the miscellaneous fees and deposits paid to the institution are actually refundable. These deposits are taken by the institute as cover in the event of any breakages or damage to the facility caused by the student. And these deposits are refundable after completion of the course, however a majority of students are unware that they are entitled to the refund. A former student of Ramniranjan Jhunjunwala (RJ) College in Ghatkoper approached the management to claim the refundable deposit. Surprisingly, his request to the college administrators was met with uncooperativeness. Fed up with the tactics of management, the ex-student who was made to run from pillar to post to recover his security deposit exposed the college through an RTI query.

In August this year, Singh sought information through an RTI, querying why the management is not refunding the student’s money. But the management refrained from giving him a reply. On 1st, October, Singh then appealed to a higher authority in the college. A week later, the college replied that the management had refunded money to all those students, who have asked for a refund. The authorities also presented a list of 14,000 students who had paid deposits to the college. However, more than 30% of the students did not receive their dues, which means that the college had pocketed approximately Rs.45 lakh in the last 10 years.

“It’s shocking and shameful for our educational system that the college is not interested in refunding the money. The college should be investigated and action should be taken against those guilty of misappropriation,” said Singh.

Following the RTI revelation, on 23rd November, Singh wrote (copy with MID DAY) to the Education Minister, State Education Minister, Governor and the Vice-Chancellor of Mumbai University to look into the matter.

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PART B: RTI act , 2005

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Confidentially can’t hide Information: SC strengthening the arms of the Right to Information Act in a manner that thwarts the Government’s procedural antics to stall information regarding corruption and human rights violations by investigation agencies under the garb of confidentiality, the Supreme Court has ruled that a Notification issued by a State for that purpose in mind can’t be made effective from retrospective date.

In a significant judgment on Monday, the Apex Court held that the Notifications under the RTI Act cannot apply retrospectively. It means, information in response to an RTI query can’t be denied merely because a Notification has been issued after the date of application.

The right of an aggrieved applicant must be decided on the basis of the law as it stood on the date when the request is made. “Such a right cannot be defeated on the basis of a Notification if issued subsequently at a time when the controversy about the RTI is pending before the Court,” a Bench of Justices Asok Kumar Ganguly and Gyan Sudha Misra ruled while disposing of an appeal filed by a resident of Manipur, Wahangbam Joykumar, who had moved the State in February, 2007 under RTI seeking information regarding the magisterial enquiries initiated by the State from 1980 to 2006.

The Government denied this information on the basis of Notification issued in 2007.

Allowing Joykumar’s appeal, the Bench asked him to seek the requisite information now as it directed the State to provide him the information.

Stressing the importance of the RTI Act, the Apex Court said its preamble would show that it “is based on the concept of an open society. Way back in 1975, the Apex Court had underscored the need of an ‘open government’ and observed that “the people of this country have a right to know every public act, everything, that is done in a public way, by their public functionaries”.

It had also said that people are entitled to know the particulars of every public transaction in all its bearing. The right to know is “derived from the concept of freedom of speech though not absolute, is a factor which should make one wary, when secrecy is claimed for transaction which can rate, have no repercussion on public security”.

It also warned saying that “to cover with veil of secrecy, the common routine business, is not in the interest of public. Such secrecy can seldom be legitimately desired”.

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Ethics and u

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Dear friends,

I hope you did not read my last month’s article. If you have read it, please try to forget it. Henceforth, we are going to listen to the dialogue between CA — Arjuna and Bhagawan Shrikrishna on the Code of Ethics (COE) of our Institute of Chartered Accountants of India — (ICAI).

Is it a coincidence that our ICAI Head Office is situated on ‘Indraprastha Marg’ — the capital of Pandavas? Anyway, CA Arjuna and Shrikrishna are present on the battlefield. War is yet to commence!

What a great idea! — Even the wars in those times were fought by following the rules of ethics! — Start at sunrise, close at sunset, not to harm women and children, not to attack anyone who is without a weapon; and above all, seek blessings from seniors even from the enemy side! — Poetic indeed — but at that time, a reality.

The dialogue begins: CA Arjuna

(A) — Hell with this profession! And that meaningless Code of Ethics (COE)! Lord Shrikrishna

(S) — What happened? Why are you so upset?

A — Last time, I was not willing to fight. You pushed me into the war. But then this COE ties my hands. I can’t freely accept audits, I cannot advertise, I cannot do any other thing! How can I fight now?

S — Who says? Have you read COE?

A — Yes. Of course! I read it 20 years ago for my exam.

S — Oh! You still remember it?

A — Not fully. I only remember that while auditing, I have to obtain an NOC, and I cannot advertise.

S — Only that much? Then why are you making such a fuss of it? Only a couple of restrictions!

A — But nowadays many of my friends are receiving love-letters from the Institute.

S — Do you remember, at that time it was called Code of Conduct; and now it is Code of Ethics?

A — The same nonsense. Only the name has changed. Unnecessary burden! Times are changing so fast — and they are sticking to those old so-called ethics!

S — Are you aware your CA Act of 1949 was amended in 2006?

A — What difference does it make to me? We elect the Council members and they harass us. I hate going for voting.

S — But do you know what the motto of the Institute is? What a CA really stands for?

A — Don’t tell me that. There is an eagle there and something scribbled in Sanskrit. Who cares to know it!

S — It is ‘Ya Esha Supteshu Jagarti’ — He who is awake when the others are asleep.

A — Yes. We are slogging round the clock, and our clients are relaxing and enjoying. Very apt motto! No wonder, I am suffering from insomnia! And on top of it this burden of Ethics.

S — No dear. You are in the slumber — only playing with numbers. You have forgotten your role. That’s what also happened in Mahabharata war. Ethics is not your burden. It is your shield. That is why you Pandavas succeeded.

A — Ah! Don’t give me the sermon. How can the restrictions imposed on me become my shield? Who will remember all those rules of ethics? Such a long list of dozens of items!

S — No. You are mistaken. Really speaking there are only 3 rules, which your Guru told you when you completed your education.

A — Yes. Something he told from Taittireeya Upanishad. S — Satyam Vada — Always speak the truth.
— Dharmam Chara — Follow the Religion — that means not the worship — or pooja path — But your duties. That time, duties as a Kshatriya (warrior); now as a CA — professional. — And third — Swadhyayat Ma Viramah — Never give up studies.

A — I know. That is that CPE! That is the only place where I can sleep in the auditorium.

S — Why? — Do you attend it or send your proxy?

A — But then, in that war, you gave us some ‘practical tips’ to circumvent the truth. Why these double standards?

S — No. That was not bypassing the truth; but temporarily masking it — Eventually to uphold the Truth — and Dharma.

A — I am again confused. Next time, explain to me all those nasty restrictions one by one — and tell me how it is a shield. Let us take a break. Om Shanti.

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FROM THE PRESIDENT

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The wait for Sachin’s elusive hundred continues, the one for the Lokpal Law is hopefully over. After a delay of more than four decades the Lokpal Bill has been passed by the Lok Sabha. For close to the past one year this subject was the matter of debate and discussion among all sections of the public. The bill in the form that it has been passed may not satisfy all but I believe that it is a good beginning. Law making is a process and one cannot wait for the “perfect” law for which hardly exists. This sentiment was echoed by the Finance Minister as he wound up the debate on the Bill before the vote thereon. The bill has still to pass through the Rajya Sabha but one hopes that it will do so. What was heartening to note was that the government accepted some of the suggestions made.

What one needs is a proper implementation and enforcement of this Lokpal legislation. The challenge before the leaders of the movement against corruption, is to keep up the pressure to ensure that the administrative mechanism for the Lokpal is set up early. Let us hope that the government acts proactively on this issue.

The last two months of 2011, saw the government awakening from the slumber that it was in. The FDI in retail had to be kept in abeyance due to lack of support from the allies in the UPA, but I think the policy will be introduced in the near future. For some other policy initiatives one may have to wait for the forthcoming assembly elections to end.

Apart from the Lokpal bill, two other important pieces of legislation are pending approval of Parliament. These are the Companies Bill 2011 and the Direct Tax Code. Out of them the Companies Bill was introduced and has been referred to the select committee. As far as the Direct Tax Code is concerned the report of the committee has yet to be received after which it is hoped that the suggested amendments will be made in the bill and the same will may be discussed in the budget session.

The year 2012 will probably see the enactment of these two laws both of which are of great importance to our profession. The Direct Tax Code has already been sufficiently debated and deliberated upon. One now awaits its passage through parliament. The Companies Bill have a significant number of changes as compared to the Companies Act 1956. Many of these have already been debated and discussed and the deliberations will continue for a long time to come.

The bill provides for a number of changes like rotation of auditors in regard to a certain class of companies, the prohibition for a statutory auditor to render other services to the auditee etc. There could be a number of views on these proposals. However, I wish to draw attention to the two most significant changes for auditors. The first is the change the role of the National Advisory Committee on accounting standards (NACAS) to National Financial Reporting Authority (NFRA). This authority will now have the power to investigate cases of professional misconduct. This virtually takes away the disciplinary mechanism from the Institute of Chartered Accountants of India (ICAI). One wonders whether such a change is advisable. There is no denying the fact that there is a perception among the public that the profession is soft on its members. There could be two views in that regard as well, but to set up another forum is hardly the solution. The second most important proposal is the duty cast on the auditor to report fraud to the Central Government. Undoubtedly the proposal uses the words “in the course of performance of his duties as an auditor” in the context of such reporting, but once the proposal becomes law it may mark a shift in the classical role of an auditor. I am sure that the ICAI will make the necessary representation but other stakeholders must also make their views known. Let us hope that the representations of all stakeholders concerned will be duly considered by the Parliament when the Companies Bill and the Direct Tax Code bill ultimately become law.

As I conclude this communication, I am reminded of the stories that were doing the rounds a few days ago that the world will come to an end in 2012. One needs to ignore all such “prophecies”. All prophets have also said that India is on its way to become a super power. But merely believing in prophecies will take us nowhere. If all of us have self belief, and work hard towards our goals, the coming year will be joyful and prosperous for us and our country. Let us hold hands, recite our century old national anthem and be proud to be Indians!

Leaders are more powerful role models; When they learn than when they teach..

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PART C: Information on & Around

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Anna Hazare’s event at MMRDA ground, Mumbai by ‘India against Corruption’ (IAC)

IAC could not rent out the ground as it is not a registered trust. It then rented through Arvind Kejriwal’s NGO. Now through RTI query comes to light that MMRDA battled no similar compunctions in handing out discounts to the city Congress committee, also an unregistered body. In an RTI reply to Mumbai-based businessman Viren Shah, the MMRDA admits that in 2009, the Mumbai Regional Congress Committee (MRCC) was given concessions to hold political rallies on MMRDA ground twice. State BJP President Sudhir Mungantiwar said, “This is favouritism. Just because the Congress is the ruling party, doesn’t mean it can use the government machinery to favour its own, and that too during elections. If the Congress is given a concession, other parties should also be shown such considerations.”

  • RTI query by 10-year-old girl

Aishwarya Parashar of Lucknow stumped PMO officials with her query on when and by what orders was the title of ‘Father of the Nation’ conferred on Mahatma Gandhi. Asked what prompted her to file the RTI application on Gandhi and send it to the PMO, Aishwarya said how the term ‘Father of the Nation’ had always “somehow excited and interested” her after she read it in her social studies text book.

The PMO replied that they had no such record whatsoever and directed the query to the Ministry of Home Affairs, which then referred the case to the National Archives of India (NAI).

The NAI”s Assistant Director and CPIO Jayprabha Ravindran also had no answers to the poser by the Lucknow girl, and responded with an invite to Aishwarya asking her to visit the Archives to find for herself if there were any such relevant papers.

[It is in public knowledge that Subhash Chandra Bose gave the title of Father of the Nation to Mahatma. He, in his address on Singapore Radio on July 6, 1944 had addressed Gandhi as Father of the Nation. Thereafter on April 28, 1947 Sarojini Naidu referred Gandhi with the same title at a conference.]

[Note: I have just talked with the mother of Aishwarya in Lucknow, an RTI Activist congratulating her for this great story. It is rarely that a minor furnishes the query under RTI. In Mumbai the episode has appeared in atleast in 3 newspapers.]

A thought of the month

Many of the areas which have actually seen systemic reforms have also seen the disappearance of corruption.

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PART B: RTI act , 2005

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Amendments to Maharashtra Right to Information Rules, 2005:

It is strange but true that Govt. of Maharashtra published in Gazette two notifications related to RTI dated 16-1-2012 and 31-1-2012 amending Maharashtra Right to Information Rules. The Govt. never informed citizens about it. It was only by chance, advocate Vinod Sampat saw that in March-end and communicated the same to all RTI activists.

All RTI activists are very much agitated. PCGT arranged a meeting with the Chief Minister (CM) where Mr. Julio Riberio, I and 7 other RTI activists invited by me met the CM on 10-4-2012. After 30 minutes dialogue, CM stated that he would look in to the matter. These notifications read as under:

The Maharashtra Right to Information (Amendment ) Rules , 2012, Dt. 16.1.2012

General Administration Department

Mantralaya, Mumbai 400032, dated the 16th January 2012

Notification

Maharashtra Right to Information Rules , 2005.

No. CRTI./2009/C.R.398/09/VI. – In exercise of the powers conferred by sub-sections (1) and (2) of section 27 of the Right to Information Act, 2005 (22 of 2005), the Government of Maharashtra is hereby pleased to make the following rules further to amend the Maharashtra Right to Information Rules, 2005, as follows, namely:-

1. These rules may be called the Maharashtra Right to Information (Amendment) Rules, 2012.

2. After rule 3 of the Maharashtra Right to Information Rules, 2005, the following rule shall be inserted, namely:-

“3A. Request relate only to single subject matter:- A request in writing for information under section 6 of the Act shall relate to one subject matter and it shall not ordinarily exceed one hundred and fifty words. If an applicant wishes to seek information on more than one subject matter, he shall make separate applications.

Provided that, in case the request made relates to more than one subject matter, the Public Information Officer may respond to the request relating to the first subject matter only and may advice the applicant to make a separate application for each of the other subject matters.’’

By order and in the name of the Governor of Maharashtra

Nandkumar Jantre
Secretary to Government

The Maharashtra Right to Information
(2nd Amendment ) Rules , 2012,
Dt. 13.1.2012

General Administration
Department

Mantralaya, Mumbai 400032, dated the 31st January 2012

Notification


Maharashtra Right to Information Rules , 2005.

No. CRTI. 2008/CR 356/VI. – In exercise of the powers conferred by sub-section 27 of the Right to Information Act, 2005 (22 of 2005), and of all other powers enabling in this behalf, the Government of Maharashtra is hereby pleased to make the following rules further to amend the Maharashtra Right to Information Rules, 2005, namely:-

(1) These rules may be called Maharastra Right to Information (2nd Amendment) Rule 2012

(2) After Rule 3A of the Maharastra Right to Information Rules, 2005, the following rules shall be added namely:

3B. Procedure for seeking inspection of records: If after having considered the application filed by the applicant for seeking inspection of record under the s.s (1) of section 6, the Public Information Officer find it appropriate, the applicant may be granted permission inspect of the record and if he grants such permission the Public Information Officer shall requisition the record desired by the applicant for perusal, from the concerned section of the Department and shall give the same to the applicant for inspection in his presence or in the presence of authorised representative, during the office hours. While inspecting such record, the applicant shall be allowed to use pencil only and the information desired by the applicant shall be noted by him by pencil only and if applicant bring any writing instruments other than pencil, he shall deposit the same with the Public Information Officer and thereafter, he shall be allowed to inspect the record. The applicant shall not make any marking on the record by the pencil he is allowed to use during inspection.

By order and in the name of the Governor of Maharashtra

Nandkumar Jantre
Secretary to Government

CIC feels RTI is dying in Maharashtra

Shailesh Gandhi, India’s feisty Central Information Commissioner and an early crusader for the Right To Information Act, believes that the RTI Act in Maharashtra is being pushed into a coma from where it may not be able to recover.

According to one version, pendency of cases pending as on 31-12-2011 is 22,000.

As per the report in Times of India acting State Information Commissioner Bhaskar Patil has stated ‘At the end of the 2011, about 1.07 lakh appeals were pending disposal’.

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From the President

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Dear Members,

As I write this communication, there is a widespread expression of anger and disappointment about the steep petrol price hike. While one understands that the government may have had its own compulsions, what is incomprehensible is the manner in which the prices were raised. The increase was announced immediately after the Parliament session concluded. If the government had to take the nation into confidence the best place to do so was the floor of the Lok Sabha.

Considering the current economic scenario, any price increase would lead to criticism of the leadership. The hallmark of a leader is to be able to explain unpopular decisions to the public. However to be able to convince the people to accept unpalatable actions a leader has to have credibility. Sadly no one among the government seems to possess it. Even if one accepts that the government cannot have control over oil prices and foreign exchange fluctuations it is within its power to make the price mechanism transparent. Back of the envelope calculation will make it apparent that a large component of the price that a petrol consumer pays is by way taxes to the Central and state governments and not cost of petrol. A citizen would not mind paying taxes if the money was well spent. Unfortunately that is not the case. A significant portion of government spending reaches the coffers of corrupt bureaucrats, politicians and their respective agents. The remaining is purportedly spent but spent most inefficiently. This is the primary cause of resentment.

In this rather gloomy atmosphere, one must commend the role that the media plays. Undoubtedly there are some excesses and some trials by the media which unnecessarily do irreparable harm to reputations. But given the information and facts that it brings to the fore this is a cost that which one will have to pay till Indian democracy matures. The recent effort by Amir Khan in his program Satyameva Jayate, is indeed laudable. There may be a debate about its impact on the resolution to the problem but there is no doubt that it substantially increases the awareness in regard to these maladies and that definitely is a welcome first step.

While on the power of the media, one must also note the change that the Finance Minister was compelled to make in the provisions of the Finance Bill before it became an Act. The representations in regard to the impact of the proposals in regard to the general anti-avoidance rules were considered by the powers that be and the provisions have been postponed for one year. One hopes that wisdom prevails and the said rules are introduced only after the requisite redressal mechanisms are available to taxpayers. The Finance Minister has stated that the Direct Tax Code after considering the recommendations of the standing committee will be placed before the Parliament in the monsoon session. One hopes that the bill will finally goes through the Parliament so that efforts made by professional do not remain an exercise in futility.

In its endeavour to keep its members updated on developments in the professional arena the Society has released a number of publications. Among them the yearly Referencer has been extremely popular. This publication is celebrating its golden jubilee and the 50th Referencer is proposed to be released on 14th June 2012. The Society has had a glorious past but has always has had its sights firmly set on the future. In keeping with this principle characteristic of the Society the theme of the Referencer is “Back to the Future”. I am sure most of you would have already booked your copy of this Referencer. If you have not done so I would earnestly request you to do so. While the Referencer has always been a great utility to all professionals this year’s copy promises to be a collector’s item.

Talking about the future, the students of today are professionals of the future. The Society has therefore always done its bit to ensure that these future chartered accountants become not only good professionals but responsible citizens. The Society organised a mega event – an Annual Day for students, which was attended by more than 300 students. The event was a great success. Around this time last year I was preparing to assume the responsibility of leading this august institution. I have now started preparations to hand over reins to the new team which has been elected for the ensuing year. Deepak Shah would be the President for the next year, and Naushad Panjwani will be the Vice President. I wish both of them and the new team success for the coming year.

With Warm Regards,
Pradip K. Thanawala

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Lecture Meetings

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Lecture Meetings: Direct Tax Provisions of the Finance Bill, 2012 Lecture Meetings

S. E. Dastur, Senior Advocate, addressed the annual lecture meeting on Direct Tax Provisions of the Finance Bill, 2012 on 20th March, 2012 at Yogi Sabhagruha, Shree Swaminarayan Mandir, Dadar. This was 24th meeting addressed by Mr. Dastur. As usual it received overwhelming response from members and public.

An audience of around 3,000 present in the auditorium and many more watching through live webcast connections throughout India and across the Globe, benefitted from Mr. Dastur’s masterly analysis of various direct tax proposals contained in the Bill.

Indirect Tax Provisions of the Finance Bill, 2012

Bhavna Doshi, Chartered Accountant and Dadi Engineer, Solicitor and Advocate, addressed the audience on various aspects of indirect tax provisions of the Finance Bill, 2012 at this lecture meeting held jointly with the Forum of Free Enterprise on 22nd March, 2012 at Kilachand Hall, IMC Mumbai. The audience gained immensely from analytical insights from the learned faculty.

Service Tax Provisions of Finance Bill, 2012

Vikram Nankani, Advocate, addressed this lecture meeting on 26th March, 2012 at Rama Watumall Auditorium, K. C. College, Churchgate. The speaker addressed the audience on various aspects of Indirect Tax Provisions of the Finance Bill, 2012 and received enthusiastic response from members and public. An audience of around 400 present in the auditorium immensely benefitted from Mr. Nankani’s expertly analysis.

Other programmes

Workshop on Personality Development for CA Students

The Human Resources Committee had organised the workshop on Saturday, 17th and Sunday, 18th March, 2012 at Direct I Plex, Andheri (East) under the auspices of Amita Memorial Trust. Fortyfour participants, all pursuing chartered accountancy as a career, actively participated in the workshop.

 Speaker Mr. Ramanujam, paved the way for the participants to better understand themselves, and he explained the importance of this aspect in today’s life. The workshop was spread over 2 days, in which important topics on Goal Setting, Time Management, Communication, Team Building, Memory Enhancement, Human Relations and Ethics, and Governance were covered.

The participants gained from the wealth of knowledge and experience shared by the learned faculty.

Interactive Session with President and Vice-President of ICAI

The Society invited CA Jaydeep Shah, President, ICAI, and CA Subodh Kumar Agarwal, Vice-President, ICAI, on 11th April, 2012 at the BCAS Office and felicitated them. Gracing the occasion were Chairman of the WIRC, members of Central Council, WIRC, BCAS, past Presidents of ICAI and BCAS.

A very interesting interactive session was held on the occasion. Past President of the Society Pradyumna N. Shah discussed with the President and Vice-President of ICAI a Chartered Accountant’s letter giving suggestions. The letter broadly gave suggestions for the possibility of having the BCAS office as a polling centre for ICAI elections, reports of decisions in disciplinary cases and issues in conversion of a CA firm into an LLP. The ICAI President assured positive actions for each of the suggestions highlighted. Other members also interacted with the President and the Vice-President, and views were exchanged.

The meeting was fruitful and has definitely strengthened the existing relationship of ICAI and BCAS.

Full-Day Workshop on Practical Issues in Tax Deduction at Source

The Taxation Committee organised this Seminar on Friday, 13th April, 2012 at Walchand Hirachand Hall, IMC, Churchgate, Mumbai. The 340 participants included students and some members from industry.

The learned speakers A. C. Shukla, CIT (TDS), Mumbai, Ms. Babina Dinashan, Manager (TIN Operations) NSDL, Nikhil Bhatia, Shabbir Motorwala, and Yogesh Thar, all Chartered Accountants, covered various aspects pertaining to practical issues with regard to Tax Deduction at Source, Tax credits and TDS assessments.

A video DVD capturing the proceedings of the seminar has been prepared and is available on BCAS Web TV.

Two-Day Workshop on Recent Developments in Accounting & Auditing Standards and Reporting Requirements

The Accounting & Auditing Committee had organised this seminar on Friday, 13th and Saturday, 14th April, 2012 at Novotel Hotel, Juhu, Mumbai. The 116 participants included non-members, members in practice and from industry. The learned speakers Akeel Master, Ashutosh Pednekar, Jayesh Gandhi, Khushroo Panthaky, Ravikant Banga, Sudhir Soni, and Mukund Chitale, all Chartered Accountants, explained the latest developments in Accounting & Auditing Standards with regards to the reporting requirements and the guidance notes. After each session, the queries raised by the participants were addressed to their satisfaction. A video DVD capturing the proceedings of the seminar has been prepared and is available for sale.

Felicitation of Hon. Auditor Shri P. M. Dharia

On behalf of the Members of the Society, President Pradip Thanawala, along with Past President Mr. C. C. Dalal and Mr. Nayan Parikh, Hon. Secretary Mr. Chetan Shah, visited to the residence of Shri. P. M. Dharia, on Akshay Tritiya Tuesday, 24th April, 2012 for felicitating him for sincere and dedicated services rendered by him as Hon. Auditor for over 40 years. n L

  

   

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Readers View

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Sir,

Apropos of the article, ‘Taxation of commission payments to non-residents’, co-authored by three C.A.s in the International Taxation Section of the BCAJ Journal of March 2012, I would like to share my views as under:

It is true that while dealing with International Taxation we must analyse the given issue with reference to tax law, circulars, notifications, DTAA, and case law evolved by jthe udiciary. The co-authors have done excellent exercise by bringing out the finer points. However, there are two more aspects which one should explore.

First, if an Indian resident agent receives commission from a foreign exporter, what are the tax withholding provisions in the country of the foreign exporter?

Second, if the Indian exporter fails to pay commission to the foreign non-resident agent as per the contract, whether legal remedy (available to the foreign non-resident agent) to recover such commission is available in the Indian Court or in the court of the country in which services were rendered by the foreign non-resident agent. This may have a bearing on the chargeability of the commission. I think the above-mentioned issues should have been addressed while dealing with the commission issue.

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Lecture Meeting

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Subject : Finance Bill, 2012
Speaker : S. E. Dastur, Senior Advocate
Date : 20th March 2012
Venue : Yogi Sabhagraha, Dadar, Mumbai

1. On 16th
March 2012, Indian Finance Minister, Pranab Mukherjee presented the
Indian Budget for the Fiscal Year 2012-13.

“The life of a finance
minister is not easy and I must be cruel only to be kind” Mr. Mukherjee
lamented in his 8th budget speech. The tax provisions contained therein
have indeed proved him right. A few days after the Bill was announced,
Mr. S. E. Dastur, ‘the’ Senior Tax Counsel shared his views on the
implications and the fine print of the Finance Bill, 2012.

 2. Vodafone —
Wherever you go, the tax net(work) follows!

The budget this year seems
focussed on garnering as much revenue as possible by way of various
retrospective amendments. While the budget took care of several issues,
plugged many loopholes and gave a few benefits to the taxpayer, the most
discussed aspect of the Finance Bill was the Vodafone case.

The issue
in the Vodafone case was that the Tax Department had issued a notice to
Vodafone for not withholding tax while making payment to Hutchison for
purchasing 1 share of a Cayman Island Company. The Supreme Court (‘SC’)
held that the tax officer did not have jurisdiction in matters relating
to tax withholding in case of offshore transaction of sale of shares of a
foreign company between two non-residents as it was not chargeable to
tax in India. To counter this decision, the Government retrospectively
amended sections 2, 9 and 195 of the Income-tax Act, 1961 (‘Act’).

The
question which arises now is whether the Government is justified in
making these retrospective amendments and what is the consequence of
these retrospective amendments?

Mr. Dastur opined that there was no bar
on making retrospective amendments. However, whether the Government
could rely on this amendment, which was made after the decision in
Vodafone’s case was pronounced to collect taxes from Vodafone itself?
The review petition filed by the Government challenging the Vodafone
decision was dismissed by the SC. This was rightly so, as on the date of
dismissal, there was no enactment on the basis of which the SC could
accept it.

A review lies because of the change in law, while presently,
the amendments are still at the Bill stage. The question now is whether,
once the provisions are enacted into a law, the Government could once
again approach the SC to review its Vodafone decision in light of the
change in law? If the answer to this is yes, would it mean that two
review petitions could be filed to the SC against the same decision?
Perhaps the better course of action for the Government would have been
to wait till the provisions were enacted and then to file the review
petition asking for condonation of delay.

3. Retrospective perspective

 It is possible to take a view that if a retrospective amendment is
passed, it means that there is an error in the Court’s judgment and
hence, the judgment could be reviewed by the Court. However, in the case
of Kauvery Water Disputes Tribunal [1993 SCC Supl. (1) 96], the SC has
held that a change of law cannot per se set aside a SC decision.

In the
case of Raja Shatrunji v. Mohammad Azmat Azim Khan, (2 SCC 200), the SC
held that a review was possible when there was a change in the law.
However, Mr. Dastur observed that it would be unjust and contrary to the
principle of equity to ask Vodafone to deduct tax at source, after the
SC has decided in favour of Vodafone on the issue, only in view of the
retrospective amendment to law. The liability of deducting tax at source
on Vodafone is only as a statutory agent of the Government. The
Government cannot say that Vodafone, having acted as per the law then
existing, ought to now deduct tax at source and pay it to the Government
only on the basis of the retrospective amendment of law. It would be
contrary to Article 14 of the Constitution of India as harsh,
unreasonable and arbitrary.

4. Curing the Vodafone indigestion

There are
two actions that the Government has undertaken to overcome the effects
of the Vodafone decision of the SC:

(i) Amendment to sections 2(14) and
2(47) which now provide that if rights in India are transferred owing to
a transfer of shares of a company registered or incorporated outside
India, then those rights are deemed to be a capital asset giving rise to
capital gains. However, if the asset is confined to rights such as
transfer of ‘right to vote’, ‘right to control’, etc., the question
arises as to how to determine the value of the ‘right’. These rights are
as a result of the shares in the offshore entity held and it is not
possible to apportion the cost of such rights from the cost of the
shares. In the case of B. C. Srinivasa Setty (128 ITR 294), the SC held
that if the cost of acquisition of the asset cannot be determined, there
cannot be a capital gains tax liability.

(ii) However, Explanations 4
& 5 to section 9(1) (i) resolve the above by deeming that if any
right in India is transferred on account of transfer of shares of an
offshore company, the shares of offshore company would be an asset
situated in India and section 9(1)(i) would apply to income arising from
its transfer.

5. Loyalty to royalty

In the case of Ericsson, the Delhi
High Court (‘HC’) held that a copyrighted article is different from the
use of a copyright. Explanation 4 is inserted in section 9(1)(vi) to
include as Royalty, the use of a computer software, thereby overcoming
the above HC decision.

In the Asia Satellite’s case (332 ITR 340), the
Delhi HC took a view that use of space on transponder for beaming
programmes to India would not amount to use of a process and thus,
consideration paid for the same is not royalty. This decision is now
brought to a naught by insertion of Explanation 6 to section 9(1)(vi).

6. The domestic transfer pricing bomb

Shielding itself by the SC remark
in the case of CIT v. GlaxoSmithKline Asia (P) Ltd., the Finance Bill
has introduced the concept of transfer pricing in relation specified
domestic related party transactions. The transfer pricing provisions
till now applicable to specified international transactions would be now
made applicable to domestic transactions as well by amendment to
section 92CA. The arm’s-length price (‘ALP’) would be determined in
accordance with the most appropriate method laid down in section 92C.
Further, these domestic entities will be required to maintain adequate
documentation supporting the transfer price on an annual basis as per
Rule 10D of the Income Tax Rules.

The sections of the Act affected by
domestic transfer pricing are:

(i) Section 40A(2) — In case of an entity
making a payment to another related entity, especially where paying
entity is posting a loss and thereby, paying lower taxes. However,
proviso to section 40A(2)(a) states that no adjustment would be made on
account of the expenditure being excessive having regard to the fair
market value (‘FMV’), if such expenditure is at ALP, thereby making a
distinction between the FMV and the ALP.

(ii) Sections 80A/80IA — if an
assessee has an 80A/80IA eligible unit and a transaction is effected
between the 80A/80IA unit and an 80A/80IA ineligible unit belonging to
the same assessee, transfer pricing provisions would be attracted. No
distinction is made between the FMV and the ALP.

(iii) Section 10AA —
Similar applicability as for sections 80A/80IA.

 7. Penalising the
honest?

Section 92CA(1) states that a reference to a Transfer Pricing Officer to determine the fair value of a transaction should be made only after consent of the Commissioner of Income-tax and if he feels that it is necessary or expedient to make the reference. However, it seems that today, reference is made only based on the monetary value of the transaction. Mr. Dastur said that such an action can be taken to the Courts by the assessee, if there appears to be no valid reason for the reference. The Bombay HC in the case of Coca Cola has favoured this position.

8.    GAAR — General Anti-Assessee Rules!

Till date, the view taken by the Courts was that there is no duty on the assessee to pay the maximum tax so far as he stays within the four corners of the law. Mr. Dastur remarked that while the GAAR provisions were introduced in the Direct Tax Code, the Code is put on hold as there were certain ambiguities in it. Nevertheless, the Finance Bill, 2012 has proposed to implement what was perhaps the most obnoxious part of the Code!

The GAAR defines ‘impermissible avoidance arrangements’ as arrangements which meet certain criteria laid down in the provisions and provide tax benefits to the assessee. In such a case, the tax officer has been given powers to disregard/ignore the transaction or steps in the transaction and rewrite the entire transaction and foist tax liability on the transaction.

Mr. Dastur opined that these are perhaps the widest and unguided powers given to tax officers and that despite the Supreme Court holding that a transaction could only be looked at and not looked through, the GAAR seeks to do just that.

Some examples of the likely consequences of the GAAR provisions pointed out by Mr. Dastur are:

  •     Setting up industries/units in backward areas to avail the tax benefits/exemptions granted to such areas could result in GAAR being invoked on the basis that no rational person would set up industry in backward areas except to obtain tax benefit.

  •     Investing of capital gains in low return securities granting exemption to the capital gains u/s.54EC of the Act could be characterised as an impermissible avoidance arrangement as it provides tax benefit to the assessee and no rational person would have invested in such low-return securities in normal circumstances.

  •     A demerger transaction could be disregarded and GAAR invoked by the tax officer claiming that the main intention of the demerger was to sell the undertaking and demerger route, which was commercially unnecessary, was adopted only to avail tax benefit.

  •     Sale and lease back transactions could be ignored stating that these were only for tax purposes.

All these consequences would be contrary to all the Supreme Court decisions till date.

9. Safeguards

The safeguards introduced to prevent misuse of the GAAR provisions by the tax officers are approval of the Commissioner of Income-tax and of a three-member Approving Panel consisting of three Income-tax Officials.

Attention was drawn to a letter from the Chairman of the Central Board of Direct Taxes dated 17th February 2012 sent out to tax officials sought to give the highest weightage to the tax revenue collections while deciding on the promotions and postings of the Commissioners.

Mr. Dastur expressed serious doubts on the independence of the Commissioner and the Approving Panel and questioned the adequacy of the safeguards.

10.    Implications on DTAAs

New section 98 gives the tax officer the power to deny DTAA benefits or modify the DTAA applicability including the power to decide which treaty should apply to the case, irrespective of the actual place of residence of the assessee. Mr. Dastur observed that while it may be permissible by a section in the Act to override a treaty, which is an agreement between two countries, GAAR gives the tax officer the power to override that treaty.

Circular 789, dated 13th April 2000 states that if an assessee provides a Tax Residency Certificate (TRC) issued by the Mauritian Government stating that he is a Mauritian resident, he shall be treated as such, and benefits for the Indo-Mauritian DTAA would be available to him. Now, in view of the above provisions, the validity of the Circular is also in question.

Mr. Dastur pointed out that the Explanatory Memo-randum to the Bill states that while obtaining the TRC is now a necessary condition u/s.90(4) for avail-ing treaty benefit, it is not the only condition.

Explanation 3 inserted in section 90 gives the Tax Department the power to retrospectively define a ‘term’ for the purposes of the DTAAs.

11.    Dispute Resolution Panel (DRP)

The DRP is now given powers to enhance the additions made by the Assessing Officer. Further, the Order of the DRP is made appealable by the Tax Department. These amendments defeat the purpose of the Panel which was to reduce the amount of tax litigation.

12.    Other amendments
Mr. Dastur, briefly dwelled upon taxation of charitable institutions, introduction of alternate minimum tax for all assessees, amendments relating to taxability of share application money u/s.68, amendments to section 2(19AA) dealing with demerger, new section 50D, extension of time limits for re-opening of assessments.

Mr. Dastur, concluded the session with the remark that the Finance Bill, 2012 has inserted approximately 31 Explanations of which 22 are with retrospective effect with most Explanations using the words ‘for removal of doubts’! Mr. Dastur, with his vast knowledge and wit, kept the audience hanging on to his every word.

Representation

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The Charity Commissioner of Greater Mumbai Region,
Mumbai

Dear Sir,

Subject: For your kind attention
           — A representation on certain Administrative matters concerning Charity Trusts

This is with reference to certain administrative aspects concerning filing of documents, inspections and permissions, etc., in various statutory matters concerning charitable trusts, in Maharashtra (particularly in Greater Mumbai Region), we would like to bring to your kind notice a few issues, which need your kind attention.

To introduce ourselves first, we would like to state here that Bombay Chartered Accountants’ Society (BCAS) is a voluntary organisation of chartered accountants. It was established in 1949 and, at present, has around 8500 members spread all over India. Its main object is to spread education among its members and the people in general. It conducts several educational programmes and organises public meetings on various topics of public interest. In addition, it publishes various books, from time to time, spreading knowledge and awareness among the people. Its monthly journal ‘BCAJ’ is being read with interest by more than 10000 subscribers. It also conducts free of charge ‘Charitable Trust Clinic’, RTI Clinic and such other guidance cell, at Mumbai, to guide members, trustees and the people in general.

Sir, the trustees of charitable trusts, their representatives, chartered accountants and lawyers are visiting your office in connection with various matters concerning administration of charitable trusts (within your jurisdiction). These matters may be concerning statutory compliances, accounts, audit, inspection and permissions, etc. There are certain limitations within the Bombay Public Trust Act, 1950, and, there are certain processes followed in your good office, both may need a little modification, so as to keep pace with time, avoid unnecessary hurdles, and to provide a hassle-free process to comply with statutory requirements.

Sir, before presenting these views (contained in the enclosed memorandum), we have discussed each issue in detail and thereafter placing before you the best possible solution within the existing framework.
We hope it will find your favour. For further discussions, you may kindly call us on any day and time as may be convenient to you.

Thanking you.

Yours faithfully,

For BOMBAY CHARTERED ACCOUNTANTS’ SOCIETY
Pradip Thanawala                                                         Govind G. Goyal
President                                                                                 Chairman
BCAS                                                           Indirect Taxes & Allied Laws Committee
                                                                                                        

Bombay Chartered Accountants’ Society
Memorandum of Representation to the Charity Commissioner of Greater Mumbai

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Society News

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Lecture meetings:

Service Tax Amendments — Point of Taxation and CENVAT Credit

At this lecture meeting held on 16th November, 2011 the speaker Sunil Gabhawalla, Chartered Accountant, explained the recent amendments relating to Point of Taxation and CENVAT credit, discussed important decisions on the subject and answered queries raised by the participants. The webcast of this meeting is available on BCAS Web TV.

Recent Developments in AS/IFRS/Ind AS — Global and India At this lecture meeting held on 6th December, 2011 the speaker P. R. Ramesh, Chartered Accountant, made a detailed presentation on recent updates on the subject and various issues arising therefrom with special focus on IFRS 1, IFRS 3, IFRS 7, IFRS 9, IAS 12, IAS 19 and IAS 1. The learned speaker also covered new pronouncements which are in the pipeline and other changes to the framework for the Preparation and Presentation of Financial Statements. The webcast of this meeting is available on BCAS Web TV.


L to R: Deepak Shah, Vice President, Anil Sathe, Ameet Patel, P.R. Ramesh, Speaker, Pradip Thanawala, President and Mukesh Trivedi Web TV.

Other programmes

Two-day comprehensive workshop on Valuation

The Infotech and 4i Committee had organised a two-day comprehensive workshop on Valuation on December 9 & 10, 2011 at the Walchand Hirachand Hall, IMC, Churchgate, with the objective of introducing members to valuation as an emerging area of practice. The workshop was attended by over 100 participants, including several participants from outside Mumbai (including two from Dubai) and from industry.

Pranay Vakil, Chartered Accountant and CEO, Knight Frank, delivered the keynote address and presented a curtain raiser on the Art and Science of Valuation Practice. He said that value of any asset is driven by scarcity, utility and transferability thereof. The participants also benefitted from experiences in real estate industry shared with them by Mr. Vakil.

T. M. Rustomjee, Senior Director, Deloitte, gave an overview of Business Valuation and shared his experiences and stressed on need to go beyond numbers to understand true value of a business.

Sujal Shah, Chartered Accountant, introduced to the participants various methods of valuations and emphasised on importance of common sense and logic while applying the methods. In another session, the learned faculty also discussed various case studies including famous 1:2:2 model used in merger of TOMCO with HLL.

Satish Deshpande, Head PE Practice, NV Capital Services LLP, presented “Users’ Perspective” and discussed how PE investors and fund managers look at valuation models.

Pinkesh Billimoria, Chartered Accountant, discussed in detail important and topically relevant DCF Method of Valuation and elaborated on various issues such as cost of capital and terminal value.

Jayesh Gandhi, Chartered Accountant, enlightened the participants on importance of analysis of historical results and issues in future projections.

Sharad Abhyankar, Advocate, discussed several important case laws on Valuations.

Shariq Contractor, Chartered Accountant, elaborated on art of report writing including disclaimers.

The participants gained immensely from the wealth of knowledge and experience shared by the learned faculty. The workshop was co-ordinated by Manish Sampat and Nandita Parekh with valuable inputs from Sujal Shah.

L to R: Nandita Parekh, Pranay Vakil, Speaker, Ameet Patel, Pradip Thanawala, President, T.M. Rustomjee, Speaker and Kinjal Shah

In life and business, there are two cardinal sins.. The first is to act precipitously without thought and the second is to not act at all.

—Carl Icahn

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From the President

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Dear Members,

April is a month of audit deadlines. There is a race to declare financial results at the earliest, which puts the fraternity of auditors under tremendous pressure. While I understand that every corporate desires to be in the news, I am unable to comprehend what difference it would really make if audited results are put in the public domain a few days later than they actually are. Those in top management are blissfully unaware of the ground realities, and many a time set impossible deadlines. This is true of audits of public sector undertakings, particularly banks. This year has been no different from the past.

The appointments of bank branch auditors were delayed this year on account of a proposal by banks not to appoint auditors for branches below a particular threshold of advances. What was distressing was that the cause for the banks wanting a reduction in the number of branches audited was the cost of audit. Audit has remained a cost centre to business and industry, which cost is treated as avoidable. When a businessman thinks of cost reduction, he looks at the cost of audit, since he does not perceive it to have a value commensurate with cost. In reality, many audit reports send warning signals to stakeholders, which if recognised and acted upon can change fortunes of a corporate. One reason for this may be the manner of presentation of these reports. Therefore, while audits deliver value, they are perceived to be only an exercise for statutory compliance. It is necessary to change this perception.

A mechanism has to be devised, whereby material findings in the course of audit are collated and brought to the notice of not only the powers that be, but also the general public. This is not easy; but if done, the public would become aware of the value of the job that we auditors perform. The public uproar that the recent reports and findings of the Comptroller and Auditor General of India have created is an illustration.

The expectation gap is something that is being discussed for a long time. While the profession must be alive to the expectations of society, the limitations under which an auditor functions must also be brought to the fore. We must point out to stakeholders of business that an audit is an exercise for providing assurance, and hence is neither an investigation nor a fault-finding mission. In fact, a public awareness campaign on a continuous basis must be carried out to ensure that the public understands the job that we perform and the value that we add.

While I am sure that most of us are doing a commendable job, it would be foolish for us to rest on our laurels. We must continuously upgrade our professional skills, and to that extent I am a supporter of the concept of continuous professional education. We at the Society continuously strive to provide excellent programmes for upgradation of members’ knowledge and skills. One such programme on Developments in Accounting, Auditing and Taxation was organised at Kolkata, jointly with the DTPA Chartered Accountants study circle of Eastern India Regional council of the ICAI. Many a time one finds that our colleagues treat a CPE programme as an idle formality, and find ways and means to comply with the letter of the regulation while killing its spirit. While this is true for some professional colleagues, organisers of such programmes must also ensure that education remains the prime objective of these programs, and no collateral purposes are allowed to creep in.

Coming back to the issue of allotment of audits by statutory authorities, I would request my colleagues to strive to give value in the professional jobs that they perform, rather than worry about work allotted by a regulatory body. If we give value, rewards will follow. While it protects the interests of the members, the Institute of Chartered Accountants of India (ICAI), our alma mater should take upon itself the responsibility of changing the perception of our profession with both the public and the authorities, for this is a task that an institution is equipped to carry out, rather than individuals. While one need not lobby for work, a sustained effort to change our image will go a long way in enhancing respect for our profession that it richly deserves. In order to do so, it may call for some necessary changes in the regulatory framework of the profession.

It has been some time since the change of guard at the ICAI. Recently, we at the BCAS had an opportunity to interact with the President and Vice President of the ICAI during their visit to the Society’s office. The current President of the ICAI concurred with the subject of education, which is close to his heart. We at the BCAS are confident that during his tenure he would address many of the issues that have been raised in this communication. We wish him and his team success in their endeavour!

With Warm regards,
Pradip K. Thanawala

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Letters

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Editor,

At the outset, I congratulate you and the author of the article “Are Options an Option?” published in the December issue. The article not only evaluates various aspects of FDI policy but also gives voice to the practical difficulty faced by the local/ domestic business houses that raise the funds thru FDI route.

We earnestly request you to use your good offices to take up this issue to the concerned body at the RBI and other appropriate forum and I am sure that they will issue suitable circular clarifying the position once for all. I am sure that many of our fellow members in the industry will be immensely benefited and boost the FDI in India.

— Ketan Mehta

Editor,

We refer to the article of Mr. Anup P. Shah published in the December edition of BCAJ on the issue of “Are Options an Option?”. The article vividly brings out as to how options are different and how and why the treatment suggested by SEBI is incorrect and erroneous.

To make the issue properly known to the Regulator and various executive director/s of SEBI, we sincerely request you to send the same to the Chairman and Executive Directors of SEBI. By representing and putting across the issue threadbare, the BCAS will have rendered valuable service to large number of financial intermediaries in correct interpretation of the law and convince SEBI to withdraw or amend erroneous notification / interpretations.

Since BCAS is a leading professional organisation, it can share various thoughts transparently, fearlessly and in larger interests of the economy. It can also take up the matter at appropriate forums to save the industry from prolonged and costly litigation and saving in time and energy of professionals.

— Mukesh Shah
Chartered Accountant

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Representation

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To,
The Commissioner, Service Tax-
I New Central Excise Bldg.,
115, M. K. Road, Churchgate, Mumbai-400020.

Dear Sir,

Re : Bombay Chartered Accountants’ Society
Re : Pre-Budget recommendations

We have received your letter dated 11th October 2011 inviting suggestions for amendments in the Service Tax Law for Budget 2012.

Bombay Chartered Accountants’ Society (BCAS) was established as a voluntary organisation on 6th July 1949 and presently has over 8,500 members from all over the country. It caters to the needs of its members in particular and the tax-paying public in general. It ensures that its members keep pace with the changing times. It also provides courses for selfdevelopment for its members and CA students. We thank you for the opportunity granted to us and we enclose our suggestions in brief in PowerPoint Format as suggested in the letter. Sir, we would be glad to meet you and the Member, CBEC in person and request you to kindly convey us a suitable time for the same.

We hope that our suggestions will merit attention and be considered while framing the amendments in the Service Tax Law.

Thanking you,
Yours faithfully,

For Bombay Chartered Accountants’ Society

Pradip Thanawala
President

Govind G. Goyal
Chairman
Taxation Committee

Pre-Budget Recommendations
Service Specific Suggestions

Preferential Location or Development Services — Section 65(105)(zzzzu)

  • Additional Charges levied by builders/developers for providing preferential location/development are made liable for service tax

  • Abatement should be provided under Notification 1/2006-ST on similar lines as provided for consideration received for sale of ‘ under-construction property’
Construction of Complex Services — Section 65(105)(zzzh)

  • Sale of under-construction property should not be taxed. The Explanation inserted in 2010 should be deleted with retrospective effect
  • Exclusion for ‘personal use’ and ‘complex having 12 or less residential units’ can be removed. Instead, an exemption for individual transactions up to Rs.50 lakhs of value can be provided
Practising Chartered Accountants Services — Section 65(105)(s)

In order to grant parity with the legal profession,

— Advisory Services rendered by individuals should be exempted
— Representational Services rendered to individuals should be exempted

Renting of Immovable Property — Section 65(105)(zzzz)

  • Long-Term Lease should be classified as sale and the lease rental/premiums should not be made liable for payment of service tax

  • In view of the long-pending litigation, it should be provided that if tax is paid before a specific date (say, 30th September 2012), no interest or penalty shall be demanded for this category of service

Supply of Goods Services — Section 65(105)(zzzzj)

An exemption/exclusion should be provided for supply of tangible goods to be used in infrastructure/non commercial projects on the lines of the exclusion for construction services

Works Contracts Services — Section 65(105)(zzzza)

The rate of composition for works contracts should be reduced to 3.3%

Other suggestions

Valuation

Principles for determination of rate of foreign exchange for transactions denominated in foreign currency should be provided
Point of Taxation Rules

  • The period of 14 days for raising the invoice from the completion of service should be increased to 30 days

  • It should be clarified that ‘a proforma invoice’ shall not be considered as an invoice for the purposes of Point of Taxation as well as CENVAT credit

  • In case of new services and change in effective rate of services, the Point of Taxation should not be shifted from the pre-defined point of taxation
Point of Taxation

Rule 7 — The first and second provisos treating the rule as non-existent in certain circumstances should be suitably amended to require the payment of tax at the end of the stipulated period rather than to provide that the rule itself is non-existent

Rule 8
— The said Rule should be applicable to franchisees as well
CENVAT Credit Rules

Rule 2(e) — It should be clarified that the term ‘exempted services’ includes ‘trading in goods’

Rule 2(l) — The phrase ‘input service’ should include ‘activities related to business’

Rule 6 — The Rule should be suitably amended to permit maintenance of one-to-one identification of some input services and claim of proportionate credit on other input services where one-to-one identification with taxable service is not possible

Procedural changes

  • The due date for payment of service tax should be kept at 15th of the next month/ quarter

  • The periodicity of filing returns should be once in a year and not once in half year

  • The assessee should be permitted to revise the return within a period of 180 days

  • Self Adjustment of Excess Service Tax should be allowed without any limit

To,
Mr. Pranab Mukherjee
Finance Minister
Government of India,
North Block, Vijay Chowk, New Delhi-110001.

Dear Sir,

Sub : Pre-Budget Memorandum 2012-13

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, 2012 for amendments to the Income-tax Act, 1961.

As mentioned in the letter inviting suggestions for Budget 2012-13, dated 2nd November, 2011, since the Direct Taxes Code, 2011 has been introduced in the Parliament and is proposed to be effective from 1-4- 2012, we are forwarding only those proposals which are urgent in nature.

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

Pradip Thanawala
President

Gautam Nayak
Chairman
Taxation Committee

Pre-Budget Suggestions, 2012-13
Direct Tax Laws
SUBSTANTIAL AMENDMENTS

1. Amendments in respect of issues/points covered by the Direct Taxes Code Bill, 2010 (the DTC)

1.1 The DTC has been extensively discussed and debated across the country by various stakeholders and detailed representations have been made to the concerned authorities and before the Standing Committee of the Parliament.

1.2 It has been time and again reiterated by the Finance Minister and other concerned officials that after considering the recommendations of the Standing Committee of Parliament, the revised DTC Bill is likely to be presented to the Parliament either in the winter session or in the budget session and is likely to be made effective from 1st April, 2012.

1.3 Even assuming that due to procedural and other compulsions, the DTC Bill is not presented to the Parliament either in the winter session or in the budget session and the date from which the DTC is likely to be made effective is postponed from 1st April, 2012 to 1st April, 2013 or thereafter, it would be prudent to let the DTC take its final shape and in respect of any of the issues/matters covered by DTC, no amendment should be made in the corresponding or related provisions of the Income-tax Act, 1961 (the Act). Such amendments to the Act would also not be appropriate if the relevant amendments are already under the separate consideration of Parliament in the form of the Direct Taxes Code Bill, 2010.

1.4 It is, therefore, strongly suggested that in the Finance Bill 2012 to be presented in the Parliament in February, 2012, no amendment in respect of any of the issues/matters covered by DTC and under consideration of the Standing Committee of the Parliament/Parliament, should be proposed.

    2. Deemed speculation loss in case of companies — Explanation to section 73

2.1 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.

2.2 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.

2.3 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.

2.4 Accordingly, speculative business is normally understood as business in respect of transactions where settlement takes place without actual delivery.

2.5 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.

2.6 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.


2.7 Automation of the trading mechanism, screen-based trading, controls on reporting of capital market transactions by share -brokers, submission of AIRs, dematerialisation 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.

2.8 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.

2.9 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.

2.10 It is, therefore, suggested that the aforesaid Explanation to section 73 of the Act be deleted.

3. Provisions relating to gift: section 2(24)(xv) and section 56(2)(vii)

3.1 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.

3.2 The gift-related provisions were sought to be introduced twice over in the past — but were, for valid reasons, withdrawn after due consideration.

3.3 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.

3.4 Measures of rationalisation

In case for any reason, the provision has to remain on the statute, it should be rationalised appropriately. The measures of rationalisation suggested are as under:

    A) The following receipts should be exempted from the charge:
    a) Gift to/from Hindu undivided family by/to a member of the family.
    b) Any receipt which is in the nature of damages or accident compensation or which is received on compassionate grounds.
    c) Any receipt which is in the nature of prize or reward for performance at state, national or international level.
    d) Any receipt, which is not in the nature of a gift.
    e) Such other receipts as may be notified by the CBDT.

    B) Further, there is an anomaly in the existing provisions inasmuch 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.

    4. Interest, commission, brokerage, rent, royalty, fees for services, payment to contractors, etc. not to be allowed as deduction unless tax deducted at source: Section 40(a)(ia)

4.1 Section 40(a)(ia) as inserted in the Income-tax Act vide the Finance (No. 2) Act, 2004 is prone to interpretation which is wholly unintended and is likely to result in undue and unbearable hardship to the taxpayers. There is, therefore, an urgent need for a suitable amendment and/or for a suitable CBDT Circular which avoids such hardships.

4.2 Section 40(a)(ia) provides that interest, com-mission, brokerage, rent, royalty, fees for profes-sional services, fees for technical services or pay-ments under a contract or sub-contract payable to a resident will not be allowed as deduction unless tax has been deducted at source and paid in accordance with provisions of section 200.

4.3 This provision is unjust. Tax deducted at source is only one mode of recovery of tax. The person paying the amount is, in fact, doing a service to the Government by deducting tax and paying it to the Government without any compensation. To penalise him by refusing deduction of expenditure even for a small default is unfair.

4.4 There are many cases where there can be two opinions on whether tax was deductible at all. If under a bona fide belief that tax was not required to be deducted the assessee does not deduct tax, but if the Department takes a view that tax was deductible, then the assessee would be refused deduction of the whole of the expenditure. Thus, even in a bona fide case, because the assessee has failed to deduct 1% from payment to a contractor or short-deducted few rupees from a payment, he may lose 100% deduction.

4.5 Under the Income-tax Act, if there is a failure to deduct tax or to pay tax deducted, there are provisions to levy interest, penalty and also to recover the tax either from the person who has failed to deduct tax at source or from the person receiving the payment. In extreme cases, the defaulter can even be prosecuted.

4.6 In this background and with such wide powers at the disposal of the Department, this provision disallowing deduction of expenditure to the asses-see is unfair and extremely harsh.

4.7 Deduction of tax from payment to a resident must be distinguished from payment to a non-resident. In case of non-residents, payment is very often to a person whose connections with India are only transient or who may not have any assets in India to discharge the tax liability. This is not the case in respect of the payments to residents. The tax authorities have sufficient powers to recover the tax from resident receivers of income (Refer section 191).

4.8 Hence, there is no justification for such a pro-vision in case of payments to residents and section 40(a)(ia) should be deleted.

Short payment results in total disallowance!!

4.9 Also, a literal interpretation of the provision may bear out that there is likelihood of disallowance should there be short payment of tax. Though the default may be marginal, the entirety of the underlying expenditure may stand disallowed in the assessment of the assessee’s income. This can happen due to administrative lapse or error. Surely, the legislative intent can never be so harsh.

4.10 Therefore, the section should be amended and it should be provided that the disallowance would only be proportionate to the amount of tax/ surcharge/education cess short-deducted and not in respect of the entire expenses.

Need for corrective action

4.11 There are a number of other situations which demand that these provisions touching the length and breadth of the country are implemented pragmatically — if necessary, by a suitable amendment to the law without compromising on the avowed objective of inculcating TDS discipline. As one alter-native, power may be given to the Commissioners to waive defaults in genuine cases. The situations which need consideration are:

    a) One can visualise cases wherein there is small or arithmetical error in compliance resulting in short payment of tax.

    b) There could be valid and bona fide cases in which, based on honest difference of opinion, an assessee finds that he has applied a wrong section or finds that an inadvertent default has been committed.

    c) There would be multiple cases in which, by the time, error is detected by the assessee, the recipient of income would have already paid up his taxes and/or would have been assessed to tax.

    d) Indeed, in real-life situations, there can be numerous other circumstances which are beyond the control of the assessee. For example: bank strike, calamities, personal disabilities in case of proprietary or partnership concerns, Court stay, litigation, etc. We submit that all such cases require sympathetic and due consideration. Surely, it can never be the Government’s intention by introducing this provision to collect duplicated revenue from citizens, nor can it be the intention to inflict undue hardship without paying heed to the reasons which lead to unintended default or delay.

4.12 While the above is the minimum which we believe ought to be rewarded to the citizens, we would once again reiterate our consistent stand that any provision on the lines of section 40(a)(ia) is the antithesis of the theory of real income to which alone the income-tax law should be wedded. We repeat that there are adequate penal provisions in the law to deal with the defaulters and it would be too unrealistic to continue with a provision like section 40(a)(ia) which can distort the level of assessable income to incredible or unbearable proportion.

Alternative suggestion

4.13 Alternatively, if the existing provisions of sec-tion 40(a)(ia) are to continue, an amendment is required for a situation where the payee has already paid the relevant taxes. Often, the deductor may not have deducted tax at source due to oversight, and suffers disallowance of the payment under this section. However, subsequently, the payee files his return of income and makes good the shortfall in tax deduction by making payment of taxes on his own. In such cases, where the payee has paid the relevant taxes, it is not possible for the deductor, nor is it required by law for the deductor, to further deduct tax at source. In such circumstances, the deductor may suffer total disallowance of the expenditure, notwithstanding the fact that the tax in respect of such income has already been paid by the payee. Since the purpose of tax deduction at source is to ensure that taxes on the relevant income are paid, and since the deductor is no longer regarded as a defaulter once the payee has paid the taxes, there is no rationale for not allowing the deductor a deduction of such amount in the year in which the payee has made the payment of the relevant taxes.

4.14 It is, therefore, suggested that the proviso to section 40(a)(ia) be suitably amended retrospectively with effect from A.Y. 2005-06 to provide that the deduction shall also be allowed in the year in which shortfall in tax deduction has been made good by the payee by paying the relevant taxes, or shall not suffer disallowance if the payee has paid the relevant taxes before the due date of filing of the return of income of the deductor.

    5. 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.

    6. 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 up-wards taking into account the impact of inflation. In particular, the limits of Rs.5,000 and Rs. 10,000 u/s.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.

ICAI and its members

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1. Code of ethics

The Ethical Standards Board of ICAI has considered some of the ethical issues which have been published in C.A. Journal of December, 2011 at pages 842-844 and are as under.

(i) Issue : What is the status of a Chartered Accountant who is a salaried employee of a Chartered Accountant in practice or a firm of such Chartered Accountants?

An associate or a fellow of the Institute who is a salaried employee of a Chartered Accountant in practice or a firm of such Chartered Accountants shall, notwithstanding such employment, be deemed to be in practice for the limited purpose of the training of articled assistants. He may hold Certificate of Practice, but he is not entitled to perform attest functions.

(ii) Issue: Can a member in practice be promoter/ Promotor director of a company?

There is no bar to a member in practice becoming a promotor/signatory to the Memorandum and Articles of Association of any company. For becoming such promotor/signatory, members are not required to obtain specific permission of the Council. There is also no bar for such a promotor/signatory becoming Director simplicitor of that Company, irrespective of whether the objects of the company include areas which fall within the scope of the profession of Chartered Accountants. In this case also, specific permission of the Council is not required.

(iii) Issue: Can a member in practice be a sleeping partner in family business concern?

A member in practice can be a sleeping partner in a family business concern, provided he takes specific permission from the Council in terms of Regulation 190A of the CA Regulations.

(iv) Issue: Can a member share profits with the widow of his deceased partner?

When there are two or more partners and one of them dies, the widow of the deceased partner cannot receive a share of the profit of the firm. However, such widow of a deceased partner, would be entitled to share the profits only where the partnership agreement contains a provision that on the death of the partner, his widow or legal representative would be entitled to such payment by way of sharing of fees or otherwise for the specified period.

(v) Issue: Can there be any sharing of fees between the widow or the legal representative of the proprietor of a single-member firm and the purchaser of the goodwill of the firm on the death of the sole proprietor of the firm?

There could not be any sharing of fees between the widow or the legal representative of the proprietor of a single-member firm and the purchaser of the goodwill of the firm on the death of the sole proprietor of the firm. Payment of goodwill to the widow is permissible in such cases only for the goodwill of the firm and to enable such payments to be made in instalments, provided the agreement of the sale of goodwill contains such a provision. These payments, even if they are spread over the specified period, should not be linked up with participation in the earnings of the firm.

2. Conversion of a CA firm into Limited Liability Partnership (LLP)

ICAI has issued detailed guidelines for conversion of CA firms into LLPs on 4-11-2011. These guidelines are published on pages 939-941 of CA Journal for December, 2011. Some of the salient features of these guidelines are as under.

(i) All existing CA firms who want to convert themselves into LLPs are required to follow the provisions of Chapter-X of the Limited Liability Partnership Act, 2008 read with Second Schedule to the said Act containing provisions of conversion from existing firms into LLP.

(ii) In terms of Rule 18(2)(xvi) of the LLP Rules, 2009, if the proposed name of LLP includes the words ‘Chartered Accountant’ or ‘Chartered Accountants’, as part of the proposed name, the same shall be referred to ICAI by the Registrar of LLP and it shall be allowed by the Registrar only if the Secretary, ICAI approves it.

(iii) If the proposed name of LLP of CA firm resembles with any other non-CA entity as per the naming Guidelines under the LLP Act and its Rules, the proposed name of LLP of CA firm may include the word ‘Chartered Accountant’ or ‘Chartered Accountants’, in the name of the LLP itself and the Registrar, LLP may allow the same name, subject to compliance to Rule 18(2)(xvi) of the LLP Rules as referred above.

(iv) For the purpose of registration of LLP with ICAI under Regulation 190 of the Chartered Accountants Regulations, 1988, the partners of the firm shall apply in ICAI Form No. 117 and the ICAI Form No. 18 along with copy of name registration received from the Registrar of LLP and submit the same with the concerned regional office of the ICAI. These Forms shall contain all details of the offices and other particulars as called for together with the signatures of all partners or authorised partner of the proposed LLP.

(v) The names of the CA firms registered with the ICAI shall remain reserved for the partners as one of the options for LLP names, subject to the provisions of the LLP Act, Rules and Regulations framed thereunder.

(vi) There are provisions relating to seniority of firms.

(vii) These guidelines will apply to conversion of proprietary firm into LLP.

(viii) There are similar provisions for formation of new LLP by Chartered Accountants in practice.

(ix) It may be noted that the following issues have not been clarified in these guidelines.

(a) Whether a CA firm converted into LLP can continue as statutory auditors of a limited company under the Companies Act and other similar Acts.

(b) Whether the proprietary concern or firm of Chartered Accountants converted into LLP will get exemption from Capital Gains Tax on transfer of capital assets, including goodwill, of the firm to the LLP. No specific exemption is provided in section 47 of the Income-tax Act on such conversion.  

3. EAC Opinion

Depreciation on freehold land having mineral reserves and the internal roads constructed in the premises of the company.

Facts
A State Government company is engaged in mining and marketing of four major minerals, namely, rock phosphate, gypsum, lignite and limestone. The company was granted a mining lease for excavation of lignite for a period of 20 years and accordingly, the company has purchased/acquired a 1063.35 hectare of freehold land having estimated mineable lignite reserves to the tune of 172.90 lakh MT for sum of Rs.18,98,59,223. As per the approved mining plan, the reserves of lignite is to be mined in 20 years. The ownership of the land would, however, remain with the company after excavation of the entire lignite reserves. After complete excavation of the mining of lignite, land would not be useful for any other purposes.

According to the company, as the mining lease was for a period of 20 years, the company has adopted the accounting policy to write off the freehold land on the basis of future benefit likely to be accrued and started writing off the value of land equally @ 1/20th per annum in view of the fact that the lease is only for 20 years. This policy has been reflected in the books of account by way of note reproduced below:

“Cost of freehold mining land is amortised on the basis of future benefit likely to be accrued.”

Due to some natural hazards beyond the control of the company, the company could not excavate the requisite of lignite as per approved mine plan.

The auditors while conducting the audit have commented that the method of writing off freehold land was not commensurate with the declared accounting policy and the matching principle. According to the auditors, as per matching principle, cost and revenue should match in the period in which they occur and such as, the company should have amortised the freehold land on the proportion of lignite mined during the year and total recoverable reserves available at the beginning of the year.

The company is also having internal roads in the mine area and the same are depreciated as per Schedule XIV to the Companies Act, 1956, i.e., @ 5% p.a. on the written down value (WDV). The auditor was of the view that internal roads in the mine area should have been depreciated on the line of amortisation of land.

The company sought the opinion of EAC as to whether accounting treatments given by the company for amortisation of the land is in order or not. If not, whether the company should charge depreciation as suggested by the auditors.

Opinion
The EAC is of the view that, in this case, since the sole purpose of acquisition of the land is to exploit it for extraction of mineral recourse and extraction of such minerals is the only economic use of the land for the company, the useful life of the freehold land would be more appropriately governed by the extractable minerals available on the land extraction thereof. In other words, it would be more appropriate to depreciate the freehold land on the basis of units of minerals extracted, viz., Units of Production method. Accordingly, the Committee is of the view that the cost of acquisition of freehold land, in the case of the company, should be depreciated on the basis of the actual quantity of lignite extracted during a period as against the estimated quantity of extractable mineral reserves.

Further, EAC is of the view that the change in the method of depreciation from straight-line method to Unit of Production would result into more appropriate presentation of financial statements of the company. The impact of the change in the method of depreciation should be calculated retrospectively from the date of the concerned asset coming into use.

The EAC is also of the view that in the case of the company, the internal roads may include two types of roads — roads that might exist when the freehold land is acquired and those developed thereafter by the company to gain access to mineral reserves. The application of unit of production method for depreciation of roads does not appear to be appropriate and the same should be depreciated separately based on their useful life.

(Pages 867 to 871 of CA Journal, December 2011).

4. ICAI News

(Note : Page Nos. given below are from CA Journal for December, 2011)

i) ICAI Publications

    a) Handbook on Professional Opportunities in Internal Audit (Page 946)
    b) Handbook on Special Economic Zone (Revised Edition)

ii) Guidance Note on certification of XBRL Financial statements has been published on page 968-978.
 

iii) CPE hours requirements for various categories of members of the Institute for the block period of 3 years (1-1-2011 to 31-12-2013)

From the President

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Hope and expectation

Dear Members,

The months of June and July are months of hope and expectation. The entire nation is hoping for a good monsoon, students who appeared for their CA examinations are hoping for a good result, and there is both hope and expectation that the change of guard in the Finance Ministry will bring cheer to a beleaguered economy.

As far as the rains are concerned, they have a knack of playing truant. In fact they defy the Meteorological Department with such unfailing regularity that when a near normal monsoon was predicted, one started worrying. The month of June has passed without much rain and as usual, Prophets of doom have started predicting a severe drought.

While it is true that no one has any control over the weather gods, very little seems to have been done in reducing the dependence on the monsoon for water requirements of both agriculture as well as domestic consumption. While one appreciates that increasing the area of land under irrigation is a long-term measure, developing water storage facilities for human consumption, conserving and ensuring minimum use of water are measures that will avert a crisis.

While there is uncertainty over the way the monsoon will behave, it appears certain that the former Finance Minister Mr Pranab Mukherjee will assume office as the President of India. As he prepares for the presidential election the charge of the Finance Ministry has been taken by the Prime Minister Mr Manmohan Singh. One only hopes that as Finance Minister we will see a decisive Mr Singh and not a person bullied by his allies. He is credited with ushering in major reforms, which brought India back from the brink in 1992. Though the situation is not as grave there is need for certain urgent policy measures. The business community has huge expectations from him. In his new innings we expect him to introduce some long overdue economic reforms even at the cost of forcing the nation into an early general election. This is an opportunity for him to change public perception of being a weak Prime Minister to a true leader.

A leader needs to take responsibility for his acts of commission and omission as well as those of his juniors. In the recent fire that gutted three floors of Mantralaya, we saw the blame game in full swing. No Minister was willing to take responsibility for the unfortunate event. While the enquiry into what caused the fire will progress at its own pace and come to some conclusions, what one needs to see is whether the powers that be will learn from the mistakes of the past. This is one characteristic that we need to learn immediately. It is not as if one cannot learn from past mistakes and tragedies. Post 9/11 the U.S. tightened its security to an extent that it did not spare any individual.

It is this sense of adherence to rules and accountability that makes the difference between, a small fire being doused immediately and the disaster we witnessed. One hopes that the government will mend its ways and avoid the recurrence of such events. This issue of the BCAJ is a special issue on professions. We belong to the profession , members of which ,Society expects to have integrity and discipline. Sadly these two qualities are on the wane, among the public in general and our profession is no exception.

I believe that we may acquire all the technical skills, update our knowledge but if our members, do not imbibe these two qualities success will be short lived. As I had said at the outset this is a month of hope and expectation. My tenure as the President of this august institution will end on 6th July 2012 when I will be handing over the baton to the President elect Mr Deepak Shah. Post 6th July I expect some respite from the hectic schedule which I have had for the past one year.

From the month of August of last year I have had the opportunity of communicating with you through this page. I have enjoyed this monthly endeavour. I hope my readers have found the effort worthwhile. In my innings as the President I made a sincere attempt to ensure that the prestige of this Institution was maintained. In my small way I have tried to add some new programs.

 I am conscious that I have left substantial unfinished agenda for my successor. I am sure that he will be able to complete them with support from his enthusiastic team. It is now time to bid adieu. It is said that that one should not feel sad about saying good bye, for it is the interregnum between two meetings and with friends meeting is a certainty irrespective of the interval.

Therefore bye till we meet again in person!

With warm regards,
Pradip K. Thanawala

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Direct Taxes

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DTAA between India and Estonia notified: Notification No. 27/2012 dated 25th July, 2012

The Double Tax Avoidance Agreement signed between Estonia and India on 19th September, 2011 has been notified to be entered into force on 20th June, 2012. The treaty shall apply from 1st April, 2013 in India.

DTAA between India and Lithuania notified : Notification No. 28/2012 dated 25th July, 2012

The Double Tax Avoidance Agreement signed between Lithuania and India on 26th July, 2011 has been notified to be entered into force on 10th July, 2012. The treaty shall apply from 1st April, 2013 in India.

Income tax (Eighth amendment) Rules, 2012 – Amendment in Rule 12 and substitution of ITR 7 – Notification no- 29/2012 [F.No. 142/31/2011-TPL] dated 26th July, 2012

Due date of filing returns for assessee required to file their return by 31st July extended till 31st August 2012 – Direct Tax Order F.No. 225-163-2012-ITA.II dated 31st July, 2012

Disallowance of expenses u/s 37(1) incurred in providing freebees to Medical Practitioner by pharmaceutical and allied health sector Industry – Circular No. 5/2012 dated 1st August, 2012

The Medical Council of India (Governing Body) has imposed a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries. It has been clarified by the Board that in cases where such freebees are provided, such expenses would be disallowed as per the provisions of section 37(1) read with its Explanation. Since such expenses would be covered under “prohibited by any law”, and cannot be claimed as business expenses. Further, the AOs of such medical practitioners and their professional associations have been directed to look into and consider the value of such freebees as either business income or income from other sources as the case may be.

Mandatory E-filing of return of income by representative assessees of non-residents and in the case of private discretionary trusts relaxed for assessment year 2012-13 – Circular No. 6/2012 [F.No. 133/44/2012-SO (TPL)] , dated 3rd August, 2012

It would not be mandatory for agents of nonresidents, within the meaning of section 160(1) (i) of the Income-tax Act and for ‘private discretionary trusts’ to electronically furnish the return of income for assessment year 2012-13, though its total income exceeds Rs 10 lakh.

Tax Information Exchange Agreement (TIEA) entered with Guernsey – Notification No. 30 dated 9th August 2012 – India has entered into a TIEA with Guernsey for sharing of information with respect to taxes. The Agreement shall enter into force from 11th June, 2012.

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ICAI News

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

 i) Audit of smaller entities: ICAI has prepared a note on the above subject which has been published on pages 453 to 465 of CA Journal for September, 2012. The Standards on Auditing, issued by ICAI, contain objectives, requirements and application and other explanatory material that are designed to support the auditor in obtaining reasonable assurance about the financial statements and express an appropriate opinion. The note prepared by ICAI explains the importance by using SA for Audit of small entities.

ii) Eligibility of paid assistant in CA firm Regulation 43 of Chartered Accountants Regulations has been amended w.e.f 1-8-2012, providing that the period of employment of paid assistant to the same firm of Chartered Accountants for the purpose of engagement of articled assistants 111 (2012) 44-b BCAJ has been increased from the present period of 12 months to 3 years. This notification is available on Institute Website (Page 518).

iii) New branches of students association The following two branches have been opened for Western India Chartered Accountants Students Association w.e.f. 4-7-2012 (Page 518). a) Gandhidham Branch of WICASA b) Solapur Branch of WICASA iv) Announcement for members in practice The following announcement has been published by ICAI (Page 518).

In continuation of the Announcement published in the February, 2011 issue of the C. A. journal at 1174, attention of the members in practice is hereby once again drawn to the resolution of the Council taken in December, 2010 required to be complied with, while responding to tenders or enquiries issued by various users of professional services.

In terms of the said Council decision, a member in practice responding to tenders and accepting professional work based thereon, is required to maintain a cost sheet incorporating therein details of the costs being incurred therein having regard to number of persons involved, hours to be spent, etc.

The said cost sheet is required to be submitted to the Institute, when so directed. Members concerned are required to take note of the above and ensure compliance, in their own interest.

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EAC Opinion

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Accounting for book value of fixed assets demolished for expansion purpose.

Facts:

A company is an infrastructure company, which is developing, constructing, operating and maintaining an international airport. The company has in its Fixed Assets Register (FAR), various assets, which include buildings and other infrastructure assets used for the airport operations. Depreciation is provided on straight line method (SLM) based on the useful life of the assets in line with the rates prescribed under Schedule XIV to the Companies Act,1956 which are considered as the minimum rates.

The company has stated that after three years of commencement of operations, the company is planning to expand the existing terminal building in order to cater to the increase in passenger traffic movement. Due to this, portion/part of the existing building and other infrastructure assets may have to be demolished. The book value of those assets are of material amounts. Net realisable values arising from disposal of those assets are not material. This demolition is required exclusively for the expansion of the terminal building. Kind of assets demolished includes : (a) part of building, (b) escalators, (c) furniture and fittings and (d) electrical installations.

Query:

On the basis of the above, the company has sought the opinion of Expert Advisory Committee on the treatment of the above value of assets in the books of the company?

Opinion:

The Committee notes that in the company’s case, the fixed assets register is being maintained wherein the details of various assets, viz., buildings, escalators, etc. are being recorded separately and , therefore, the assets which are being demolished can be identified separately. Further, it is understood from the Facts of the Case that the existing assets are being demolished and there is no intention to refurbish such assets. Further, these assets will not be used in future.

The Committee is also of the view that there could be the possibility of a time gap between the time when these assets are retired from their active use and the time when these are demolished/ disposed off. The Committee, considering AS 10

 “Accounting for Fixed Assets”, is of the view that a fixed asset should be eliminated from the financial statements on disposal or when no further benefit is expected from its use and disposal. Further, as per the requirements of AS 10, when an already existing fixed asset is demolished for constructing a new asset, it is the derecognition principles of AS 10, which are to be first applied to the existing asset before recognition of a new asset, irrespective of the purpose for which it has been demolished/ disposed off. Accordingly, the Committee is of the view that on disposal/demolition of the existing fixed assets, the carrying amounts of the portion/items of the fixed assets demolished/disposed off, should be eliminated from the financial statements and the gain or loss on derecognition, i.e., the difference between the net disposal proceeds (if any) and the net book value of such fixed assets, should be recognised in the statement of profit and loss.

As regards capitalisation of book value of the demolished asset to the cost of new asset to be constructed, the Committee is of the view that although demolition/disposal of the existing asset may be necessary for the construction of new asset, the demolished asset is not part of the construction activity and accordingly, can not be said to be directly related to the specific asset or attributable to the construction activity in general. Therefore, the book value of the demolished/disposal of asset should not be capitalised as part of the cost of the new asset.

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Code of Ethics

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The Ethical Standards Board of ICAI has given answers to some of the ethical issues raised by our members. These are published on pages 416- 418 of C.A. Journal for September, 2012. Some of these issues are as under:

 (i) Issue: In a representation submitted to a company u/s. 225(3) of the Companies Act, 1956, the auditors of the company included the contribution made by the firm in strengthening the control procedures of the company during their association with the company. Is it misconduct? Para (i) under Clause (6) of Part 1 of the First Schedule to the CA Act, provides for scope of such representation, which an Auditor is entitled to make u/s. 225(3) of the Companies Act, 1956. This section permits a retiring auditor to make a representation in writing (not exceeding a reasonable length) to the company. The proposition of the partner to highlight contributions made by the firm in strengthening the control procedures in the representation should not be included in such representation because the representation letter should not be prepared in a manner so as to seek publicity. The Code of Ethics issued by the Institute makes it amply clear that the right to make representation does not mean that an auditor has any prescriptive right or a lien on an audit. The wording of his representation should be such that apart from the opportunity not being abused to secure needless publicity, it does not tantamount directly or indirectly to canvassing or soliciting for his continuance as an auditor. The letter should merely set out in a dignified manner how he has been acting independently and conscientiously through the term of office and may, in addition, indicate if he so chooses his willingness to continue as auditor if re-appointed by the shareholders. The representation proposed by the auditors could not be approved since, it may lead to his being held P. N. Shah H. N. Motiwalla Chartered Accountants icai and its members guilty of professional misconduct under Clause (6) of Part 1 of the First Schedule to the Act.

(ii) Issue:

Can a Chartered Accountant in practice, accept original professional work emanating from the client introduced to him by another member? Para (i) under Clause (6) of Part 1 of the First Schedule to the Act prescribes that a member should not accept the original professional work emanating from a client introduced to him by another member. If any professional work of such client comes to him directly, it should be his duty to ask the client that he should come through the other member dealing generally with his original work.

(iii) Issue:

Whether a Chartered Accountant in practice can give public interviews and also whether he can furnish details about himself or his firm in such interviews? A Chartered accountant in practice can give public interviews. While doing so, due care should be taken to ensure that such interviews or details about the member or his/her firm is not given in a manner highlighting the professional attainments, which may hit clauses (6) & (7) of the First Schedule of the Act.

(iv) Issue:

 Whether a Chartered Accountant in practice can use expression like Income Tax Consultant, Cost Accountant, Company Secretary, Cost Consultant or a Management Consultant? Council direction under Clause (7) of Part 1 of the First Schedule to the Act which prescribes that it is improper for a Chartered Accountant to state on his professional documents that he is an Income tax Consultant, Cost Accountant, Company Secretary, Cost Consultant or a Management Consultant. However, it is permitted to mention his/her degrees.

(v) Issue:

Can a Chartered Accountant in practice give the date of setting up the practice or date of establishment on the letterheads and other professional documents, etc.? Council direction under Clause (7) of Part 1 of the First Schedule to the Act prescribes that the date of setting up of the firm on the letterheads and the professional documents, etc. should not be mentioned. However, in the Website, the year of establishment can be given on a specific “pull” request.

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FROM THE PRESIDENT

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Dear Members,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

With Warm Regards,
Yours truly,
Deepak R. Shah
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ICAI News

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(i) In CA students Journal for June, 2012 (Page 19) the following announcement by ICAI is published.

 “All members of ICAI are hereby informed that the Council of ICAI has prescribed Regulation 47 of the CA Regulations which reads as ‘No amount shall be charged from, or payable by, an article assistant or any other person on his behalf, directly or indirectly, whether by way of premium or as loan or deposit or in any other form in connection with his engagement as an article assistant’.”

 “In view of the above, charging of premium form article assistants is misconduct under the provision of clause (1) of Part II of the Second Schedule to the C.A. Act and punishable u/s. 21B(3) of the C.A. Act.”

(ii) In CA students Journal for June, 2012 (page 19) the following announcement is published. “It has been decided to henceforth (w.e.f. 23-5-2012) charge a sum of Rs.500 per person as the education verification fee from the companies/agencies seeking such verification of qualification. The fee shall be payable by D.D. in favour of the Secretary, ICAI, payable at New Delhi.”

 It is clarified that this fee is not payable by the Central/State Government, PSUs, Concerned Member/Student.

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Code of ethics

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The Ethical Standards Board of ICAI has given answers to some of the ethical issues raised by our members. These are published on page 1794 of C.A. Journal for June, 2012. Some of these issues are as under.

(i) Issue: Can a Chartered Accountant in practice share his fees with the Government in respect of Government Audit? The Institute came across certain Circulars/Orders issued by the Registrar of various State Co-operative Societies, wherein it has been mentioned that certain amount of audit fee is payable to the concerned State Government and the auditor has to deposit a percentage of his audit fee in the State Treasury by a prescribed challan within a prescribed time of the receipt of audit fee. In view of the above, the Council considered the issue and while noting that the Government is asking auditors to deposit such percentage of their audit fee for recovering the administrative and other expenses incurred in the process, the Council decided that as such there is no bar in the Code of Ethics to accept such assignment wherein a percentage of professional fees is deducted by the Government to meet the administrative and other expenditure.

(ii) Issue: Can a goodwill of a Chartered Accountants’ firm be purchased? The Council of the Institute considered the issue whether the goodwill of a proprietary firm of Chartered Accountant can be sold/transferred to another eligible member of the Institute, after the death of the proprietor concerned and came to the view that the same is permissible. Accordingly, the Council passed the Resolution that the sale/transfer of goodwill in the case of a proprietary firm of Chartered Accountants to another eligible member of the Institute, shall be permitted, subject to the provisions appearing at pages 129-130 of the Code of Ethics 2009 edition.

(iii) Can a practising Chartered Accountant solicit clients or professional work by advertisement? Clause (6) of Part-1 of the First Schedule to the Act prohibits a practising Chartered Accountant from soliciting clients or professional work either directly or indirectly by circular, advertisement, personal communication or interview or by any other means.

However, there are the following exceptions to it:

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

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

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

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Letters

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Sir,

I am an avid reader of BCAJ. The article captioned “Accounting of Foreign Currency Translations,” which appeared in the February 2012 issue of the BCAJ, provided immense clarity on the subject. It captured all the complications in a precise and concise manner.

I request you to publish an article on the same subject giving stepby- step guidance on journal entries to be passed.

—R Dilip Kumar Chartered Accountant

Sir,

The Budget presented in Parliament by Hon. Finance Minister reminded me of the remark made by Vidya Balan, the heroine of Dirty Picture, with a slight modification – “Expenditure, Expenditure, Expenditure.” Source: Robbing the Future and Digging the Past (Retrospectively). All that remains for him to say is, “Aur main expenditure hoon.” And sure he is. The so-called deficit, both revenue and fiscal, has been reworked cleverly using divestment target (Rs. 30,000 Crore) which will never materialise (?), gap in the revenue and expenditure of over Rs. 1,85,000 crore, which is left unbalanced, assumes subsidy burden of 2% (which will in all probability be far more at 4% to 5% of GDP)… the list is endless, and of course there is the borrowing, the growing debt of the Centre and the States. As if not satisfied with it, they now want to turn into grave-diggers by digging money and taxes from the past with retrospective amendments dating back to 1961, when I was a threeyear- old baby and many of us were not even born. The Budget claims to aim at a faster, sustainable and more inclusive growth in a stable environment. FM reiterates in Para 8 of his speech. “I know that mere words are not enough. What we need is a credible road map backed by a set of implementable proposals to meet these objectives…” Good words indeed, but again empty words. Our new Budget jingle will be – “Spend it all, spend it all, spend it all the way. Oh what fun it is to spend, When you’re not answerable any way.” Yes, there are increased doses of expenditure in all areas of the economy. But it does not add up to a sustainable game plan. Then there is the regressive move to enlarge service tax burden by a whopping 20% from 10% to 12%, which will hit the poor and the middle-class the most. There is a lot of devil in the fine print as well – Alternate Minimum Tax extended to all taxpayers, then there is TDS @1% on transfer of immovable property, TCS of 1% on cash sale of gold/bullion and jewellery. Special tax courts for summary trials and prosecution makes us look like petty offenders, rather than honest law-biding citizens. To top it up is the GAAR. The whole sense that it conveys is an extreme authoritarian hegemonistic attitude, where rather than treating the tax payers as partners in progress they are made to look like criminals and cheats. Unless we act, our position would be as illustrated in the Sanskrit couplet “Ashwam Naiva, Gajam Naiva, Vyagrham Naivacha Naivacha, Ajaputram Balim Dadyat Devo Durbala Ghatakaha”. (Not the horse, nor the elephant, and never the tiger, it is the kid goat that is sacrificed to the Gods.) We will be the sacrificial lambs.

—Dr. Vishnu Kanhere
Chartered Accountant

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Direct Taxes

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Income tax (12th amendment) Rules, 2012 – Insertion of Rule 21AB and Forms 10FA and 10FB- Notification no- 39/2012 [F.No. 142/31/2011-TPL] dated 17th September, 2012

The Rule prescribes the particulars that must be included in a Tax Residency Certificate, which a nonresident would obtain, from the Government of the country or the specified territory of which he is a resident. The Rule also provides that a person being a resident in India, shall, for obtaining a certificate of residence for the purposes of an agreement referred to in section 90 and section 90A, make an application in Form No. 10FA to the Assessing Officer and the Assessing Officer shall issue a certificate of residence in Form No. 10FB. The Rule will come into force from 1st April, 2013.

Income tax (13th Amendment) Rules, 2012 – Debt securities issued by infrastructure finance companies which are registered with RBI are now included in the list of eligible investments u/s. 11(5) for Charitable trusts – Notification no 40 dated 20th September 2012 


Income tax (14th Amendment) Rules, 2012 – Notification no 42 dated 4th October, 2012

In case of search and requisition, specified categories of assessees have been notified wherein assessment/ reassessment notice would not be issued by AO for six assessment years immediately preceding the year for which assessment is in progress as prescribed in these rules.

Annual detailed Circular on Deduction of tax from Salaries during the Financial Year 2012-13 – Circular No. 8 of 2012 [F.No. 275-192-2012-IT(B)] dated 5th October, 2012

TDS on payment of gas transportation charges – Circular No 9/2012 dated 17th October, 2012

The Board has clarified that so long, as it can be established that the transportation of the gas is furtherance to the actual sale of natural gas by the seller, TDS provisions will not be triggered since essentially it is ‘contract of sale’ and not ‘works contract’. In case a third party transports gas, TDS would apply u/s. 194C of the Act.

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ICAI News

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(i) Code of Ethics

The Ethical Standards Board of ICAI has released a brochure — ‘CA Ethics Plus’ to promote ethical standards amongst members. This will available on the website of ICAI. (Page 9) (ii) Message from Minister of Corporate Affairs In a recent message given by the Minister of Corporate Affairs, he has stated as under: “The Institute of Chartered Accountants of India, being an excellent regulator, standard setter and educator, has been greatly contributing as a ‘Partner in Nation-building’.

The accountancy profession has been the backbone of fiscal discipline in the country. The nation has great expectations from the Institute and its members. They have a pivotal role to play in good governance by ensuring transparency, compliance with statutory as well ethical requirements, correctness of accounts and business advice for the benefit of all the stakeholders, including the government and society. You have a crucial role to play in India’s growth story. Keep up the good work.”

(iii) CA qualification recognised by University System

The following news item is reported on page 110 of C.A. Journal for July, 2012. The Chartered Accountancy qualification has been recognised in the University System particularly for pursuing Doctorate of Philosophy (Ph.D). The Association of Indian Universities (AIU) has recognised CA Course as equivalent to post-graduate course in Commerce for registration to Ph.D Programme by passing the following resolution — “Resolved that the graduates having passed their final examination of the Institute of Chartered Accountants of India, New Delhi be treated to have completed a post-graduate degree in Commerce or allied discipline for purpose of registration to Ph.D.” With constant follow-up with various Universities and Indian Institute(s) of Management, the Board of Studies has been successful in obtaining recognition from 84 Universities and 6 IIMs for members of the Institute to pursue Ph.D. Recently, ICAI has received letter from University Grants Commission (UGC) stating that the threshold limit of 55% marks in post-graduate examination is not applicable in case of the Chartered Accountants for enrolment to Ph.D Programme.

(iv) Status of intervening holidays during CA Examination

The Council of the Institute recently considered the issue regarding status of intervening holidays during CA Examinations and decided that the break in between examination days, though not holidays, be treated as period actually served under articles. The Council further decided that if an articled assistant appears for one group, all intervening break for any reason, from the day of commencement of CA Examination till the day of last examination of the concerned group and similarly, if an articled assistant appears for both groups, then all 637 (2012) 44-A BCAJ intervening breaks for any reason from the day of commencement of CA Examination and completion of both groups of the examination be treated as part of the training and the articled assistants be deemed to be on duty accordingly. Accordingly, all intervening holidays or breaks due to any reason, falling in between the day of commencement of CA Examination till its completion as above explained will be treated as part of the training i.e., the articled assistants be deemed to be on duty. (Page 212)

(v) Campus Placement Programme

The following Campus Placement programme for newly qualified CAs has been organised by ICAI during the months of August and September, 2012. (Refer page 213)

(vi) Update on strength of members and students of ICAI

The following are some of the figures made available for information of members (page 192). Membership strength of the ICAI stands at 1,96,748 as on 15th June, 2012.

Update for strength of students available on page 194.

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From The President

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Dear Members,

By the time this issue reaches your hands, most of you would be feeling relaxed after the hectic days in the end of September. This year Ganesh Chaturthi festival being in the second fortnight of the month, everybody would have faced difficulties and pressure situations. But, surely Lord Vignaharta was there to take care of all the stress. Every year when the deadline approaches, there is a clamour for extension of the date. I would earnestly request each one of you to ask a question to oneself – Do we really need the extension? I am sure the answer would be ‘no extension’, as the scenario would be the same for next month also. The only solution is to educate clients, chalk out systematic schedules, and accept assignments that are within our capacity.

Friends, it’s time to rejoice now and put aside all the stressful & negative experience, and celebrate the positive spiritual vibrations emanating from the coming holy festivals of Navratri & Dussera.

On the Society front, I am happy to share with you that the most eagerly awaited event – our 46th RRC – to be held this year at Bangalore, has received an overwhelming response, and enrolment was closed within a week of it’s announcement. I congratulate our Seminar Committee for the same, and I am sure members enrolled will have a great time. The International Taxation Committee and Taxation Committee of BCAS has forwarded the representation on draft report of the Expert Committee on GAAR, and we do hope that the issues covered in the representation will be considered by the Committee.

I have received various emails and feedback from members suggesting organisation of programmes and events at bigger venues, as they could not attend the programme as enrolment was closed. At the outset, I on behalf of BCAS am thankful to all for attending the programmes in large numbers. We have taken note of the inconvenience faced in the past few months, but my only request to all would be to enrol well in advance and not to wait till the last date. Your early action will help us to take remedial action to the extent possible. At this juncture, I would also urge members to enrol for WEB TV facility offered by BCAS, as then, one can watch the important seminars or lecture meetings posted on the WEB TV. I with all earnestness request all our esteemed readers and members to continue their feedback.

I would like to take this opportunity in this month’s communiqué to delve upon an issue that is on our minds, but has taken a back seat and that is of ‘Being Human’. In a society, where the barometer of happiness is judged through one’s wealth and riches, being ‘human’ is a rare quality.

This issue is aimed at getting us working professionals to take a second out from our busy lives to contribute to the society at large, for what is a professional who has no heart and only a mind? There are endless questions that bother us, but none more pertinent than those that follow:

 Is it right to charge a person who lives below the poverty line for a fatal illnesses like cancer ? Is it right to charge a client more than what he has been serviced for ? In charging fees, should one charge fees commensurate with service or according to the ‘ability to pay’ principle ? The so called ‘realists’ would say ‘yes’ and in their truculent manner, state that it is essential to do so to survive.

The Chartered Accountants Act, 1949 gives an overview of what is ethical and what isn’t, but there is only one guide book which shows us what we should do and what we shouldn’t and that is our conscience. And though we, who are deemed to be the smartest minds in the professional world can manipulate documents and numbers, can we sleep in peace when we know the ‘best practices’ that are being followed aren’t what they should be?

The world has become a place where there is growing interdependence amongst nations, where the previously existing fissiparous tendencies have given way to a cordial environment, where individuals now work without any cultural barriers. In such a global workspace, it is important that we as Indians and especially chartered accountants should set the benchmark. And for me, that would be being human along with being witty. For that would definitely take us places. Here is a real life example:

One of the more heart-warming stories involves a young man, his dying grandmother, and a bowl of clam chowder from Panera Bread. It’s a little story that offers big lessons about service, brands, and the human side of business — a story that underscores why efficiency should never come at the expense of humanity.

Brandon Cook, from Wilton, New Hampshire, was visiting his grandmother in the hospital. Terribly ill with cancer, she complained to her grandson that she desperately wanted a bowl of soup, and that the hospital’s soup was inedible. If only she could get a bowl of her favourite clam chowder from Panera Bread! Trouble was, Panera only sells clam chowder on Friday. So Brandon called the nearby Panera and talked to store manager Suzanne Fortier. Not only did Sue make clam chowder specially for Brandon’s grandmother, she included a box of cookies as a gift from the staff.
It was a small act of kindness that would not normally make headlines. Except that Brandon told the story on his Facebook page, and Brandon’s mother, Gail Cook, retold the story on Panera’s fan page. The rest, as they say, is social-media history. Gail’s post generated 500,000 (and counting) “likes” and more than 22,000 comments on Panera’s Facebook page. Panera, meanwhile, got something that no amount of traditional advertising can buy — a genuine sense of affiliation and appreciation from customers around the world.
Marketing types have latched on to this story as an example of the power of social media and “virtual wordof- mouth” to boost a company’s reputation. But I see the reaction to Sue Fortier’s gesture as an example of something else — the hunger among customers, employees, and all of us to engage with companies on more than just dollars-and-cents terms. In a world that is being reshaped by the relentless advance of technology, what stands out are acts of compassion and connection that remind us what it means to be human.
All of us cannot be philanthropists and open a ‘Being Human’ NGO, for we have our own lives to look into, but we definitely can do something, which would give us a sense of satisfaction which material things will not, and I am sure our auditor i.e. God would want to see a healthy balance sheet.

At BCAS, few of our members actively involve themselves, in activities that are being carried out by BCAS Foundation. One such activity is “Chalo English Sikhaye” , where the volunteers teach English to students of Standard 5th to 8th, studying in vernacular schools. There are a lot of other activities which are carried on by BCAS Foundation with other similar organisations. Any member who is interested, may volunteer and join hands with other fellow colleagues for the good cause.

I wish all the luck to Team India, and let’s hope that they lift the World Twenty-20 Cup.

With Warm Regards,

Yours truly,

Deepak R. Shah

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From the President

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Dear Members,

Be Jagrat , Be Vigilant !


I thank you all for making this year special, for electing me as your 64th President, and giving me opportunity to serve the Society, and share my views with all fellow alumni of this profession. It is my honour and privilege to accept this position.
In my acceptance address at the AGM held on 6th July, 2012 I have highlighted the focus areas, and the Annual Plan for 2012-2013 was placed before the members. The said speech is reproduced in this issue in the column “Society News”.
The Annual Plan for the Year 2012-2013 which was laid out in AGM had 3 focus areas:- Relationship, Membership and Mentorship. I urge all members to come forward and share your views and expectations, and join the new Team, as we build relationships, increase membership, and expand our mentorship program.
As we enter the year 2012-2013 I would like to thank you for your continued support to BCAS. In fact, it has been your participation and encouragement that has helped us evolve to serve you better. We take immense pride in keeping you at the core of all our activities and innovations.

I had stated in my speech that the times in which we live, one has to be JAGRAT – to be alert or vigilant at all times. Also one has to move forward in the right direction to reach the goal.

There is a group of famous verses in Sanskrit that ends with the call – “Tasmat Jagrat Jagrat”. If due to lack of alertness, you take a false step, one will suffer an irreversible fall. This is true as much in the case of individuals as much as in that of nations.
We would be celebrating 65 years of India’s Independence on 15th August. As one of the oldest surviving civilization, India has experienced every malady that history has thrown up and through her unique , mature wisdom discovered and applied suitable remedies. It is a hard won legacy which has been achieved not just by way of an accident but by a continuous struggle against heavy odds. India has been able to preserve her soul and protect her identity through all the vicissitudes of time. That is why when the American President Barack Obama visited India, and addressed our parliament he said “ My confidence in our shared future is grounded in the respect for India’s treasured past – a civilization that has been shaping the world. Indians unlocked the intricacies of human body and the vastness of our universe. India not only opened our minds, she expanded our moral imagination.”

Our forefathers have created institutions like the judiciary, the independence of which we must zealously protect, and whose decisions we must respect however severe our disagreement with them. The constitution has created a system of checks and balances. We must recognize the wisdom of our ancestors and preserve the system and not dismantle it.

Such an effort at dismantling the system has been recently witnessed in the Finance Act 2012, bringing in most inappropriate policies like GAAR, and also by its action of retrospectively amending the law to supercede the Supreme Court’s verdict. Such policies and measures has its own negative impact, which has been noticed in the form of devaluation of rupee, loss of confidence by foreign investors, creating an environment which is not conducive to growth. So Vigilance-Jagrat becomes critically relevant in this context.

Let us hope that problems plaguing the economy as well as problems on tax front would be addressed, in the backdrop of incumbent in the finance ministry, and Mr Pranab Mukherjee moving to Rashtrapati Bhavan as the 13th President of India.

No matter where the economy is headed, or even when the nature of reforms in laws brings with it the general negative mood, we Chartered Accountants will have to be Jagrat, especially when you are part of the globally acclaimed CA profession. We all will have to keep pace with the change, and to overcome the challenge.

The next couple of years for CA’s are expected to be challenging years as compared to the past. We have witnessed large scale changes in the Finance Act, 2012 and many more are expected in the near future in major areas of practice. As a consequence of this, the demand for professionals is bound to be on the rise, and would offer tremendous scope to increase their level of practice.

The purpose of BCAS is to assist professionals in advancement and success in their careers, and prepare oneself to meet new challenges. I believe that it always pays to invest in one’s own career. It enables you to explore new avenues in practice.

At BCAS, our efforts will be to keep on innovating and explore new ideas while planning and carrying out various activities. We would endeavour to see that knowledge content created in various programs, reaches to the maximum through the medium of WEB TV.
At the society, we would also constantly endeavour to represent at various levels to see that hardship and inconvenience caused on account of administrative apathy is reduced. We will be vigilant and expect that you will respond in the same manner.

Before I sign off, I congratulate all those who have qualified as CAs, and becoming part of this noble Profession. At this juncture, I invite you all to be active with the BCAS family consisting of 8600 and more co-members, to realise a greater level of knowledge sharing on a continuous basis, and to sharpen your skills, and keep adding to the value you wish to create. Come and experience the intrinsic value of your decision to have joined the Society.

With Warm Regards,

Deepak R. Shah

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Letters

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Sir,
It was a genuine privilege to read January 2012 edition of BCA Journal. Your sincere and honest efforts to provide us with updated knowledge along with some of the best articles, stories, etc. are really worth appreciating.

Especially I liked the stories compiled by CA Raman Jokhakar. Those stories are really helpful in our professional and social life as well. My special thanks to you Raman Sir.

Thanks and regards.

— Vaibhav Mungashe,
C. A. Student, Pune.

Sir,
Re: Delay in introduction of Safe Harbour Rules The Finance Minister introduced section 92CB by the Finance (No. 2) Act, 2009 w.e.f. 1-4-2009, empowering the Board to make Safe Harbour Rules for determination of arm’s-length price. ‘Safe Harbour’ means Circumstances in which Income-tax authorities will accept the transfer price declared by the assessee. The enabling section 92CB was introduced after persistent demand by the taxpayers, particularly by the foreign companies.

One is, therefore, surprised that even after a lapse of three years, the relevant rules have not been notified. If this is not a sign of policy paralysis, then what constitutes policy paralysis? Of course, our ruling politicians and bureaucrats are allergic to use of the term and recently the PM openly chided the business community for using the same.

Further, though the transfer pricing provisions were introduced w.e.f. 1-4-2002, the CBDT has not provided enough guidelines about its implementation even after ten years. In western countries, such as Australia, New Zealand, Canada, UK, USA etc., their tax departments have put up hundreds of pages of guidelines for the taxpayers. Absence thereof in India is puzzling, to say the least; perhaps the Revenue Officers are either themselves not clear about the implications of the Law which they are implementing or they do not want to give up their discretionary powers!!! It is high time that the Tax Department provides clear guidelines on implementation of Transfer Pricing Law and formulate Safe Harbour Rules are introduced. Indian Transfer Pricing Officers are one of the most aggressive in the world, leading to mind boggling adjustments and litigation which helps nobody (except legal and tax professionals) and is driving away the Foreign Direct Investment though the high officials won’t accept the same.

—T. K. Singhal
Chartered Accountant
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Ethics and u

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

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

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

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

S – Did you go for voting?

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

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

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

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

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

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

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

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

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

S – It is a misconduct for a professional.

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

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

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

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

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

S – Are you sure about it?

A – I mean I have heard about it.

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

A – How?

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

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

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

A – Tell me then, what else is prohibited?

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

A – What if somebody does it for me?

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

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

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

A – But why such restrictions?

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

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

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

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

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

A – What about small classified ads?

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

A – But can we apply for empanelments?

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

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

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

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

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

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

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

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

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

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

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

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

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

A – And what about websites?

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

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

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

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

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

A –  I agree; Bhagwan.

Om Shanti.

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

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

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

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

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

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

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

Light Elements

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The other day my friend Herambha Shastri was in introspective mood. I felt he certainly came of age. It means now he is not a just an aged colleague but a matured one. He must have done a lot of thinking over (in his full-time thinking and part-time practice) what the role of a chartered accountant is.

When Herambha started to elaborate this issue, what is the role of a chartered accountant — a hero or a villain, or the most vulnerable character actor in the film? Is he a friend, philosopher and guide? Is he a partner in the nation-building? Is he being an auditor watchdog or a bloodhound or the HMV dog (His Master’s Voice)?

Herambha pulled the first string. “When you finally pass the Final C.A. examination you feel that you are a hero or heroine (look at the percentage of girls passing C.A.). But when you appear for the first time before an Assessing Officer — the ‘first fault-finding authority’ in the Income-tax Department, he makes you feel ‘zero’ with his bureaucratic arrogance and ignorance of basic tenets of justice. He is always on a different page. For reasons best known to him or to you, you are a villain of Income-tax Department. As time passes, you develop a thick skin to bear the brunt of comments of the income-tax authorities for the acts of omission and commission in terms of statutory compliances by your clients. You harbour a feeling of a vulnerable character actor in Hindi flick deserving no awards or cheers, neither in the theatre, nor outside the theatre. You are constantly nagged by the clients and the Department.

Next salvo by Herambha was about the role of C.A. as a friend, philosopher and guide. “Well, my dear friend, we are often referred to as a friend, philosopher and guide, particularly in the co-operative sector.” Any seminar on co-operative societies either begins or ends with a statement from the organiser or the faculty that “a chartered accountant is a friend, philosopher and guide” drawing thunderous applause from the audience, especially from C.A.s in the audience. It is a matter of serious research who coined this phrase ‘friend, philosopher and guide’. One can understand the terms friend and guide, but what about ‘the philosopher’. What philosophical need is there in the co-operative sector? God knows!

As soon as I begin to think over this, Herambha broached the next issue “Is C.A. a partner in nation-building?” We always proclaim that we are partners in nation-building. Are we really partners in nation-building? Supplementary question arises, are we sleeping or seasonal partners? Or are we minors admitted to the benefit of partnership? What are we?

While exploring this point, Herambha narrated a situation in a five-star hotel. Suppose a chartered accountant suddenly goes on long leave no one would bother or notice. But if the chief chef of the hotel were to go on long leave, it would create havoc in the kitchen. In short, Herambha concluded we chartered accountants produce nothing except compilations of facts and figures which supposedly present a true and fair view (a rare case indeed). Herambha gave very simple reasoning why we are partners in nation-building. We are so, because the Institute of C.A. of India is set up by an Act of Parliament.

Eventually Herambha came to the last issue. Is C.A., as an auditor, a watchdog or bloodhound or HMV dog? Herambha elaborated, “Look my dear friend, qualities of watchdog or bloodhound have evaporated over the years. C.A. is neither a watchdog nor a bloodhound; in most of cases he plays the role of an HMV dog. I mean, he just listens to the orders of his master.

It is said that we should not compromise our independence for any fear or favour while discharging our professional duties/responsibilities. This is all in theory. But in reality you can’t compromise your dependence for independence. On this point I could not argue with Herambha, because I started introspecting myself what role do I play as a chartered accountant?

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PART A : Decision of the H.C.

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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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FROM THE PRESIDENT

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Dear Members,

This has been a rather disappointing month. The Railway budget presented in Parliament raised so much controversy that one wondered whether the Finance Minister would be able to keep his scheduled date for presentation of the Budget. Perhaps, the Railway budget was to an extent a precursor of what was to follow. Although the speech of the Finance Minister on the floor of the house while presenting the budget did not inspire much confidence, after one read the fine print in the Finance Bill one felt really devastated. Much has already been said about the Budget. In fact, the editorial discusses retrospective amendments and questions their advisability. At the Society, we have already made our post-budget representation, and we hope that our voice will be heard in the corridors of power.

Talking of representations I often hear a refrain among many professionals, particularly the younger lot, that making such representations is an exercise in futility. Being an eternal optimist I do not concur with this view. I believe that as an institution of professionals it is our duty to bring to the notice of lawmakers the difficulties and problems that would arise if the provisions are enacted in the form they are proposed. The manner in which such a representation should be made, so that it attracts the requisite attention, can be discussed, but the making of representations cannot be dispensed with. It is often said that communicating with a stubborn bureaucracy is like banging your head against a wall. Many a time this is true, but there are exceptions. In a majority of cases the head is likely to suffer injury, but sometimes the ball will give me one.

Recently, all taxpayers are facing substantial hardship with their refunds being adjusted against non-existing demands. The Society has continuously been following both on formal and informal basis this issue with the authorities concerned. We were pleasantly surprised by the response of some officials in Mumbai as well as some of their counterparts in Bangalore. Although the effect of their action may not be all pervasive, even if it brings solace to some taxpayers, the representation of the Society and its efforts will have been rewarded. We hope that many more proactive officials are appointed in relevant positions, so that some of the hardships faced by taxpayers will be mitigated.

While the Budget has failed to provide any relief, the news of various scandals continues unabated. The anger and frustration of the Indian public is mounting, but it needs to be channelised, or else it will give way to despondency or indifference. Unfortunately, those who are currently spearheading the fight against corruption seem to have lost all clarity of purpose. One had hoped that after the break that they had taken, they would marshal their resources in a more efficient way and with better purpose. In a battle against corruption, the media hype can never replace a well-knit organisational structure. Some rounds of a battle against corruption may be won by sporadic action, but to win the war one will require a well thought-out strategy and substantial patience. One does not find this in the existing leadership of the movement against corruption.

Finally, one of the legends of Indian cricket Rahul Dravid called it a day. I have always admired the grace with which he carried himself both on the field and off it. There are very few cricketers for whom one can use the term gentleman, and Raul Dravid is one of them. The world has always been fascinated by the achievements of Sachin Tendulkar, but we forget that many a time the master was able to achieve what he did on account of the strength of the “wall”. I join the entire nation in saluting this fine person. In fact, politicians have quite a few things to learn from this man. He played life with a straight bat and retired with grace. If many of our politicians emulated his example their parties, and the nation would thank them.

Last July, you had entrusted me with the responsibility of leading this organisation. I have tried to shoulder the responsibility to the best of my ability. My only regret is that our members and the readers of this Journal do not express themselves about what they feel about the organisation. It is only if we at the Society hear from you that we will be able to change track if we are going wrong. I would be very happy to receive bouquets of praise, but I am also willing to face brickbats, because I am sure that they will be well intentioned and in the interests of the Society. It is only when there is total silence that we office bearers worry whether we are traversing the right path. Therefore, it is my earnest request to all of you to please communicate with me or any of the office bearers with your feedback.

We are coming to the close of what has been a turbulent financial year. All of you have worked very hard and deserve a small break. So let us look forward to a small vacation before we begin the daily grind in the new financial year. Therefore, before I sign off, let me wish all of you a very happy and prosperous new financial year!

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From published accounts

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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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From published accounts

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Section A:

Illustrations of Audit Reports with multiple qualifications

Compiler’s Note
On August 13, 2012, SEBI issued a circular directing Stock exchanges on the manner of dealing with audit reports filed by listed companies. As per the said circular, all stock exchanges will carry out a review of all audit reports filed with them. After such a review, in case the reports are ‘qualified/ subject to/except for’, the same shall be referred to a newly formed committee of SEBI called “Qualified Audit Reports Committee” (QARC). The QARC will after due deliberations can refer the case to the Financial Reports Review Board (FRRB) of ICAI for its opinion thereon. If the FRRB, opines that the qualification is justified, SEBI may direct the company to restate its financial statements. The above process by the stock exchanges, QARC and FRRB is to be completed in a time bound manner. The said process will be applicable to all annual audited financial results submitted for the period ending on or after December 31, 2012.

Given below are 2 Audit Report of listed companies, one of a private sector company and another of a PSU where, in the view of the compiler, restatement may become necessary in case the various qualifications and remarks recur in the audit of financial statements for 2012-13.

Kingfisher Airlines Limited (31-3-2012)

Note: Portions of the report as printed in italics in the annual report is reproduced accordingly

1. … not reproduced
2. … not reproduced
3. … not reproduced

4. Other Income for the fifteen months ended June 30, 2006 included a sum of Rs. 2,672.20 lakh towards certain subsidy provided to the Company by one of its suppliers in conjunction with lease of aircrafts on operating lease basis. The previous auditors had reported that they were of the opinion that such accounting treatment was not in accordance with Accounting Standard 19 on “Leases” and the subsidy should be recorded on a straightline basis over the period of the lease. Their audit report on the financial statements for the fifteen months ended June 30, 2006 was modified in this matter. We concur with the views of the said auditors in principle that such subsidy should be recognized on a systematic basis in the Statement of Profit and Loss over the periods necessary to match them with the related costs, which they are intended to compensate although the matter does not appear to be covered explicitly by the said AS 19.

5. Attention is invited to note 48 of the Notes forming part of the Financial Statements (‘Notes’) regarding method of accounting of costs incurred on major repairs and maintenance of engines of aircrafts taken on operating lease during the year aggregating to Rs. 28,480.24 lakh (year ended March 31, 2011 Rs. 12,256.85 lakh) (aggregate amount as at March 31, 2012 Rs. 36,978.84 lakh), which have been included under fixed assets and amortized over the estimated useful life of the repairs. In our opinion, this accounting treatment is not in accordance with current accounting standards.

6. As reported in paragraph 6 of our report dated July 28, 2009, the Company novated its rights in certain aircrafts purchase agreements during the year ended March 31, 2009 in favor of certain lessors and took such aircrafts back on operating lease from the same persons. The Company incurred a loss of Rs. 8,110.36 lakh on such novation (including interest on loans borrowed for making predelivery payments to aircraft manufacturers of Rs. 2,706.77 lakh) (after eliminating loss in respect of redelivered aircrafts). As already reported in the said report, in the absence of an independent valuation report, we had relied on the representations of the management that the novation was not established at fair value, the fair value of the aircrafts is at least equal to or more than the cost of acquisition and the preconditions specified in AS 19 for deferring the said loss are satisfied. We do not express any independent opinion in the matter.

7. Attention is invited to note 49 of the Notes regarding use fees/hourly and cyclic utilization charges payable by the Company in respect of certain assets taken on operating lease aggregating to Rs. 6,033.53 lakh (year ended March 31, 2011 Rs. 5,576.45 lakh) (aggregate amount till March 31, 2012 Rs. 12,418.61 lakh), as maintenance reserves, in accordance with its understanding. Pending formalization of understanding with the relevant lessor, we do not express any independent opinion in the matter.

8. Attention of the members is invited to note 52 of the Notes regarding write back of withholding tax earlier accrued and non-provision for withholding tax for the year, on amounts paid/provided as payable to certain non-residents/ interest thereon, based on professional advice. This is subject to receipt of certain documentation from the relevant payees, the Company complying with the requisite formalities under the relevant tax laws and validation of the position stated in the books of account.

9. Attention of the members is invited to note 36(b) of the Notes regarding write back/non provision for guarantee and security commission to guarantors, which we understand was done at the behest of the consortium bankers (aggregate amount Rs.13,772.30 lakh). We understand that consent of the concerned guarantors has not been received. We cannot express any opinion in the matter.

10. Attention of the members is invited to note 39 of the Notes regarding recognition of deferred tax crediton account of unabsorbed losses and allowances during the year aggregating to Rs.111,808.46 lakh (year ended March 31, 2011 Rs. 49,341.80 lakh) (Total amount recognized up to March 31, 2012 Rs. 404,586.77 lakh). This does not satisfy the virtual certainty test for recognition of deferred tax credit as laid down in Accounting Standard 22.

11. We further report that, except for the effect, if any, of the matters stated in paragraphs 6 to 9 above, paragraph 1(b) of the annexure to this report and notes 34(a), 44, 46 and 53 of the Notes, whose effect are not ascertainable, had the observations made in paragraphs 4, 5 and 10 above been considered,the loss after tax for the year ended March 31, 2012 would have been Rs. 344,402.41 lakh (March 31, 2011 – Rs. 155,349.03 lakh) as against the reported loss of Rs. 232,800.75 lakh (March 31, 2011-Rs. 102,739.80 lakh), earnings per share would have been Rs.(68.92) (March 31, 2011 – Rs.(59.90)) as against the reported figure of Rs. (46.92) (March 31, 2011- Rs. (40.16)), debit balance in statement of profit and loss as at March 31, 2012 vide note 4 of the Notes would have been Rs.1,192,423.76 lakh (March 31, 2011 – Rs. 848,021.34 lakh) as against the reported figure of Rs.767,648.18 lakh (March 31, 2011 – Rs. 534,847.43 lakh), Other current liabilities would have been Rs. 321,876.74 lakh (March 31, 2011 – Rs. 202,878.92 lakh) as against the reported figure of Rs. 321,864.34 lakh (March 31, 2011 – Rs. 202,600.40 lakh), fixed assets would have been Rs.124,126.34 lakh (March 31, 2011- Rs. 137,071.61 lakh) as against the reported figure of Rs.144,302.75 lakh (March 31, 2011 – Rs. 157,188.69 lakh), deferred tax asset (net) as at March 31, 2012 would have been Nil (March 31, 2011 – Nil) as against the reported figure of Rs. 404,586.77 lakh (March 31,2011 – Rs.292,778.31 lakh). Data for the year ended March 31, 2011 recast from that stated in our previous year’s report taking into account deferred tax credit to be derecognized.

12.    Attention of the members is invited to note 45 of the Notes regarding the financial statements of the Company having been prepared on a going concern basis, notwithstanding the fact that its net worth is completely eroded. The appropriateness of the said basis is inter alia dependent on the Company’s ability to infuse requisite funds for meeting its obligations, rescheduling of debt and resuming normal operations.

Further to our comments in the annexure referred to above, we report that:

13.    We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purpose of our audit.

14.    In our opinion, the Company has kept proper books of account as required by Law so far as appears from our examination of those books.

15.    The Balance Sheet, Statement of Profit and Loss and Cash Flow Statement dealt with by this report are in agreement with the books of account.

16.    In our opinion, subject to the effect of the matters stated in paragraphs 4 to 6 and 10 above, the Balance Sheet, Statement of Profit & Loss and Cash Flow Statement dealt with by this report comply in all material respects, with the mandatory Accounting Standards referred to in sub-section (3C) of section 211 of the Act.

17.    … (not reproduced)

18.    In our opinion and to the best of our knowledge and according to the information and explanations given to us, the said accounts subject to note 43 of the Notes and read with other notes, give the information required by the Act in the manner so required and subject to the effect of the matters stated in paragraphs 4 to 11 above, foot note to note 38(a) regarding carve out of certain costs from their natural heads based on estimates made by management and presentation of the same as ‘Restructuring/Idle costs’ and note 46 of the Notes regarding the basis of computation of unearned revenue (including refunds due on account of cancelled tickets/ flights) as at March 31, 2012 (Data of number of unflown tickets and their aggregate average value, based on which management has estimated the amount of unearned revenue, not being drawn from accounting records, have not been verified by us) (Effect thereof on revenue not ascertainable) give a true and fair view in conformity with the accounting principles generally accepted in India.

…..

Mahanagar Telephone Nigam Limited (31-3-2012)

Note: None of the portions of the report as printed in the annual report is in bold/italics.

4.    Further to our comments in the Annexure referred to in paragraph 3 above and subject to:

a)    Point No.6 (a) to Note No. 40 regarding deduction u/s. 80IA of the Income Tax Act claimed by the company of which 75% has already been allowed upto Tribunal level and the company has preferred an appeal for the remaining 25% with the High Court. The company is maintaining a provision for income tax amounting to Rs. 4003.31 million for the years 1997-98 to 1999-2000 on this account, whereas the similar claims for subsequent years involving a tax liability of Rs. 3948.46 million have been shown as Contingent Liability. In view of the pending disputes with the Income Tax Departments at the High Court level, we are unable to comment on the adequacy or requirement of the provision or contingency held in this regard.

b)    Point No. 6 (b) to Note No. regarding accounting of appeal to the effect of Rs. 1015.43 million including accrued Interest of Rs.412.04 million (Rs.101.86 million for the year) as recoverable, is subject to adjustment as per the final orders to be passed by the Income Tax Department. Besides, the balances appearing in Advance Tax, Provisions for Income Tax and Interest on Income Tax Refund are subject to reconciliation with the figures of the Income Tax Department.

c)    Points No.11 & 14 to Note No. 40 regarding the amounts recoverable from BSNL/DOT are subject to reconciliation and confirmation and in view of various pending disputes regarding each other’s claims, we are unable to comment on the impact of the same on the profitability of the company.

d)    Point No. 1(k) of Note 40 regarding disclosure of contingent liability of Rs. 1403.63 million, instead of actual provision on account of License Fee to the DOT which is being worked out on accrual basis as against the terms of License Agreements according to which the expenditures/ deductions from the Gross revenue are allowed on actual payment basis.

e)    The company has allocated the establishment overheads as per Note 25 and Administrative overheads as per Note 28.The company’s policy in this regard needs to be made more scientific and the same should avoid capitalising the loss due to idle time of labour and machines.

f)    Point No.32 of Note No. 40 regarding no impairment adjustment required to the carrying value of the fixed assets as at 31st March 2012. In our view, due to recurring losses incurred by the Company and uncertainty in the achievement of projections made by the Company, we are unable to comment on the provisions, if any, required in respect of impairment of carrying value of the fixed assets (including capital work in progress), other than land, and its consequential impact, if any, on the loss for the year, accumulated balance in the Profit and Loss Account and the carrying value of the fixed assets as at 31st March 2012.

g)    Point No. 27 (ii) of Note No.40 regarding the provision for employees benefits which have been made on the basis of actuarial valuation. The issue being technical, we are unable to comment on the adequacy or otherwise of these provisions.

h)    Point No. 28 of Note No. 40 regarding Non provision of actuarial liability on account of medical expenses for retired employees and continuing employees as the Insurance policy has been taken by the company and yearly premium is only charged.

i)    Insurance claim for the fire loss in Data Center in July, 2009 amounting to Rs. 40 million has been considered as good despite of the same being still pending with the Insurance Company.

j)    Accounting Policy No.2 (iv) regarding valuation of scrapped/ decommissioned assets which are not being revalued every year.

k)    Accounting Policy No. 1(ii)(b) regarding exclusion of dues from operators for making provision for Doubtful debts and non-provision of disputed cases which are outstanding for less than three years in Basic and less than six months in wire-less services.

l)    Point No. 22 of Note No. 40 regarding non valuation of vacant land and Guest Houses/Inspection quarters at fair market value as at the year-end for the purpose of wealth tax provisions.

m)    Point No.18 of Note No.40 regarding non confirmation and reconciliation of amounts receivable and payable from various parties.

n)    Point No.14(b) regarding balance in subscriber’s deposits account of Rs. 588.81 million, unlinked receipts from subscribers Rs. 412.60 million are subject to reconciliation. Balance of sundry debtors as per Ageing Summary is short by Rs. 94.70 million with comparison to balance in general ledger though the same has been fully provided for (Refer Note No. 14(c)). The reconciliation of metered and billed calls in various units and leased, operational and billed circuits is in process. The final impact of above on the accounts is presently not ascertainable and the same may have an impact on the Profitability of the company.

o)    The matching of Billings for roaming receivables/payable with the actual traffic intimated by the MACH is not being made and the amounts received are allocated on estimated basis. The impact thereof, on profitability, if any, is unascertainable.

p)    The system of issuance of completion certificates by engineering department needs to be strengthened. The impact due to the delay in issuance of completion certificate on Fixed Assets and Depreciation is not ascertainable.

q)    Point No.23 of Note No. 40 regarding provision for ADCC recoverable from Project Development Company amounting to Rs. 91.25 million and non-accounting of interest thereon in absence of explicit agreement to that effect.

r)    Point No. 34 of Note No. 40 regarding non deduction of tax at source on services received from BSNL and treatment of the expenditure on account of Pension liability on the basis of actuarial valuation as an allowable expense based on experts opinion.

s)    The Company had accounted for Rs. 2850.00 million towards wet lease for infrastructure and other services provided in respect of Commonwealth Games during the year 2010-11 of which Rs. 430 million is subject to acceptance and final settlement.

t)    The reconciliation of Income from Re-charge Coupons, ITC Cards, Prepaid calling cards and stock of recharge coupons and leased circuits is not available for our verification.

u)    No service tax is being charged on the revenue sharing with BSNL for inward circuits for which no bills are being raised.

v)    The material sent to BSNL on barter basis, the VAT liability on this account has not been ascertained and provided for.

w)    Point No 26 of Note No 40 regarding the requisite information & details for the identification of Micro, Small & Medium enterprises, as such we are unable to comment upon the compliance of section 15 & 22 of the Micro Small & Medium Enterprises Development Act-2006.

x)    The Company has not made following disclosures required under Schedule VI of the Companies Act, 1956 as per references given after each item:

i.    Consumption of imported and indigenous stores and spares and Percentage to the total consumption;
ii.    The classification of Trade Receivable as unsecured, without considering the security deposit that the company has received from subscribers;
iii.    Trade Receivable figures outstanding for more than six months and up to six months, are ascertained by the management and relied upon by the auditors.
iv.    The Land and Buildings transferred from DOT have been classified as Leasehold as there was no breakup available.
v.    The bifurcation of assets and liabilities into Current and Non Current, has been made by the company as per their own assessment of their recoverability and likely payments. In absence of any scientific basis, we are unable to comment on the same.
vi.    Classification of amount recoverable from BSNL as loan & advances instead of Trade Receivable.
vii.    The reclassification of previous year figures to make it comparable with the revised schedule VI requirements have been made by the management as per their assessment and relied upon by us.

The overall impact of matters referred to in the preceding paras on the loss for the year is unascertainable.

We report that:

i.    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;

ii.    In our opinion, proper Books of Account, as required by law, have been kept by the Company, so far as appears from our examination of those books except that the following items are consistently accounted on cash basis, instead of on accrual basis as required u/s. 209 of the Companies Act, 1956:

a)    Interest Income / Liquidated Damages, when realisability is uncertain;
b)    Annual recurring charges of amount up to Rs. 0.10 million each for overlapping period
c)    Revenue on account of service connections is being accounted for when the recovery for the same is established.

iii.    The Balance Sheet, Statement of Profit and Loss and the Cash Flow Statement dealt with by this report, are in agreement with the books of account;

iv.    In our opinion, the Balance Sheet, Statement of Profit and Loss and the Cash Flow Statement dealt with by this report comply with the Accounting Standards referred to in sub-section (3C) of Section 211 of the Companies Act, 1956 except AS – 2 regarding Valuation of Inventories (Refer Significant Accounting Policy No.3); AS-4 regarding Contingencies and Events Occurring after the date of Balance Sheet; AS -5 regarding Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies [Refer Significant Accounting Policy No.1(i)(b) and ii(a)];AS- 6 regarding Depreciation Accounting [Refer Significant Accounting Policy No. 2(v)];- AS – 9 regarding Revenue Recognition [Refer Accounting Policy No 1(ii); AS- 10 regarding Accounting of Fixed Assets (Refer Significant Accounting Policy No.2);AS- 15 regarding Accounting for Retirement Benefits in the Financial Statements of Employers (Refer Note No.27);AS17 regarding Segmental Reporting; AS- 18 regarding related party transactions: AS 19 regarding Leases: AS -28 regarding Impairment of Assets ; AS-29 on Provisions for Contingent Liabilities and Contingent Assets.

v.    Since the company is a Government company, clause (g) of sub-section (1) of section274 of the Companies Act, 1956 regarding obtaining written representations from the directors of the company, is not applicable to the Company in terms of Notification No.GSR-829 (E) dated 21.10.2003);

vi.    Attention is further invited to the following without making them a subject matter of qualification: –

a)    Point No.13 of Note No.40 regarding over dues of Rs.1000 million on account of Cumulative preference Shares of one of the Govt Company which are considered good on the basis of comfort letter issued by the concerned Ministry.

b)    Point No.16 (e) to Note No.40 regarding the issue of pension liability on account of absorbed employees is yet to be settled with the DOT, which may have substantial impact on the profitability of the company which could not be ascertained by the company.

c)    Point No.20 of Note No 40, regarding retaining of outstanding liability of Rs. 736.20 millions on account of decommissioned assets pending arbitration case.

d)    Point No. 17 of Note No. 40 regarding non provision of diminution in the value of investments in joint ventures as these diminutions are considered temporary in nature.

vii. In our opinion, and to the best of our information and according to the explanations given to us, the said accounts read with the significant Accounting Policies and together with the notes thereon, give the information required by the Companies Act, 1956, in the manner so required and also give, subject to our observations in paragraph 4foregoing, a true and fair view in conformity with the accounting principles generally accepted in India.

Ethics and u

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Bhagwan Shrikrishna

 (S) — Hey you Arjuna, why are you looking so weary? In that Mahabharata War, you were so brave! What’s the matter? Arjuna
(A) — That war was much simpler. Either kill or get killed. Now as a CA, I am dying every day.

S — Where is your bravery gone? Where is that old uprightness? Why are you so depressed?

A — I don’t get time for regular exercise. Just sitting before the computer whole day. My spine is bent like my bow!

S — Are you still having a spine? Err-sorry — a bow?

 A — What do you mean? I wonder why people believe that CAs don’t have a spine! Anyway, you wanted to tell me something about ethics. Is it a long list?

S — No dear. Only a few rules of fair practice as a professional.

A — That reminds me. They say everything is fair in war. That made the war simpler. In practice, they expect us to be fair. True and fair! That is the difficulty. How can a thing be true as well as fair at the same time?

S — Yes I agree there are dilemmas. But in all fairness, one has to be true.

A — Actually, I left my bow and arrows and took up this pen. I separated from Bhima, Nakula and Sahadeva. Somehow, I was holding on to Dharma. But many situations compel me to go away even from Dharma. I feel insecure.

S — You are right. Remember, Dharma alone will protect you. Dharma is Yudhishthira — ‘yudhi’ means ‘in a war’. ‘Sthira’ means stable, unshaken. Dharma is nothing but ethics. That will make you stable in war-like situations.

 A — Our Council does not allow us any freedom. It thrusts those meaningless ethics on us. Even a little deviation, and there is punishment. I have lost my independence.

S — Arjuna, independence is always very costly. Its cost is nothing but ‘eternal vigilance’. Independence does not mean freedom of behaviour.

A — Then what it is?

S — It is freedom from fear. Fearlessness comes not merely by sword but by shield. Ethics is that shield. It is not a burden.

A — But if I do something wrong in the interest of my client, why should the Council punish me? How does a small wrong matter?

S — Remember dear. If you compromise on your principles, a client may pay you money but will never give you respect. Not only that, but he will treat all CAs alike — amenable to temptation — and willing to compromise.

 A — Oh, that will spoil the image of whole profession!

S — Precisely. The Council is more concerned with credibility of the profession. Therefore, the punishment to the wrongdoer. You remember, whenever Gopikas complained to my mother Yashoda, she used to scold me, beat me; and used to tie me up. Mother wants to uphold reputation of the child and also of the family.

A — But many times, complainants themselves are wrongdoers. They are even fraudsters. Why does our Council not do anything to them?

S — The Council is there to protect you and the profession. It just wants to see that its members behave properly. The Council is not so much concerned with the behavior of others.

A — This is not fair. So then the others go scotfree?

S — No. There are other forums to deal with such people. The Council only expects that you don’t become a party to the misdeeds.

 A — But if nobody is adversely affected by my mistake, then how and why is the Council concerned? S — For example?

A — I certify incorrect accounts of a charitable trust, its income is exempt any way!

S — Do you mean tax is the sole purpose of certifying the accounts? I think the tax consultant in you is overpowering the auditor in you.

A — But then tell me who else is affected?

S — All the users of your accounts, Members, beneficiaries of the Trust, Regulators, Lenders . . . . .

A — See, if anybody suffers due to my wrong certificate, I will compensate him. Or what if he pardons me on his own? Then what’s the issue? Unnecessary harassment! Where is the loss then?

S — Loss of respect, my dear! Loss of credibility. The sole foundation of your profession is its credibility. Can you leave a thief merely because he compensates you for the theft? Was it the practice in your Pandava’s Kingdom?

A — No. If a wrongdoer is let off, he will do more wrong. And that would tarnish the king’s image if he lets of a thief.

S — Unfortunately, though Government today does not understand this, the Council is very much conscious about it. Moreover it is like Paap (Sin) and Punnya (Bliss). The debit cannot be adjusted against credit. You cannot undo misconduct by doing good. Good may or may not be rewarded; but bad is punished. Same like Adhyatma (Spiritualism).

A — Many times, there are mischievous complaints. There is dispute between two parties and the auditor is made a scapegoat! He is victimised only to exert pressure on other party.

S — That is precisely why your work should be perfect in absolute sense — regardless of whether it suits someone or not. See, you were asking about the Trust. There could be dispute among Trustees or among members. And you would become vulnerable!

A — And what if the complainant wants to withdraw the complaint later on?

 S — See, this is a quasi-criminal proceeding. And so he cannot withdraw the complaint as a matter of right. That can be done only with the consent of the Board of Discipline or the Disciplinary Committee.

A — I think we were happy and at peace in the exile!

S — But man has destroyed jungles and has become junglee himself. Money has assumed supreme position. Society is looking upon you CAs to bring monetary discipline. But if you CAs prefer to be a part of the indiscipline, who will save the mankind ?

A — I am realising a little bit. You mean to say that we Pandavas should not become one like Kauravas!

S — You said it! Om Shanti! Important principles

The above dialogue between Arjuna and Shrikrishna is intended to bring out important principles in disciplinary proceedings. We can summarise the principles as follows :

1. The complainant need not come with clean hands. The Council is not concerned with, nor has jurisdiction over the complainant’s behaviour or conduct.

2. The fact whether the complainant or anybody else is aggrieved or has suffered any loss or not is of no consequence while holding a member guilty or otherwise.

3. It is of no avail even if the member compensates the complainant for any losses. It does not undo the misconduct.

 4. Even if the complainant pardons the respondent member, or offers to withdraw the complaint, or does not pursue it, or remains absent at the hearing, the member is not automatically absolved. The Council steps into the shoes of the complainant and takes it to the logical conclusion.

5. Complaint, once lodged, cannot ordinarily be withdrawn except with the permission of the Board of Discipline or the Disciplinary Committee [Rule 6 of The Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of cases) Rules, 2007].

6. Misconduct includes both professional misconduct as well as ‘other misconduct’. The latter is too wide; and goes beyond the ‘Code’. — i.e., beyond the items listed in the Schedules. It implies a behaviour unbecoming of a professional.

levitra

Laws and Business

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Introduction
In the commercial and legal world, one often comes across a transaction being executed through a power-ofattorney. It is a means by which a person who is unable to be physically present to carry out a task or a transaction, does so through another person. While most of us may be conversant with the concept of a power-of-attorney, it would be interesting to note that there is a separate Act, i.e., the Powersof- Attorney Act, 1882 (Act), which governs the law relating to powers-of-attorney. In addition, certain other statutes also regulate the law in relation to powers-of-attorney. Let us have a brief overview of the law in this respect.

Meaning
The Act defines a power-of-attorney to include any instrument empowering a specified person to act for and in the name of the person executing it. Thus, there is an inclusive definition of the term. The following are the key features emanating from the definition:

(a) It is an instrument;
(b) The instrument must be executed by some person, known as the donor of the power;
(c) It must empower a person specified in the instrument, known as the donee of the power; and
(d) The donee must be empowered to act for and in the name of the donor.

The Bombay Stamp Act, 1958, defines a power-of-attorney includes any instrument empowering a specified person to act for and in the name of the person executing it and includes an instrument by which a person, not being a lawyer, is authorised to appear on behalf of any party in any proceeding before any Court, Tribunal or authority. However, it does not include a vakalatnama given to an advocate which is stamped with the court-fees.

Effect

Under section 2 of the Act, if the donee (holder of power-of-attorney), based on his discretion:

(a) executes any instrument or does any act;
(b) under his own name, signature and seal, if seal is required;
(c) but under the ambit of the authority conferred on him by the donor of the power-of-attorney; then such instrument or act would be treated in law as if it had been execution or done in the name, signature and seal of the donor. The legal effect of the power is that the acts of the donee, when done under proper authority, are treated as if they were done by the donor. This is an important provision of the Act, which gives legal sanctity to all acts done by a donee on behalf of the donor.

Thus, the position of the donee-donor is similar to that of an agent and his principal. A power-of-attorney’s origins may be traced to the legal maxim qui facit alium facit per se, i.e., what one can do directly he can also do through an agent. But one crucial difference as compared with an agent-principal relationship is that an agent must sign in the principal’s name while the power-of-attorney holder signs his own name.

The object of the aforesaid section and of the Act is to effectuate instruments executed by an agent, but not in accordance with the rule of the Contract Act. It does not confer on a person a right to act through an agent. It presupposes that the agent has the authority to act on behalf of the principal and protects acts done by him in exercise of that authority but in the agent’s own name — Rao Bahadur Ravulu Subba Rao v. CIT, 30 ITR 163 (SC).

In the case of Suraj Lamp & Industries P. Ltd. v. State of Haryana, (2012) 1 SCC 656, the Supreme Court has held that a power-of-attorney is not an instrument of transfer in regard to any right, title or interest in an immovable property. The power-of-attorney is creation of an agency whereby the grantor authorises the grantee to do the acts specified therein, on behalf of the grantor, which when executed will be binding on the grantor as if done by him. It is revocable or terminable at any time unless it is made irrevocable in a manner known to law. Even an irrevocable attorney does not have the effect of transferring title to the grantee.

In State of Rajasthan v. Basant Nehata, (2005) 12 SCC 77, the Apex Court held that a grant of power-of-attorney is essentially governed by the Contract Act. By reason of a deed of power-of-attorney, an agent is formally appointed to act for the principal in one transaction or a series of transactions or to manage the affairs of the principal generally conferring necessary authority upon another person. A deed of power-of-attorney is executed by the principal in favour of the agent. The agent derives a right to use his name and all acts, deeds and things done by him and subject to the limitations contained in the said deed, the same shall be read as if done by the donor. A power-of-attorney is, as is well known, a document of convenience.

Execution of a power-of-attorney in terms of the provisions of the Contract Act as also the Powers of- Attorney Act is valid. The donee in exercise of his power under such power-of-attorney only acts in place of the donor subject of course to the powers granted to him by reason thereof. He cannot use the power-of-attorney for his own benefit. He acts in a fiduciary capacity. Any act of infidelity or breach of trust is a matter between the donor and the donee and does not affect an outsider.

Revocation of a power

A power-of-attorney can be terminated or cancelled by the principal by revoking his authority or by the power-of-attorney holder renouncing his authority. A power-of-attorney is revoked by implication in the following circumstances:

(a) The donor expressly revokes all powers given by him;
(b) The donor dies;
(c) The donor becomes of unsound mind; or
(d) The donor becomes insolvent.

In any of the above situations, the power comes to an end. In Prahlad v. Laddevi, AIR 2007 Raj 166 it was held that a power comes to an end on the demise of the donor. Any acts done by the donee thereafter in pursuance of such a power are invalid.

However, if the donee not being aware of the above situations, does any act or makes any payment in good faith pursuant to the power-of-attorney, then he shall not be liable in respect of such payment or act. But any person interested in the money so paid shall continue to have a right against the recipient and he will have the remedy against the recipient as he would have had against the payer, if the payment had not been made by him.

According to the Indian Contract Act where the agent has himself an interest in the property which forms the subject matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest. Thus, in cases where the power-of-attorney is coupled with interest it is irrevocable. For instance, A gives authority to B to sell A’s land, and to pay himself out of the proceeds, the debts due to him from A. This power cannot be revoked by A. In State of Rajasthan v. Basant Nehata, (2005) 12 SCC 77, the Apex Court held that except in cases where power-of-attorney is coupled with interest, it is revocable.

Evidence of power-of-attorney

Any power-of-attorney which has been verified by an affidavit, statutory declaration, notarisation, etc., and which has been deposited with a High Court or District Court shall be treated as sufficient evidence of the contents of the instrument.

The Indian Evidence Act, 1872 provides that any Court shall presume that every power-of-attorney executed before and authenticated by a Notary Public, Court, Judge, Magistrate, Indian Consul or Vice-Consul was so executed and authenticated. This is the reason why powers-of-attorney are notarised. The presumption about the authenticity is a mandatory provision. The Delhi High Court in the case of Kamala Rani v. Texamco Ltd., AIR 2007 Del. 147 has held that the onus lies on the other side to prove that the power-of-attorney is not genuine.

 A donee of a power-of-attorney cannot give evidence in Court on behalf of the donor — Rajiv Gadkari v. Smt. Nilangi Gadkari, AIR 2010 (NOC) 538 (Bom.) 2010. The Patna High Court in the case of Rajmuni Devi v. Shyama Devi, (2007) 9 RC 309 (SC) has held that a power-of-attorney holder cannot depose on behalf of the donor, but can appear as a witness on behalf of the principal.

A power-of-attorney holder cannot depose and be cross-examined in Court on matters which only the principal is expected to have knowledge of — Janki V. Bhojwani v. IndusInd Bank Ltd., 2005 Vol. 107 Bom. LR 28 (SC).

Power-of-attorney of married woman

A married woman who is not a minor has powers, as if she were unmarried to appoint an attorney on her behalf.

Can a donee sign under Income-tax Act for donor?

If the Income-tax Act or the rules made thereunder specifically require the personal signature of the assessee, then the same cannot be delegated by way of a power-of-attorney. This is would be a circumcision of the field of operation of the Power-of-Attorney Act and such a curtailment of powers is not ultra vires — Rao Bahadur Ravulu Subba Rao v. CIT, 30 ITR 163 (SC). All that section 2 of the Act provides is that there can be a delegation of powers and the manner of doing so. However, if any other enactment requires a personal presence or signature, then the two Acts operate in separate fields. The Court laid down this principle under the 1922 Income-Tax Act in relation to signing an ap-plication for registration of a firm. The rules required the partner to personally sign the application. It may be noted that Rule 22(5) now expressly permits such an application to be signed by a power-of-attorney holder in the case of a person absent from India.

Stamp Duty

Under the Bombay Stamp Act, 1958, a power-of-attorney is liable to be stamped as follows:

(a)    When executed for the sole purpose of registering documents — Rs.100. Most of the builders give a power-of-attorney in favour of their employees for registering the agreements for sale/flat ownership agreements with buyers.

(b)    When authorising a person to act in a transaction — Rs.100.

(c)    When given without consideration authorising specified relatives to sell or transfer immovable property — Rs.500.

(d)    When any person other than cases covered by (c) above authorising to sell or transfer immovable property — the same duty as on a conveyance on the market value of the immovable property, e.g., 5% on the stamp duty ready-reckoner value. One of the ways to avoid payment of stamp duty was to give a power-of-attorney to a person authorising him to sell the property and receive consideration equal to the market value of the property for such a power. This method is very prevalent in Northern India. In 2008, the Bombay Stamp Act was amended to increase the duty on such a power from 1% to 5%. Thus, now such powers are at par with a conveyance of immovable property.

A power-of-attorney given to manage and sell an immovable property and hand over the consideration to the owner cannot be treated as a conveyance for consideration and hence, charged with stamp duty as on a conveyance — Suman Kumar Sinha v. State of Jharkhand, AIR 2009 Jharkand 53.

It is not necessary that every power-of-attorney ex-ecuted abroad must be presented before the Collector for adjudication of stamp duty. Only those powers which have been executed abroad and on which no stamp duty has been paid need to be adjudicated. If proper duty has already been paid, then nothing further needs to be done — Anitha Rajan v. Revenue Divisional Officer, AIR 2010 Kerala 153.

A power-of-attorney is to be compulsorily registered only if it creates an interest in immovable property and not otherwise — B. Maragathamani v. Member Secretary, Chennai Metropolitan Development, AIR 2010 Madras 61.

Transfer of property by power of attorney

A very popular mode of transferring immovable property in Northern India was by adopting a combination of a sale agreement, general power-of-attorney and a will. This facilitated the avoidance of a conveyance and thereby saving on stamp duty for the buyer. The modus operandi in such transactions was for the owner to receive the agreed consideration, deliver possession of the property to the purchaser and execute the following documents or variations thereof:

(a)    A sale agreement by the vendor in favour of the purchaser.
(b)    An irrevocable general power-of-attorney by the seller in favour of the purchaser authorising him to manage, deal with and dispose of the property without recourse to the seller.
(c)    A will bequeathing the property to the purchaser (as a safeguard against the consequences of death of the seller before the transfer is effected).

The Supreme Court had in the case of Suraj Lamp & Industries Pvt. Ltd. v. State of Haryana, (2009) 7 SCC 363 referred to the “ill effects of what is known as general power-of-attorney sales”.

In its latest decision in the case of Suraj Lamp & Industries P. Ltd. v. State of Haryana, (2012) 1 SCC 656, the Court has held that there cannot be a sale of immovable property by execution of a power-of-attorney, nor can there be a transfer by execution of an agreement of sale and a power-of-attorney and will. It held that these kinds of transactions were evolved to avoid prohibitions/conditions regarding certain transfers, to avoid payment of stamp duty and registration charges on deeds of conveyance, to avoid payment of capital gains on transfers, to invest black money’ and to avoid payment of ‘unearned increases’ due to Development Authorities on transfer.

It also held that the observations of the Delhi High Court, in Asha M. Jain v. Canara Bank, 94 (2001) DLT 841, that the “concept of power-of-attorney sales have been recognised as a mode of transaction” when dealing with transactions by way of sale agreement/ general power of attorney/will are unwarranted, unjustified and unintendedly misleading the general public into thinking that such transactions are some kind of a recognised or accepted mode of transfer and that it can be a valid substitute for a sale deed. Such decisions to the extent they recognise or accept transactions by way of by way of sale agreement/ general power-of-attorney/will as concluded transfers are not good law.

The Apex Court however, carved out a niche for genuine transactions where the owner of a property grants a power-of-attorney in favour of a family member or friend to manage or sell his property, as he is not able to manage the property or execute the sale, personally. It also held that a power-of-attorney holder may however execute a deed of conveyance in exercise of the power granted under the power-of-attorney and convey title on behalf of the grantor.

It only clamped down upon transactions, where a purchaser pays the full price, but instead of getting a deed of conveyance gets a sale agreement/general power-of-attorney/will as a mode of transfer, either at the instance of the vendor or at his own instance.

Registering a property under a power

The Sub-Registrar of Assurances permits a power-of-attorney holder to register an instrument on behalf of the donor. However, the power must first itself be registered before the Sub-Registrar. For this purpose the donor and the donee must both go to the Sub-Registrar. Further, the Sub-Registrar insists that both the donor and the donee sign the power before him.

Conclusion

To sum up, a simple power-of-attorney has been the subject matter of great controversy and litigations. Chartered Accountants would be well advised to consider whether the power-of-attorney relied upon by their clients is valid or not. When in doubt, they should consider obtaining an opinion. One is reminded of the quote by W. H. Auden which ended as follows:

“……There is always another story, there is more than meets the eye.”

FROM THE PRESIDENT

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Dear Members,

Those who stay away from the election think that one vote will do no good: ‘Tis but one step more to think one vote will do no harm. – Ralph Waldo Emerson

Always vote for principle, though you may vote alone, and you may cherish the sweetest reflection that your vote is never lost. – John Quincy Adams

Let these words of great minds inspire you, and you will get an answer to the basic questions which I am sure must be in your minds:

“Must one vote?”

“Should one vote?”

Elections of our Institute are scheduled for the 7th & 8th December. They are just a month away. At this juncture I would like to share my views on our duty and role, and why each one of us should vote.

We live in a democracy and that means we get a say in who runs our country, and how Your country is run. This is equally true with our Institute.

Today, we are surrounded with an unstable Government, political games being played everywhere. We come across cases of frauds that cannot be digested and which we never imagined would take place. Here, our fraternity is being looked at with great expectations, and our Institute has to play a big role in such a situation. When we say the Institute, it is we who play a major role, as we elect a few amongst us to represent us in the Institute. So the onus is on us to select a right candidate and the right team. It is we who can make a difference by selecting the right team, and that is possible when we get involved in the process. The first step towards that is to exercise our right and discharge our duty to vote, by taking the right and rational decision and casting a meaningful vote.

Remember elections are more than a process of voting for someone to represent us. It is a right and a responsibility. We cannot give up the power and let other people make our decision by not casting our vote. We need to keep our eyes open and make the decision ourselves.

It is very easy to be blasé about our right to vote and take a “whatever, who cares” kind of attitude about it, but if you ask me, not to vote is to abdicate our responsibility. Surely, voting involves some time , effort and cost. However, not casting your vote may result in the right candidate not being elected and that is too steep a price to pay.

Surely, the two basic questions posed earlier will come to your mind. So let me attempt to help you find the answer to that.

In my view, and as I look at it, voting is not an ethical obligation. Nor it is compulsory by the Act; voting is something as an Individual may do, not something we must, like pay taxes and attend school, and now after becoming CA’s attend seminars to get CPE hours. Many democracies have tried compulsory voting. Belgium, for example, introduced such a requirement as early as 1892, Argentina in 1914. Some later rescinded these measures, and whereever they remain they are not always vigorously enforced. In countries where this right exists, people do not value it and in others where it does not, people are literally dying to be able to cast a ballot and make a difference.

I, for one would think of voting as a prime duty. And as a Chartered Accountant, I would surely not like measures which compel me to go & vote, eg Vote and get “x” no of CPE hours. I believe that forcing people to vote will not encourage them to learn about the consequences of their vote. I believe in the old philosophy that says, “If you don’t vote, you can’t complain.” It was true then, and it is true now.

Today, most of the voters wonder whether One Person’s Vote Really Matters, but the fact remains that “every vote counts.” When you do not vote, you do not participate in a democratic process and your action not to vote might harm you, and will give a feeling that the things that matter to you are moving away. It’s the question of your professional security.

A healthy democracy requires an educated and engaged population, and we are amongst that fortunate lot. So I would urge that each one of you should go to the polling place on Election Day and vote, as we are highly educated and respected all over, and we should set the standard of the highest turnout ratio, so that in the forthcoming parliamentary elections, the government should quote our example to motivate the rest of the population .

My earnest request to all is – “Educate yourself on the issues and candidates, then vote. All of this is your civic duty.” But “just vote” is succinct.

And do remember the words of Andrew Lack: “Bad officials are elected by good citizens who do not vote”.

At BCAS, looking at the statistics of low turnouts in the past for voting, it would be our endeavour to get people to vote, not for anyone in particular, but as an expression of civic virtue. Vote for the candidate of your choice, but vote, and fulfill your duty of a responsible professional.

At BCAS, we would make all attempts to share with you, views of seniors and other professionals, on election and what they feel about the whole process, and how one can make a difference. If you can come up with better ways to encourage members to vote and otherwise participate in the democratic process, please do write to me at president@bcasonline.org.

With Diwali just round the corner, it’s time to celebrate with loved ones and friends. I am sure everyone would have made plans to be with family and friends to enjoy the festival of lights.

I on behalf of the entire BCAS family take the opportunity to wish each one of you and your family a very HAPPY DIWALI & HAPPY NEW YEAR.

With Warm Regards,
Yours truly,
Deepak R. Shah

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ICAI and its members

1.    Finances of ICAI

Audited accounts of ICAI for the year ended 31-3-2011 have been recently released at the 62nd Annual Meeting held on 11-2-2012. The summarised position is as under.


2.    Our New President and Vice-President

Shri Jaydeep Shah from Nagpur has been elected as President and Shri Subodh Kumar Agrawal from Kolkata has been elected as Vice-President of ICAI on 12th February. Our greetings and best wishes to both of them. We wish them a successful term of office in 2012-13.

3.    New Committees of the Council

The Council of ICAI has formed seven standing committees and 31 other committees on 12-2-2012 for one year. Details of these committees are given on pages 1415 to 1421 of C.A. Journal for March, 2012.

(i)    Standing Committees

Chairman and Vice-Chairman of the Executive, Examination, Finance and Disciplinary

Committee (u/s.21D) are Jaydeep Shah (President) and Subodh Kumar Agrawal (Vice-President), respectively. Chairman of Board of Discipline (u/s.21A), Disciplinary Committee (u/s.21B) and Disciplinary Committee — Satyam Bench (u/s.21B) is Jaydeep Shah (President).

(ii)    Other Committees

Names of chairmen of some of the other committees are as under:

4. New office bearers of WIRC

The following new officer bearers of WIRC are elected for 2012-13:


5.    EAC Opinion

Accounting for Sales Returns

Facts
A company has been in the business of manufacture of readymade garments for the last 5 to 6 years. It sells its products to franchisees located across the country. The company has stated that the sale is said to be completed at the time when risks and rewards of ownership of goods are transferred to the franchisees. Readymade garment industry is subject to change in trends of fashion and as such, some of the goods are returned and the company accepts them back as sales returns. According to the company, sales returns are said to be completed when the goods have been physically received back in the factory premises and all the risks and rewards of ownership have been transferred to the company. Hence, the company records the sales returns in its books of account on their physical receipt. On the basis of the past trend, sales returns work out to be approximately 20 to 22% of the sales for the year.

The company has further stated that the company has accounted for the sales return received during the financial year up to the balance sheet date but has not reversed the sales returns likely to be received after the balance sheet date, on the basis of past trend. During the course of audit for the financial year 2010-11, the auditors have raised an objection regarding booking of revenue from sales. The auditors are of the opinion that since there is a past trend indicating the return of goods sold to franchisees, the company should effect the reversal of sales on March 31, 2011 to the extent that the goods sold in the year 2010-11 are likely to be returned by the franchisees in the year 2011-12 and subsequent years.

Issue for consideration
On the basis of the above, the company seeks the opinion of the Expert Advisory Committee (EAC) on the question as to whether the present policy of the company regarding recognition of sales returns after the date of the balance sheet in the books of account only upon the physical receipt of goods from the franchisees is correct or should record the sales returns received after the date of the balance sheet on estimated basis taking into account the past trend?

Opinion

After considering para 11 of the Accounting Standard (AS) 9, ‘Revenue Recognition’ and paragraph 10 of Accounting Standard (AS) 29, ‘Provisions, Contingent Liabilities and Contingent Assets’, the Committee is of the view that since obligation in respect of sales return can be estimated reliably on the basis of past experience and other relevant factors, such as fashion trends, etc., in the company’s case, a provision in respect of sales returns should be recognised. The provision should be measured as the best estimate of the loss expected to be incurred by the company in respect of such returns including any estimated incremental cost that would be necessary to resell the goods expected to be returned. The Commit-tee is also of the view that as per paragraph 52 of AS-29, provisions should be reviewed at each balance sheet date and, if necessary, should be adjusted to reflect the current best estimate. As far as actual sales returns that occur between the balance sheet date and the date of approval of financial statements are concerned, the Committee is of the view that necessary adjustments should be made in this regard to the amount of the provision.

(Refer pages 1355 to 1357 of C.A. Journal for March 2012)

6.    Guidance Note on Accounting for Real Estate Transactions

The earlier Guidance Note on this subject issued by ICAI in 2006 has now been revised in 2012. The revised Guidance Note is published on pages 1436 to 1440 at C.A. Journal for March, 2012. AS -7 relating to ‘construction contracts’ applies to accounting by construction contractors. The revised guidance note deals with Accounting by ‘Real Estate Developers’, ‘Builders’ and ‘Property Developers’. It applies to all projects in real estate which commence on or after 1-4-2012 and also to projects which have commenced but revenue is being recognised for the first time on or after 1-4-2012.

7.    Guidance Note on Accounting for Rate Regulated Activities

This is a new Guidance Note. The objective of this Guidance note is to recommend the recognition of a regulatory asset or regulatory liability if the regulator permits the entity to recover specific previously incurred costs or requires it to refund previously collected amounts and to earn a specified return on its regulated activities by adjusting the prices it charges to its customers.

The effective date for this Guidance Note will be announced later on. This Guidance Note is published on page 1442 to page 1447 of C.A. Jounral for March, 2012.

8.    Guidance Note on Accounting for self– generated certified Emission Regulations

The objective of this Guidance Note is to provide guidance for accounting by entities generating carbon credits in India. It comes into force for accounting periods beginning on or after 1-4-2012. Text of the Guidance Note is on pages 1448 to 1453 of C.A. Journal for March, 2012.

9.    ICAI News

(Note: Page Nos. given below are from C.A. Journal for March, 2012)

(i)    Action Plan for 2012-13

Our new President has presented his action plan for his term of office. Details are given on pages 1310 to 1314. We hope the Council members and other concerned members will give him full co-operation to achieve his goals.

(ii)    62nd Annual Function of ICAI

62nd Annual Function of ICAI was held at New Delhi on 11-2-2012. Minister of Corporate Affiars Dr. M. Verrappa Moily inaugurated the function. Y. H. Malagam and T. N. Manoharan, Padmashree Awardees, were felicitated at the function. Details of the function are at pages 1322 to 1330.

(iii) Chartered Accountants (Amendment) Act, 2011

As reported in February issue of BCAS Journal, the above amendment Act was passed by the Parliament in December, 2011. It is now reported that this amendment Act has come into force with effect from 1-2-2012. (Refer page 1351)

(iv)CARO 2003 Report

It may be noted that under para 4(ix)(a) of CARO, 2003 Report, the statutory auditors are required to report on the matter relating to regularity of the company in depositing undisputed statutory cess. The statement on CARO, 2003, issued by ICAI has now been amended and it is clarified that till the Rules are prescribed u/s.441A of the Companies Act, the statutory auditors need not make any comment about depositing undisputed statutory cess. (Refer page 1422)

(v)    Exposure draft

Exposure draft of Standard on Internal Audit (SIA), dealing with ‘Related Parties’ is published on pages 1454-1456. Last date for sending commends by members is 30-4-2012.

(vi)    New ICAI publications

(a)    Implementation Guide to Standard on Auditing (SA) 530 ‘Audit Sampling’.
(b)    Implementation Guide to Materiality in Planning and Performing an Audit.
(c)    Guide on Environmental Audit.
(d)    Technical Guide on Stock and Receivable Audit.
(e)    Educational Material on Indian Accounting Standard (Ind AS)1, ‘Presentation of Financial Statements’.
(f)    Educational Material on Indian Accounting Standard (Ind AS)2, ‘Inventories’.
(g)    Compendium of Opinions (Volume XXIX).
(h)    Aspects of International Taxation — A study (Revised in 2012).

Light elements

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KYC — know your customer is the buzzword in banking sector and elsewhere. In good old days we often read the quote ‘Customer is God’ by Mahatma Gandhi. Under the changed circumstances this quote seems to be redundant with the introduction of ‘Know your customer’ formality. It makes the customer feel that he is no more ‘God’ as per Bapuji’s view. Maybe now the customer is viewed as a devil or a suspect. This is what my friend Herambha Shastri once remarked. However he did not stop there, he encroached into idiosyncrasies of our ‘clients’ giving us bread (applicable to small firms), butter (applicable to medium-size firms) and cheese (applicable to Big Four).

“My dear friend, we also need to do KYC. We have clients of different hues. Clients just flirting with law, law-abiding clients, paying clients, non-paying clients, organised clients, unorganised clients, close relatives as clients, seasonal clients, one-time clients, perpetual clients, local clients, outstation clients, international (MNC) clients, etc. Well, we deal with them day and night! Are you surprised? Check your mobile call log — received calls — the last call at 11.30 p.m. What a generosity we show to them!

At times it so happens that you are attending a funeral of a near and dear one and you receive call from your client. Either to impress or out of compulsion, you answer the call. Despite informing the client that you are at crematorium, he continues: “Sir, first may the soul rest in peace. (Great etiquette indeed!) Please, one second Sir. Can I invest my retirement proceeds in the name of my wife (as if she were his Mumtaz) in a fixed deposit, right now I am in the bank. What should I do? Tomorrow it’s a bank holiday.” You are stumped.

Sometimes you are at a traffic signal and your mobile starts ringing, you identify the person calling you. Oh! A new client or a star client. The moment you answer the call you are spotted by the traffic police hiding in the corner. And your client on the line is asking you how to avoid disallowance u/s.40(A)(3) for cash payment.

My dear friends, if you are in holiday mood and forget to switch off your mobile, clients are bound to play spoil sport. Your family members get irritated. And obviously some urgent matter comes up and you cut short your holiday.

You can’t avoid meeting relatives at family functions. The moment they come to know that you are a C.A., distant relatives become close relatives. Being close relatives they don’t spare you, they feel that you are available 24×7 (note that this is also true with other non-relative clients). Most importantly, you are advising them for free. At times, out of ‘Aatithi Devo Bhav’ ethos you are forced to ask them to join for breakfast, lunch or dinner or a cup of tea. Because consultation takes place at your residence.

Mind you, most of the clients are playing the ‘hideand- seek’ game with you as far as their financial transactions are concerned. When you make enquiries (obviously in client’s interest) in the process of reconciling his investments and income, initially he is very tentative, the moment you talk about ‘penalties and prosecution’ provisions under the Income-tax Act, he reveals something of your interest. You have to play the role of “devil’s advocate” constantly. Devil means the Income Tax officer. Keep in mind, at times your client will not hesitate to share with you his secret love affairs, but not his financial affairs.

Your clients are always ahead you! I am making this statement with full consciousness and experience. Situation number one: They do everything they have in mind to reap the ‘business’ opportunity and ask us to cram it into the ‘legal frame’. So what is left for you is ‘window dressing’. They have their own definition of ‘commercial expediency’. They happen to be at point of no return and you don’t want to lose your client, you keep scratching your head.

Situation number two: They are always influenced by print, electronic media TV/Internet, lectures, seminars, and their personal network. They pose ‘tax planning’ questions to us based on the so-called ‘tax expertise’ they gather from their sources, particularly TV programmes dealing with ‘how to manage your tax matters’ with on-the-spot question — answer segment where eminent tax experts air their views. You get floored by their queries.

So is the case with public awareness campaign by the Income-tax Department, particularly announcement of advance tax due dates. For example, once the 15th June advance tax due date for corporate assessees popped up on the TV screen non-corporate assessees including salaried employees make it a point to confirm from the horse’s mouth meaning ‘you’, whether they are liable to pay any advance tax. The reason for this anxiety of your client, the advertisement comes with a string “if you fail to pay advance tax you attract penalty and prosecution”. Poor taxpayers.

Sometimes your client tells you how his friend or travel acquaintance (from his personal network) has claimed a particular deduction or exemption. You have no choice but to follow the wishes of your client.

Be aware once you start endorsing your client’s views you may feel that you are just rendering ‘courier services’.

Some clients are ‘dashing and daredevil’ clients, they have their own connections with the Incometax Department right from the peon to the Chief Commissioner. So they ask you to do as they say, rest they undertake to ‘manage’.

This is how your clients are always ahead of you. But when you demand certain information, explanations, record and documents he eschews it and air myriad excuses till the time you fire him.

‘Second opinion’ is another fad in the taxpayers community purportedly as an abundant precaution. This opinion ‘poll’ travels from one expert to another till the opinion is to client’s satisfaction. This happens because you give a ‘devil’s opinion’ — opinion against the assessee’s opinion. Some-times the client has it before he approaches you, and then he shrewdly corners you or tests your knowledge on the given issue. But I tell you it is always safe to have ‘second opinion’ to calm down the suspicious clients. This second opinion is also sought when the client invents a new scheme of ‘tax planning’.

I would end my KYC analysis with two more issues.

First, clients at large think tax compliances, particularly dues dates are for you to bother. So you have sleepless nights, blood pressure (high or low) diabetes, etc.

Second, most of the clients are forgetful about your professional charges, but are very particular about getting the work done. Professional charges are always ‘past’ overdue. Either the clients find the fees too high or they are facing financial crunch in the business. In fact, we extend maximum credit period on the earth. Unfortunately, unlike physical goods we cannot repossess services rendered. If you insist for payment of fees/charges they instantly switch over to another professional. So you have to be very patient.

So my dear friend, Do you Know Your Client?

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ICAI and its members

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1. Disciplinary cases
It is reported that the Disciplinary Committee has given its decision and awarded punishment in the cases of Shri Srinivas Talluri, partner of M/s. Price-Waterhouse & Co., and Shri Srinivas Vadlamani, the former CFO of Satyam Computers. It is also reported that the Committee has held Shri Srinivas Talluri guilty of gross negligence in the performance of his duties as auditor and his membership is cancelled for life and a penalty of Rs.5 lac is imposed. Similarly, in the case of Shri Srinivas Vadlamani the Committee has barred him from attesting financial statements for life and also levied a penalty of Rs.5 lac.

2. EAC Opinion Accounting treatment of success fee paid to the financial advisors

Facts
A government company registered under the Companies Act 1956, is a wholly-owned subsidiary of listed government company. The shares of the company are not listed with any stock exchange. The company is engaged in activities relating to exploration and production of oil and gas. The company is holding participating interest (PI) in various oil and gas blocks. The company along with another company ‘V’ has acquired company ‘A’ in joint venture. Company ‘B’ is 100% subsidiary of company ‘A’, which holds the PI in oil and gas blocks in Brazil.

The company appointed financial advisors to carry out: (i) financial due diligence, (ii) develop a detailed financial model and other methodologies to determine the transaction value, (iii) analyse various risks associated with the projects, (iv) valuation of company/project, (v) assisting in appointment of technical, legal and tax consultants, (vi) listing out various financial options available to the company, and (vii) preparing the bidding strategy to acquire the proposed equity interest or participating interest by the seller.

For this purpose, the fees payable was a fixed fee of US $ 2,50,000; if for any reason the transaction does not consummate and a success fee of 0.70% of the bid price, payable on successful closure of the transaction. The company has pointed out that the fixed fees shall not be payable if engagement is commenced, but the financial advisors are unable to continue or complete the transaction for reasons attributable to them. Notwithstanding this, payment of fixed fees shall become due and payable only after 90 days from the date of signing of the agreement with them.

Thereafter, the financial advisors submitted the report along with the presentation and the same was deliberated upon by the company and company ‘V’. After the internal deliberations the strategy meeting between the company and company ‘V’ for acquiring company ‘B’ was held wherein it was decided to bid for the various basins held by company ‘B’. An amount of Rs.2,40,95,418, (being 0.70% of bid price of US $ 82.5 million) after TDS was paid, to the financial advisors against the bill of the financial due diligence, etc.

Query
The company has treated the above success fees as revenue expenditure in the books of the company. Whether the aforesaid treatment is correct? If not, then what is the correct accounting treatment?

Opinion

The EAC noted that the underlying assets (PI) are not in the books of the company. The expenditure on account of success fees was incurred at the bidding process stage before the formation/ incorporation of company ‘A’. The success fee has relation to bidding process for PI and has no relation to the acquisition of equity shares in company ‘A’. Hence, the company has incurred the expenditure on fee to financial advisors for a commercial advantage which is to be availed through its joint venture company ‘A’, in whose books, the investment in company ‘B’ would appear. After considering paragraphs 28, 29 and 32 of Accounting Standard (AS) 13, ‘Accounting for Investment’ the committee took the view that in the present case the expenditure on fee paid to financial advisors cannot be included in the ‘cost of Investment’ at the time of initial recognition. Such expenditure also does not become part of carrying amount of the investment in the shares of company ‘A’ as the investment is to be carried at cost, with only diminution to be recognised under certain circumstances. Further, the committee noted that the term ‘asset’ has been defined in the Framework for the Preparation and Presentation of Financial Statements, issued by the Institute of Chartered Accountants of India as “a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise”. Therefore, the committee is of the view that expenditure on fixed fee and success fee does not result into a resource control by the company and accordingly, it cannot be capitalised as an asset.

In view of the above, the expenditure on ‘fixed fee’ and ‘success fee’ incurred by the company does not meet the definition of an asset and should be expensed in the statement of profit and loss. Therefore, the treatment given by the company in its books of account is correct.

(Refer page Nos. 1202 to 1204 of C.A. Journal, February 2012) 3.

Results of Final C.A. Examination — Nov. 2011

Results of the above examination were declared in January, 2012. Analysis of the results of examinations held in last two years are as under.

4. Campus placement February-March, 2012 ICAI has organised campus placement programme for the newly qualified Chartered Accountants during February-March, 2012, at 17 centres. Detailed announcement about this programme is available

at www.cmii.icai.org. The places and dates are as under. The newly qualified members can take advantage of this facility at their respective cities.

(i) Baroda, Chandigarh, Indore, Kanpur and Nagpur 22-23 February, 2012

(ii) Bhuvaneshwar, Coimbatore and Ernakulam 23-24 February, 2012

(iii) Ahmedabad, Jaipur and Pune 27-29 February, 2012

(iv) Chennai, Mumbai and New Delhi 26-31 March, 2012

(v) Banglore, Hyderabad and Kolkata 28-31 March, 2012 (Refer page 1279 of C.A. Journal for February, 2012)

5. ICAI News

(Note :Page Nos. given below are from C.A. Journal for February, 2012)

(i) Vision 2030

ICAI has released ‘ICAI Vision 2030’ at its Annual Function held on 11-2-2012. Copies can be obtained from ICAI office. (Page 1142)

(ii) Health Insurance from members and students

ICAI has tied up with New India Assurance Co. Ltd. for launching a special scheme for members and C.A. students. Details are available at www. icai.org.in (Page 1142).

iii)  New branches of ICAI 
Following new branches have been opened by ICAI.
(a)  Kannur branch  (SIRC)
(b)  Shivkashi branch (SIRC) (Page 1286)

 (iv)  New branch buildings of ICAI

Following new buildings have been inaugurated at branches of ICAI (SIRC):
  (a)  Coimbatore
  (b)  Nellore
  (c)  Madurai (Page 1142)

(v)    Revision of fees payable to Expert Advisory Committee (EAC)

EAC of ICAI is giving opinions on Accounting and Audit Issues to members and others. At present, a fee of Rs.25,000 is required to be paid to EAC for each opinion. This fee is now enhanced to Rs.50,000 w.e.f. 10-1-2012 in cases which relate to an enterprise whose equity capital or debt securities are listed on the stock exchanges. Further, the increased fees are also payable in cases where the enterprise is having annual turnover exceeding Rs.50 crore based on the accounts of the year ending on a date immediately preceding the date of sending the query. In all other cases a fee of Rs.25,000 will be payable.

FROM THE PRESIDENT

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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

levitra

ICAI and its members

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1. Code of Ethics
The Ethical Standards Board of ICAI has given answers to some of the ethical issues raised by our members. These are published on pages 254-256 of CA. Journal for August, 2012. Some of these issues are as under:

(i) Issue:
Can a member in practice indicate in a book or an article, authored/contributed/ published by him, his association with any firm of Chartered Accountants?

As per Para (c) under Clause (6) of Part 1 of First Schedule to the Act as appearing in the Code of Ethics, 2009, a member is not permitted to indicate in a book or an article, authored/contributed/ published by him, the association with any firm of Chartered Accountants.

(ii) Issue:

Whether the word “Chartered Accountants” and name of city after the name of the members of the Institute be mentioned in the articles contributed by such members and published in the Institute’s Journal?

Under Clause (6) of Part 1 of the First Schedule to the Act, there is no restriction in the Code of Ethics for mentioning the word “Chartered Accountant” and also the name of city in an article contributed by a member in the Institute’s Journal as well as in newspapers and other periodicals.

(iii) Issue:

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

An individual Chartered Accountant or a firm of Chartered Accountants can institute or sponsor prizes, provided that the designation “Chartered Accountant”, is not appended to the prize and the Clause (6) of the First Schedule regarding advertisement and publicity is complied with.

(iv) Issue:
Can a Chartered Accountants firm give advertisement in relation to Silver, Diamond, Platinum or Centenary celebration of the firm?

While considering the implications of Clause (6) & (7) of Part 1 of the First Schedule of the Act in relation to such advertisements and also the need of interpersonal socialisation/relationship of the members through such get-together occasions, the advertisement for Silver, Diamond, Platinum and Centenary celebrations of the firms has been permitted to be published in any newspaper or in the newsletters.

(v) Issue:
A Chartered Accountants firm issued circulars to the non-clients that a Chartered Accountant who was the former partner in-charge of Taxation of one of the largest accounting firms of the world, had joined them as partner. Can they do it?

Clause (6) of Part 1 of the First Schedule to the Act prohibits solicitation of clients or performing work either directly or indirectly by circular, advertisement, personal communication or interview or by any “other means”. The issuance of circular to persons who are not clients, but may likely require services of a chartered accountant would be tantamount to advertisement, since it is solicitation of professional work by making roving enquiries. As per Clause (7) of Part 1 of the First Schedule to the Act, the usage of the words “one of the largest accounting firms of the World” and the specification of specialisation in “taxation” would also amount to advertisement and, thus, constitute professional misconduct.

2. EAC Opinion
Accounting Treatment of Liability for Unbilled Work-in-Progress in the Books of Executing Agency.

Facts:
A government company was set up as a special purpose vehicle for executing the infrastructure development and related projects in a State with quality and speed. The projects are identified by the Government and these projects are entrusted for execution to the company.

For executing the projects, the company engages the services of various contractors who are required to use their own men, materials and machines and the company does not supply any of these. The company has also clarified that it has not received the projects from the Government in the capacity of a contractor, rather, the Government has entrusted the work in the capacity of executing agency through Memorandum of Understanding (MOU). The projects have not been sub-contracted by the company. Further, as per the company, the ownership interest relating to contract assets and liabilities vest with the Government.

The company is not raising any bill for the work executed by it. The company is charging development fees at certain pre-fixed percentage of the development expenditure incurred, to the Government towards the services rendered.

As per agreed terms of contract, the contractor raises running account (R.A.) bills on the company for the work done by him and final bill is raised after completion of the project. The billing period generally falls into two or more financial years.

The company is providing for the liability towards work executed upto the financial year end based on bills received till the finalisation of accounts. However, on the basis of advice from the Comptroller and Auditor General of India (CAG), the company started providing for work executed till financial year end towards the work for which bills have not been received on the basis of estimated value worked out by the engineering department of the company.

Query:
On the above facts, the company has sought the opinion of the Expert Advisory Committee as to whether or not the company should recognise liability in respect of unbilled work-in-progress.

Opinion:
The Committee notes from the Facts of the Case that the company in this case is acting merely as an execution agency of the Government, for which it is getting a development fee for rendering its services. The Committee further notes that the terms ‘Assets’ and ‘Liabilities’ are defined in paragraphs 49(a) and 49(b) respectively of the ‘Framework for the Preparation and Presentation of Financial Statements’.

After considering the said paragraphs, the Committee notes that in this case, the future economic benefits from the project assets are not expected to flow to the company. On completion of the project, the assets would be taken over by the Government. Further, the Committee notes from the MOU between the company and the Government that the project assets are not funded by the company. In substance, they are funded by the Government. Accordingly, the liabilities which arise during the transactions are those of the Government and not that of the company. Thus, all the significant risks and rewards relating to the ownership of project assets and liabilities vest with the Government. In so far as the company is concerned, the Committee is of the view that the project assets and project liabilities do not meet the definitions of “Assets and Liability” respectively and as such, the project assets and liabilities of the said business should not be recorded in the books of account of the company.

On the basis of the above, the Committee is of the view that the liability for work-in-progress and the corresponding asset, viz. the work-in-progress (billed or unbilled) in respect of the project, if any, should not be recognized in the books of account of the company.

[Pl. refer pages 287 to 289 of C. A. Journal of August, 2012]

3. Examination Results

(i) Results for CA Final Examination held in May, 2012, were declared in July, 2012. 16.38% candidates passed in Both Groups. 25.32% candidates passed in Group I and 29.62% passed in Group II. Abhishek Gupta (Kolkata), Divyang Bhandari (Chennai) and Shruti Sodhani (Bangalore) secured 1st , 2nd , and 3rd Rank respectively in the Final Examination.

(ii) Results for CPT examination held on 17-6-2012 have been declared. 37.56% of candidates passed in this examination. Girls have taken a lead over Boys by a margin of 2% i.e. 40.04% against 37.56%

(Refer Page 238 of CA Journal of August, 2012.)

4.    Elections to Regional and Central Council

The next elections to the Central Council and Regional Councils of ICAI are scheduled to be held on Friday, 7th December and Saturday, 8th December, 2012 in cities having more than 2,500 Members. In other places, the elections will be held on Saturday, 8th December, 2012. Members from Mumbai, Kolkata and New Delhi, where there are more than one polling booth, have option to select the booth of their choice. For this purpose, they have to exercise option in writing before the specified date. Full details about the procedure for elections is hosted on ICAI website www.icai.org (Refer Page 362 of CA Journal of August, 2012).

5.    ICAI News

(Note : Page Nos. given below are from CA Journal of August, 2012)

(i)    New ICAI Publications

(a)    Compendium of Accounting Standards (Up dated as on 1-7-2012) (P. 376)

(b)    Technical Guide on Internal Audit of Infrastructure Industry (P. 377)

(c)    Technical  Guide  on  Internal  Audit  of Not-for-profit Organisation ) (P. 377)

(d)    Technical Guide on Internal Audit of Mining and Extractive Industry (P. 378)

(ii)    Annual Membership Fees

Annual Membership Fees for 2012-13 can be paid on or before 30-9-2012 (P. 387)

(iii)    Certificate Courses

Members can take advantage of Certificate Courses conducted by ICAI, including those on Indirect Taxes, Enterprise Risk Management, Concurrent Audit of Banks, Internal Audit, Master in Business Finance, International Taxation, Forensic Accounting & Fraud Detection using IT & CAATs and International Financial Reporting Standards. Interested members must consult ICAI website for the list of the complete courses available. Many post-qualification courses are available to promote and enhance members’ career prospects. List of these courses include Information Systems Audit (ISA), CPE Course on Computer Accounting and Auditing Techniques (CAAT), Diploma in Insurance and Risk Management (DIRM), etc.: for complete list of such courses, members must refer to ICAI website (Page 250).


(iv)    International Assignments

Members interested in international assisnments can take advantage of the existing memorandums of understanding (MoUs), mutual recognition agree-ment (MRAs), and joint declarations of ICAI with international institutions. The list is available on the ICAI website. At present, there is an MRA with The Canadian Institute of Chartered Accountants (CICA), CPA Australia and CPA Ireland. ICAI has MoUs with The Institute of Chartered Accountants in Australia (ICAA), The Institute of Chartered Accountants in England and Wales (ICAEW), Higher Colleges Of Technology, Ministry Of Higher Education And Scientific Research, UAE, and University of Djbouti. ICAI has signed a joint declaration with the Bahrain Institute of Banking and Finance and a License Agreement with ISACA (Page 250).

ICAI and its members

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1. ICAI Elections – December 2012

(i) By a Notification dated 5-9-2012, Secretary, ICAI, has notified that the elections to the Central and Regional Councils of ICAI will be held on 7th and 8th December, 2012, in the cities of Ahmedabad, Bengaluru, Chennai, Delhi/New Delhi, Gurgaon, Hyderabad, Jaipur, Kolkata, Mumbai & Pune, Polling will be held on 7th and 8th December. In other places the Polling will be on 7th December only. Results will be declared on 9th January, 2013.

(ii) The number of candidates to be elected will be as under:

(iii) A candidate for Central Council has to pay a fee of Rs. 5,000/- and also provide Security Deposit of Rs. 20,000/-. Fees for candidates for Regional Council is Rs. 2,500/- and Security Deposit is Rs. 10,000/-. The Security Deposit will be forfeited if the candidate for Central Council does not get 2% of valid First Preference votes polled. Similarly, a candidate for Regional Council will forfeit the deposit if he does not get 1% of valid First Preference Votes.

(iv) CA Election Rules provide for compliance with a strict code of conduct by the candidates. A candidate for Central Council cannot incur expenditure exceeding Rs. 6 lakh. Similar limit for candidate for Regional Council is Rs. 4 lakh. All candidates have to file details of expenses with ICAI within 15 days of announcement of results of the elections. Disciplinary action will be taken against a candidate who violates the code of conduct provided for the candidates.

(v) Briefly stated’ the code of conduct for elections to ICAI Councils put restrictions on candidates as under:

(a) Restrictions on addressing conferences, seminars, study circle meetings etc. of our members.
(b) Restrictions on addressing meetings organised by other Trade and Professional Associations.
(c) No gifts, refreshments, parties etc. can be given to voters.
(d) Only one Manifesto/Circular or appeal seeking vote in the election can be issued.
(e) No separate website can be maintained for the election.
(f) Restriction on publication in News Papers, Magazines etc. about candidature of the members.

(vi) Sometimes, our members have a grievance that the institute is not doing enough to address their problems. It is, therefore, necessary for our members to elect a strong Council at the centre as well as at the regional level. This is possible only if each and every member of the Institute considers it to be his/her bounden duty to elect the right type of candidates to the Council. A member should consider whether the candidate will be able to contribute to the cause of the profession and devote time for the activities of the Institute. Integrity, honesty and ability to stick to the right path are the qualities of a good candidate, which should be our touchstone in selecting the right type of candidate in this election. A voter should not be carried away by innovative methods of canvassing adopted by some candidates. It may be noted that, as stated earlier, strict Election Code of Conduct has been introduced and a ceiling on election expenses to be incurred by each candidate is fixed. Our members should ensure that if a candidate is found to be canvassing for votes in a manner which violates the Election code of conduct, it should be brought to the notice of the Secretary to ICAI.

(viii) In elections of this type, each vote is valuable. Our elections are held on the ‘single transferable vote system, under which the voter has to indicate preference about the candidates by inserting figures 1,2,3 etc. against the names of candidates according to his/her preference. Some members are under the impression that only the ‘first preference’ vote is of value. This impression is not correct. A candidate is required to obtain only a specific number of first preference votes for getting himself elected. If the first preference votes obtained by him are more than the required number, the excess is transferred, at appropriate value, to the candidates who have secured 2nd, 3rd, 4th, etc. preferences. If a voter exercises only his/her first preference for a particular candidate and does not mark subsequent preferences and that candidate gets more than the required first preference votes, the balance of votes will go waste. Similarly, if the number of first preference votes received by the candidate are much below the required quota, candidates getting subsequent preferences will get an advantage by way of transfer of such votes at appropriate value. It is, therefore, essential to note that a voter should not select only one candidate of his choice, but should select as many candidates as possible and mark his preferences for such candidates. It may be noted that by giving second or subsequent preferences, the position of the candidate to whom the first preference vote is given will not be jeopardised. By giving subsequent preferences’s the voter will be able to get at least one of the candidates of his choice elected.

2. EAC Opinion

Provision for Warranty under Construction Contract and Corresponding Revenue Recognition:

Facts:
A public sector company (company) is engaged in the field of engineering, manufacture of equipment, erection and commissioning of power projects. In addition, the company is also in the business of transportation, transmission, defence, etc. The normal execution period of a contract ranges between three and five years. The normal warrantee/ guarantee period of a contract is between 18 and 24 months, which starts from the date of completion of trial operation of the project.

The Company has stated that the revenue recognition in respect of long term construction contracts is done based on percentage of completion method in line with the requirements of Accounting Standard (AS) 7, ‘Construction Contracts’. The warranty obligation is created at 2.5% of the contract value based on past trends.

The Company has stated that provision is created towards warranty obligation at 2.5% of the revenue progressively as and when the revenue is recognised and the same is added to ‘actual cost incurred’ upto reporting period for working out percentage of completion under AS 7 contracts. 2.5% of the contract value is also added towards warranty obligation to the ‘total estimated cost’ to complete the work for percentage completion method.

Query:
The company has sought the opinion of the Expert Advisory Committee as to whether the present policy and practice of the company on ‘provision for warranties’, viz. creation of provision towards warranty obligation progressively during construction period and considering the same as “cost incurred” to determine the percentage of completion for revenue recognition under AS 7 is in the line with the requirements of accounting standards?

Opinion:

After considering paragraphs 11 and 14 of AS 29, notified under the Rules, EAC is of the view that a provision should be recognised when there exists present obligation to act or perform in a certain way and other conditions for its recognition under AS 29 are satisfied. Obligation may arise from a binding contract or statutory requirement and may also arise from normal business practice, custom and a desire to maintain good business relations or act in an equitable manner. From the Facts of the Case, it is evident that all the contracts of the company provide for warranty for periods ranging between 12 and 24 months and while executing the contract over a period of 3 to 4 years, the company is always bound to rectify, rework and compensate any defects, short supplies, operational problems of the individual equipment already supplied under construction contracts. Thus, there exists a contractual/customary present obligation in respect of warranty service, which will require outflow of resources embodying economic benefits to settle the obligation. Further, EAC notes that, in the present case, the company can make reliable estimate of the amount of obligation on the basis of past trend. Accordingly, EAC is of the view that a provision in respect of warranty service should be recognised in the extant case of the company.

Further, as regards the timing of recognition of provision, EAC notes paragraphs 15, 16 and 21 of AS 7. After considering the same, EAC is of the view that the expected warranty cost is a contract cost which is directly related to a specific contract. When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively, by reference to the stage of completion of the contract activity at the balance sheet date. In the present case, the company follows the percentage of completion method for recognising its revenue, which indicates that the outcome of a construction contract can be estimated reliably. Accordingly, following the percentage of completion method, the contract costs, including provision for expected warranty costs, should be recognised by reference to stage of completion of the contract activity at the reporting date.

[Pl. refer pages 596 to 599 of C. A. Journal – October, 2012]

3.    Campus Placement Programme – September 2012

ICAI had organised the Campus Placement Programme for new members of the profession in August – September, 2012. This programme was held at Ahmedabad, Bengaluru, Baroda, Bhubaneshwar, Chennai, Coimbatore, Ernakulam, Hyderabad, Indore, Jaipur, Kanpur, Kolkata, Mumbai, Nagpur, New Delhi, Pune etc. Briefly stated, the result of this programme is as under.

(i)    Number of candidates Registered (9382), Interview Teams (86) and Organisations (53);

(ii)    Highest salary offered for – Domestic Assignments Rs. 13.77 lakh p.a.

– International Assignments Rs. 16.70 lacs p.a.

(iii)    Minimum salary Rs. 4 lakh p.a.

(iv)    Number of candidates who got jobs in (a) February/March Programme (933) and (b) August/September Programme (497).

(v)    Highest number of jobs offered were in New Delhi (160) and Mumbai (100). Jobs offered in Chennai were (63) and Bengaluru (55).

(Refer pages 671-672 of C.A. Journal for October, 2012)

4.    ICAI News

(i)    ICAI Publications

(a)    Guide to reporting on Pro Forma Financial-Statements.

(b)    Compendium of statements on Auditing and Guidance Note (3 volumes) (As on 1-8-2012)

(c)    Compendium of Implementation Guides to Engagement and Quality Control Standards.

(d)    Data Analytics and Continuous Controls Monitoring.

(e)    Technical Guide and Internal Audit to Tendering Process.

(f)    Guide on Corporate Social Responsibility.

(Refer pages 691 to 696 of CA Journal for October, 2012)

(ii)    Some Ethical Issues

Ethical Standards Board of ICAI has answered some questions on Ethical Issues at page 558 of C.A. Journal for October, 2012.

Ethics and u

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(Engaging in Other Business………)

Shrikrishna (S) – Arey Arjun, Why are you looking so tired? Your pressure of September is still not over?

Arjuna (A) – September is over; but not our pressure.

S – I am sure, the Dandiya was keeping you busy late night.

A – Kaash! CAs were that fortunate!

S – Why? What happened?

A – By 30th September, returns were e-filed. But now we are signing all balance-sheets and reports. Besides, I have to do so many things for this Diwali.

S – Why? For CAs, what is special about Diwali?

A – Diwali has nothing to do with my practice. But that other business of mine! That consumes lot of my time.

S – What business?

A – Don’t you know? We are into trading of construction material. We have a few agencies.

S – We means who?

A – My wives Droupadi and Subhadra. They are directors but I only have to manage everything. It is our family business.

S – What do you mean by family business? Was it started by your father Pandu Chacha?

A – No. I only started it. I am also a director in Bhima’s company. Bhima runs a gym.

S – And what do you do in your business?

A – Get orders, procure material, manage the workers, look after Government authorities – and what not!

S – Have you sought your Council’s permission?

A – What for? In my business, I am just shown as a manager. My wives are directors and I draw only remuneration. In Bhima’s company, I look after administration. Actually, Nakula and Sahadeva want me to become a partner in their firm. They are into share-trading.

S – For Dharma’s sake, please don’t do that! Council does not permit all this.

A – I have already thought of it. I will become partner in my HUF capacity. Simple!

S – When you were a student in Guru Dronacharya’s school, you were very brilliant and focused. You could see only one single eye of the fish! But now, I find that you are simultaneously looking at so many things – except your profession and its ethics!

A – Why? What’s wrong?

S – Firstly, remember, an HUF as such can never be a partner. Only an individual or a company can be partners. – either a natural person or a legal person.

A – But HUF is also a person.

S – You are not able to think of any law except the Income Tax Act. Partnership is governed by Partnership Act and not by tax laws.

A – But I have formed firms where same individual is partner in both capacities – that is himself and also as Karta. None else.

S – Anyway, that’s a separate topic. Council will not recognise any activity under socalled HUF, if it is not a genuinely ancestral business.

A – This is very unfair. If I am serving my clients well and they don’t have any complaints, why should the Council come in the way? How is it concerned?

S – See, the council has two major concerns. Firstly, your profession is very demanding. It requires continuous update of knowledge. Council feels that you should pay undivided attention to the profession.

A – Ah! I can manage all things simultaneously.

S – If that is so, why are you signing the hard copies of balance sheet now, after the returns are e-filed?

A – OK. What is the other point?

S – Remember; as a businessman, you are likely to invite lots of risks and liabilities. Due to the financial or other worries, you may often compromise on your principles. That is most dangerous. Your quality of work then suffers. Moreover, doing certain businesses may hamper the dignity of your profession. And under the guise of promoting your business, you may even advertise your profession. This is unfair and not desirable.

A – Yes, Sometimes I also lose my patience and don’t feel like attending office, if I have to execute orders and manage the funds for business. But then, I have heard that the Council allows us to become a director in a company.

S – You are right. You can even be a promoter; and also a director in a board-managed company. But you cannot be an executive director.

A – What do you mean by that?

S – You can be only a ‘Director Simplicitor’. You may attend board meetings, participate in discussions; but cannot be involved in execution.

A – Can I sign cheques?

S – Council says, ‘no’. You should not sign any documents, bills, contracts, letters and the like.

A – This is strange. But I know many CAs who have a private limited company with only two directors – only husband and wife.

S – Then they must be signing the balance sheet also! – That is also not looked at with favour by the Council. Unfortunately, nowhere it is defined as to what amounts to ‘engaging in a business’.

A – And many CA friends of mine are doing regular trading in shares.

S – Blissful ignorance! You said you draw remuneration as Manager.

A – Yes. I am showing it in my income. What’s wrong?

S – You have to seek permission from the Council for any employment – be it full time or part – time. Even college lecturers have to seek permission.

A – And then what happens?

S – See, there is a prescribed application form, Council examines how much time you are required to devote for the other occupation. What are your financial stakes, and so on.

A – You mean I should have obtained permission?

S – Yes, obviously. And then, you will be treated as in part time practice.

A – So what?

S – You cannot then do attest function – cannot sign balance sheets as auditor! And cannot keep articled trainees.

A – Oh my God!

S – There is a recent real story. Mr. A was a CA who did active business in a private limited company in which his friend B, an engineer was the other director. There were the only two of them. B’s son completed articleship with A and passed his CA.

A – Then?

S – There was a serious dispute and litigation between A and B, and ‘B’s son filed a complaint against his own ex-boss ‘A’ that he was an executive director.

A – How ungrateful! Complaint against his own Guru!

S – Yes, And the Guru was held guilty of professional misconduct!

A – For each and everything, one has to approach the Council?

S – No, Council has announced certain general permissions and certain items require special permission. That is Regulation 190A.

A – Now, what do I do?

S – Better withdraw your name from everywhere. Stop signing any documents of business at once. And don’t join Nakula and Sahadeva as a partner.

A – Then who will sign the balance sheet of Bhima’s company?

S – Better induct someone. It always happens – many CAs start business knowingly or unknowingly. They avoid taking permission. Afterwards, when they come to know the seriousness, they are afraid of approaching the Council.

A – Then, what should they do?

S – Either stop the other activity; or approach the Council. Better late than never. Voluntary application may prove your bonafides.

A – Bhagwan, I forgot to mention one small thing. I have an agency of LIC ; but it is in Subhadra’s name; and a sub-brokership in Droupadi’s name.

S – Do they really do it themselves? Do they really know the business?

A – No, I have their Power of Attorney to do everything.

S – Then better take your own insurance! Also enquire about professional indemnity insurance. Dear Arjun, I saved you many times in Mahabharata War; But with your Council, I wonder whether I will be able to help.

A – How can you say so? You are God – Omni potent and Omniscient.

S – True. But I save only honest and righteous people. Not those who compromise on ethics.

‘Om Shanti’.

NOTE :
The above dialogue is with reference to Clause 11 of the First Schedule which reads as under:

Clause (11) : engages in any business or occupation other than the profession of chartered accountants unless permitted by the Council so to engage:

Provided that nothing contained herein shall disentitle a chartered accountant from being a director of a Company, (not being a managing director or a whole time director), unless he or any of his partners is interested in such company as an auditor;

Further, readers may also refer pages 211 to 225 of ICAI’s publication on Code of Ethics, January 2009 edition (reprinted in May 2009)

ICAI and its members

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1. Code of Ethics:

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

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

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

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

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

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

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

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

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

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

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

“192, Restriction on fees

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

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

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

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

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

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

2. EAC Opinion:

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

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

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

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

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

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

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

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

3.    ICAI News:

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

(i)    International Conference to be held at Mumbai:

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

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

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

(iii)    ICAI Publications:

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

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

Direct Taxes

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

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

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

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

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

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

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

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Lecture Meetings

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Important tax issues encountered in doing business in India

Hitesh Gajaria, Chartered Accountant, addressed the audience on various aspects of tax issues faced by foreigners doing business in India, at this lecture meeting held jointly with the Indo- American Chambers of Commerce on 17th April, 2012 at Walchand Hirachand Hall, Indian Merchant Chambers, Churchgate. The attendees of the lecture meeting gained immensely from the analytical insights from the learned faculty. Video recording of the proceedings is available on BCAS Web TV.

Recent judicial rulings with special emphasis on Corporate Taxation

At this lecture meeting held on 26th April, 2012, the speaker Rajan Vora, Chartered Accountant, presented a masterly analysis of important recent judicial rulings and answered questions from the audience. Video recording of the proceedings is available on BCAS Web TV.

Other programmes
10th Annual Residential Camp

The Human Resources Committee had organised this Residential Camp from 20th to 22nd April, 2012 at Moksh, Village – Kadadhe, Pune. This Residential Camp was based on the theme ‘Everyday Happiness’. The faculty, Mr. Nithya Shanti, a Spiritual teacher, shared his practical wisdom teachings for happiness and enlightenment with people in a joyful and transformational way. The objective of the camp was well achieved as it helped the participants to improve their ability to bring more joy and presence to their daily lives.

Seminar on Development in Accounting, Auditing & Taxation Field held at Kolkatta

This seminar was organised by the Accounting & Auditing Committee jointly with DTPA Chartered Accountants’ Study Circle — EIRC on Saturday, 21st April, 2012 at The National Library, Kolkata. The participation of over 500 included professionals in practice and from the industry. Speakers Jayesh Gandhi, Himanshu Kishnadwala, and Gautam Nayak, all Chartered Accountants covered various aspects with regards to new developments in the field of Accounting & Auditing, Revised Schedule VI and some recent issues on Tax Credit and Rectifications. The participants gained immensely from the wealth of knowledge and experience shared by the learned faculties.

2nd i-Power Summit

The Infotech& 4i Committee had organised this Residential Summit on 27th & 28th April, 2012 at Rambhau Mhalgi Prabhodhini, Bhayander that was attended by 66 participants including a large number of out station members. The Summit took off with a key note address by Padmashri T. N. Manoharan, Other speakers Pradeep Shah, Chartered Accountant, Keith Prabhu, Sunil Kothari, Chartered Accountant, Hareesh Tibrewala, Shariq Contractor, Chartered Accountant, Huzeifa Unwala, Chartered Accountant and Nilesh Vikamsey, Chartered Accountant dealt with the various aspects that included Networking, Mergers, International Networking, Technology, Cloud Computing and use of Social Media. The participants gained immensely from the wealth of knowledge and experience shared by the learned faculty and the programme was highly appreciated by all.

Seminar on Labour Laws

The Indirect Taxes & Allied Laws Committee of Bombay Chartered Accountants’ Society jointly with The Chambers of Tax Consultants organised this Seminar on Saturday, 28th April, 2012 at the Society. Speaker Ramesh Soni, Senior Labour Law Consultant addressed the audience and covered various acts like Employee State Insurance Act, The payment of Bonus Act, Provident Fund, Gratuity & Labour Welfare fund. The programme received very enthusiastic response from members and participants from the industry.

Seminar on Finance Bill, 2012 — Service Tax Provisions

The Indirect Taxes & Allied Laws Committee of the Bombay Chartered Accountants’ Society had organised this Seminar on Sunday, 29th April, 2012 at Hotel JW Marriott, Mumbai. The speakers Shailesh Sheth, Advocate, Vipin Jain, Advocate, S. S. Gupta, Chartered Accountant and Rohit Jain, Advocate, between them covered changes in service tax law that included Negative list based taxation of Services, exemptions, declared services and valuation principles. The seminar even though held on a Sunday received full house response from participants that included several non-members and representatives of industry.

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

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The representatives of the Chamber of Tax
Consultants and Bombay Chartered Accountants’ Society met Shri N P
Singh, CCIT(CCA),Mumbai and Shri T K Shah, CCIT-V, Mumbai with a
suggestion to revive the practice of holding meetings with Chief
Commissioners. Proposal was accepted. The representatives thereafter
sent a list of issues and suggestions for resolution thereof for
discussion with the Chief Commissioners in their first meeting.
Consequently, a meeting of the Chief Commissioners and representatives/
office bearers of associations of tax consultants was held on 9th May,
2012 at 4.00 pm in the conference hall of Aayakar Bhavan, Mumbai.

The following Officers attended the meeting:

1. Shri T K Shah – CCIT-V,Mumbai; Chairman
2. Shri S Ravi – CCIT-XI
3. Shri P C Srivastava – CCIT~VII
4. Shri Swatantra Kumar – CCIT-XII
5. Shri A K Mehrish – CCIT-XIII
6. Shri A C Shukla – CIT (TDS)
7. Shri Sandip Pradhan – CIT (CO)

The representatives from the associations of tax consultants present in the meeting were:

1. Shri Deepak R Shah ? Vice President, BCAS
2. Shri Kishor B Karia ? Chairman, Int. Taxation Committee, BCAS
3. Shri Gautam S Nayak ? Chairman, Taxation Committee, BCAS
4. Shri Vipul B Joshi ? Chairman, Law and representation Committee, CTC
5. Shri Mahendra Sanghvi Co-chairman, Law and Representation Committee CTC
6. Shri S M Bandi ? Vice-chairman and Representation committee CTC
7. Shri Apurva R Shah ? Convenor, Law and Representation Committee, CTC
8. Shri Anil Doshi ? Convenor, Taxation Committee, BCAS

The issues proposed by the associations for discussions included the following.
1. Rectifications and Appeal Effects.
2. Stay of demand and coercive action for recovery.
3. Credit for TDS.
4. Interest under section 244A.
 5. Revalidation/re-issue of Refund Cheques.
6. Adjustment of refunds against old demands.

On
preliminary discussions between the participants, a general consensus
emerged that having regard to the accumulated huge volume of work
involved in the list of issues to be resolved, the Department needs to
take up one important aspect of work at a time instead of dabbling with
all matters simultaneously, review the progress in the next meeting and
move ahead for resolution of other issues. It was also felt that the
foremost need is to correct the demand uploaded by the AOs on to the CPC
server which is otherwise resulting in adjustment of refunds against
non-existent/excessive demands.-

In this background, the issues that were discussed in the meeting are as under:

 I   Correction of Demand uploaded on CPC Server

Shri
M B Sanghvi stated that refunds due to the taxpayers are often not
issued as the AOs have uploaded incorrect demands on to the CPC portal.
Shri Swatantra Kumar explained that there were a few system related
problems earlier. These problems have been resolved and the officers are
now in a position to correct the demand. Shri T.K. Shah informed the
participants that the CCIT-I, CCIT-II and CCIT-X have already appointed
their AC/DCsIT(HQ) as Nodal Officers in their Regions to receive
applications regarding objections to the arrears of demand intimated by
the CPC to the assessees. To start with (upto 30th June, 2012)
applications for correction of such demands which are shown outstanding
on account of following reasons alone will be made by the taxpayers.

(i) Multiple demands for the same assessment year such as demand raised under sections 143(1), 143(3), 154 etc.

(ii) Demand reduced/cancelled on account of rectification/appeal effect orders already passed.

(iii) Demand on account of adjustment of refunds or not allowing credit for TDS and taxes paid.
(iv) Demands in respect of which intimation/ order/demand notice not served

The
scope of the matters covered by the applications to be received by the
Nodal Officers, as aforesaid, needs to be clearly understood and
explained. After 30th June, applications in respect of demands intimated
by the CPC other than those specified above at item nos. (i) to (iv)
may also be made to the Nodal Officers. [Action- All Associations of Tax
Consultants]

Consequent to the discussions in the meeting,
other CCs lT have also passed the orders appointing Nodal Officers. List
of Nodal Officers appointed by the CCs lT is enclosed herewith. It was
clarified that Nodal Officers will not be appointed for CIT charges
located in BKC and Vashi as they will/are being served by Aayakar Seva
Kendra (ASK). Shri S Ravi suggested that the Chartered Accountants/
Advocates may make available the list of rectifications (if they are
more in nos.) in excel format along with applications, so that the same
may be uploaded to the CPC by the AO. Modalities for implementation of
this suggestion need to be discussed and finalized. [Action- Shri S Ravi
and representatives of Associations of Tax Consultants] Shri T K Shah
proposed that second fortnight of June will be devoted to corrections in
demands, as aforesaid, which was found acceptable by all the
participants. He further suggested that the clearance period may be
given wide publicity by the Department/Tax Consultants Associations.
[Action- All Associations of Tax Consultants]

The format to be
used by the assessees for making applications for correction of demand
devised by the Associations is enclosed. II TDS Mismatch Shri Kishor B
Karia, stated that in a large number of cases, credit for TDS is not
given as it does not appear in Form 26AS. He raised the issue that if
the assessee makes an application regarding TDS mismatch, whether the
Income Tax Department can take action against the deductor. He further
suggested that

(i) the reasons for non-grant of credit must invariably be given along with the relevant order/intimation and

(ii)
detailed guidelines should be issued for claims in respect of TDS
credits in cases where amount does not appear in Form 26AS. In response
to the same, Shri T K Shah stated that there were various improvements
under consideration and were being looked into. Since under the existing
instructions, in a case where amount of TDS is not reflected in Form
no. 26AS, the AO has to allow credit after “due verification”, reference
will be made to the CBDT to issue guidelines with regard to what
constitutes “due verification” for this purpose. [Action – Shri T K
Shah] Shri A C Shukla stated that for F.Y.2007-08 and 2008-09, large no.
of statements/returns were pending due to mentioning of wrong PAN,
Section, AY. etc. by the tax deductors. The deductor has to file revised
statements to sort out this problem. Regarding 26AS, he further
requested the representatives to sensitize the deductors about proper
deduction and uploading of TDS statements/returns. It was decided that
the common reasons for mismatch of TDS may be compiled by the CIT (TDS)
and annexed with these minutes. The CIT (TDS) has since done that. A
copy of the common reasons compiled by him is enclosed (not printed
here). [Action- All Associations of Tax Consultants]

Another
problem pointed out in this regard was that TDS certificate cannot be
generated from TIN centre in a case where PAN of the deductee is not
available. Shri A C Shukla stated that this problem has been taken up
with the DGIT (Systems), New Delhi. Shri Swatantra Kumar informed the
participants that with issue of TDS certificates from TIN, this problem
will no longer be there.

III. Rectification & Appeal Effects

Shri M B Sanghvi requested that each and every officer should maintain a separate register for such applications (for matters other than those where applications are made to the Nodal Officer in respect of demands intimated by the CPC) which should bear a separate acknowledgement number. This suggestion was found acceptable by the par-ticipants. Instructions to this effect will be issued to the AOs other than those served by ASK.
[Action – All CCs lT]

IV.    Re-issue/Revalidation of Refund Cheques

The Members stated that in many cases, refund cheques are not sent in time and are received by the assesses few days before their expiry dates and at times after the expiry dates. The representatives stated that the new procedure of issuing new refund cheque delays the matter and suggested that the rules should be amended to permit revalidation of cheques. It was clarified that in view of the guidelines of the RBI, reverting back to the process of revalidation is not an option. To eliminate this problem, Shri T K Shah suggested that the Associations should educate/ encourage the assessees to opt for receipt of refunds under ECS and furnish relevant bank ac-count details in the return itself.
[Action – All Associations of Tax Consultants]

Regarding issue of refunds, Shri Sandip Pradhan suggested that if there is change in address, the assessees should be advised by the associations to get PAN data immediately updated otherwise the refunds cheques are returned unserved.
[Action- All Associations of Tax Consultants]

V.    Migration of PAN and Jurisdiction of the Assessee

The representatives of associations stated that during the process of PAN migration, some clerks do not accept the returns in new jurisdiction as per the Notification of jurisdiction on the ground that the PAN is not migrated to their jurisdiction. They suggested that the clerk in new jurisdiction should accept returns in such cases. Shrl Sandip Pradhan clarified that the assessees have option to file return in either of the jurisdiction. Shri P C Srivastava suggested that it will be advisable if the return is filed in new jurisdiction and is accompanied by a copy of the application addressed to the AO in old jurisdiction for migration of PAN to the new jurisdiction.
[Action- All Associations of Tax Consultants]

It was pointed out that the AO does not send intimation to the assessee at the time of migration of PAN. Shri Sandip Pradhan clarified that the assessee can always know the change jurisdiction/AO online.

Regarding PAN migration, the CIT(CO) suggested that the matter pending before the old AO should be resolved first. Only thereafter the system allows migration of PAN to the new AO.
[Action- All Associations of Tax Consultants]

VI.    Stay of Demand & Coercive Action for Recovery

The representatives stated that very large demands have been raised upon completion of the scrutiny assessments and coercive action is taken without giving the assessee adequate opportunity to even approach the concerned authorities for stay of recovery of demand. Shri Vipul B Joshi suggested that the bank accounts should not be freezed, if stay application is pending. In response, Shri T K Shah stated that there cannot be any specific guidelines and as facts of cases vary, a decision requires to be taken by the officer concerned. The department also has its administrative Instructions to follow. Shri P C Srivastava stated that there is a Board Circular No.1914 which is followed in such cases.

On the issue of action during the pendency of stay application, it is also a fact that the assessees go on making applications for stay at various levels when application is rejected at one level. It may not be workable option not to take action for recovery during the course of pendency of stay petition at level higher than that of AO. It was agreed that this issue will be discussed in next meeting.

VII.    Interest u/s. 244A

The representatives brought to the notice of the Department that the AO is issuing interest u/s 244A till the date of intimation/order, but in fact, the assessee is getting the refund cheque only after 3 to 4 months from the date of intimation/order. In response, Shri T K Shah stated that in many a case, the delay is due to absence of details from the assessee and that under the law the AOs are required to grant interest upto the date of issue of refund.

Conclusion

Shri T K Shah thanked all the participants for their presence and participation. It was agreed to hold next meeting in the first week of September, 2012.

The meeting concluded at 5.30 pm.

(T K Shah)
Chairman and
Chief Commissioner of Income-tax- V,
Mumbai

22.05.2012
 

APPLICATION FOR RECTIFICATION IN PURSUANCE OF NOTICE
OF ARREARS OF DEMANDS RECEIVED FROM CENTRAL PROCESSING CENTRE

From published accounts

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Section A:

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

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

Hindalco Industries Ltd (31-3-2012)

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

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


Table 2


From Auditor’s Report on CFS

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

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

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

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

From Directors’ Report on CFS

4. Changes in Accounting Policy

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

5. Business Reconstruction Reserve

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

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Letters

The Editor,

The article ‘Giving Lessons from Life’ in Namaskaar was very inspiring. I will like to add one incident, just to re-emphasise the beautiful message that you wanted to convey.

The piece of land on which our hostel for the tribal girls living in remote forest is now situated, is donated to us by one poor tribal. Before we shifted to this location, we were his neighbours, living in a modest house.

When we started considering setting up of the hostel, we could not find a suitable place. The neighbour guessed the problem and told us: “You can well build the hostel on our land, in the next village”. We visited that land immediately and started construction.

At long last we succeeded in getting the land transferred in the name of Vedchhi Pradesh Seva Samiti. The poor tribal did not take a Paisa, saying — ‘It is for our girls.’

Finally, we went to the Registrar for signing the papers. The old man was in his clumsy dress, without chappals, supported by his grandson. Our co-ordinator managed to take the chappals from that boy, to give it to the old man. He was very uncomfortable and could hardly walk, as that was the first time in his life that he had put on the chappals. After the formalities were over, the first thing the old man did was to take out the chappals and carried them in his hands, till we sat in the jeep.

I reached the hostel, contemplating over this unique donation.

—Bhikhubhai

FROM THE PRESIDENT

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Dear Members, As I write this communication the assembly elections are in their final phase. The results are expected on 6th March, and they will have an impact on the future of the UPA government. The election results will be followed by another mega event, the presentation of the Union Budget on 16th March, for the year 2012- 13. While it is true that much of the hype that surrounds a budget presentation is created by the media, its importance cannot be ignored. While there are many more ways in which a government can bring in policy reform, a budget is an indication of the thinking of the government.

At the Society we make a pre-budget representation to the government with regard to the direct and indirect tax proposals. At the beginning of the financial year it was felt that the Direct Tax code (DTC) would be passed and consequently there would be no significant amendments in the Finance Bill as far as direct taxes are concerned. The DTC now having been postponed by at least one year, some of the proposals contained therein may well find a place in the budget. The DTC proposals have already been extensively debated and the thinking of the finance minister in that regard will be known on 16th March. In this communication I am taking the opportunity to air my thoughts about what I would expect from the finance minister of this great country in regard to proposals other than those related to taxes.

The primary aspect of worry is the burgeoning fiscal deficit. The government needs to control and restrict its administrative expenditure severely. In terms of quantum the saving may not be significant but it sends a message to the public that the government is serious about controlling the deficit and keeping it within the range of budgeted figures. In the bureaucracy there is urgent need to cut flab. Successive pay commissions have made government emoluments attractive, but none of them have addressed the problem of the waning efficiency.

Subsidies, including fertiliser subsidies form a substantial part of the government’s outlay. I believe that it is time that the government did a serious rethink on its strategies in regard to subsidy. Most of the subsidies have turned out to be inefficient in as much as they are a drain on the exchequer and yet do not reach the intended beneficiaries. The existing system needs to be phased out and a system whereby monetary assistance flows directly to beneficiary must be put in place. The UID system may facilitate this process. This would reduce the levels of corruption and make subsidies effective.

Education and health need to get a substantially increased allocation on par with infrastructure. We constantly talk of India’s demographic advantage. That advantage can be converted into well distributed economic prosperity only if quality education is made affordable. The government has legislated on the Right to Education, but it must not remain only on records. Public health systems in most states are in disarray. In this regard Central assistance is the need particularly in the smaller states. These are state subjects but the necessary impetus must be given by the Centre.

On account of political compulsions many big-ticket reforms have been put on the back burner. Irrespective of the assembly results, the government must bite the bullet. The disinvestment process has suffered substantially on account of inaction by the Centre. I am a firm believer in the maxim that the government has no business to be in business. Most of the Public sector undertakings need enterprising leadership. The government must unlock its capital invested in these undertakings so that the funds for infrastructural development are easily available.

And finally the budget must give agriculture its due share. This does not mean giving a loan waiver as the government did some time ago. What it really means is a sustained reform process for modernisation of agriculture. While growth in the agricultural sector as well as its contribution to the GDP is not satisfactory, the importance of agriculture can never be understated. The land use for primary agriculture is constantly reducing. This has implications well beyond short term economics. A nation should be reasonably independent in respect of its food requirements if it is to retain its stature in global politics. This is one aspect that the finance minister needs to consider.

Apart from the above, another aspect that is in a way unrelated to the budgetary exercise is government accounting. Business is expected to follow global accounting norms and the latest accounting standards. In fact, a lot of the problems in regard to government finance and government expenditure would be in the public domain if it is shifted from the cash method of accounting to accrual. However, this will be the subject matter of a separate communication.

For the time being let me wish readers a Happy Holi, and let us hope that in my next piece I can welcome a path-breaking budget.

Honest disagreement is often a good sign of progress.

— Mahatma Gandhi

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LECTURE METING

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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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ICAI and its members

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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.

Lecture Meetings

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Tough times never last, but tough people do

Shailesh Sheth, Advocate speaker at the lecture meeting held on 20th June 2012, under the auspices of Dilip N. Dalal Oration Fund, delivered a motivational talk in Gujarati about the attitude of the people who survive and tide over tough times. The speaker lucidly explained the way people react to a situation and come out positively. The lecture was highly appreciated by the participants at the venue. Video recording of the proceedings is available on BCAS Web TV.

Filing of Income-tax returns for A.Y. 2012-13

At this lecture meeting, held on 27th June 2012, the speakers Jinal Shah and Mandar Telang, Chartered Accountants, shared their views on various aspects of filing of Income-tax returns including Budget amendments effecting tax returns and general pointers while filing Income-tax returns. The lecture as always drew large attendance and queries raised by the participants were also addressed. Video recording of the proceedings is available in the free section of the BCAS Web TV.

Recent controversies in Cross-Border Taxation

At this lecture meeting held on 11th July 2012, Pinakin Desai, Chartered Accountant, addressed the audience on the current controversies related to Cross-Border Taxation, giving an overview on GAAR, the draft GAAR guidelines, the indirect transfer of assets in India and other provisions related to the topic. The lecture was highly appreciated by all. Video recording of the proceedings is available on BCAS Web TV.

Other programmes

Seminar on Practical Aspects of Important Articles of DTAAs and Impacts of Recent Amendment to Section 9.

The International Taxation Committee of the Society had organised this Seminar on Saturday 16th June, 2012 at Novotel Hotel, Juhu, Mumbai.

The speakers H. Padamchand Khincha, Himanshu Parekh, P. V. Srinivasan, Chartered Accountants and Nitesh Joshi, Advocate amongst them covered various aspects of the Article 15 & 17, Amendments to section 9 and Non-Discrimination and MFN under tax treaty by the Finance Act, 2012. The seminar received a full-house response from participants from practice and industry, who gained immensely from the wealth of knowledge and experience shared by the learned faculty.

Internal Audit Studies Foundation Course

 The Accounting & Auditing Committee of the Society organised this 6-day Internal Audit Studies Foundation Course from 18th June to 23rd June 2012 at Hotel Parle International, Vile Parle, Mumbai. Various speakers Atul Shah, Arun Kumar, Bhargav Vatsaraj, Deepjee Singhal, Himanshu Vasa, Huzefa Unwalla, Jairam Shekhar, Nandita Parekh, Preeti Cherian, Sanket Dawda, Satish Shenoy, Shailin Desai, Sujit Cherian, all Chartered Accountants covered various aspects of the Internal Audit. The 72 participants from varied backgrounds derived tremendous benefit from this course. The participants including members, nonmembers, those in practice and from industry gained immense-ly from the wealth of knowledge and experience shared by the learned faculty.

63rd Annual General Meeting

The 63rd AGM of the BCAS was held on Friday, 6th July 2012 at Rangswar Hall, Y. B. Chavan Pratishthan, Mumbai. Pradip Thanawala, President of the Society was in the chair. The President presented the 63rd Annual Report of the Managing Committee and the audited Accounts.

Chetan Shah, Joint Secretary announced the results of the election of President, Vice-President, two Secretaries, Treasurer and eight members of the Managing Committee for the year 2012-13. He announced the names of the following members as elected unopposed for the year 2012-13. (The list of Office Bearers and the Managing Committee members is reproduced on the next page.)

The President then announced the ‘Jal Erach Dastur Awards’ for best article and best feature appearing in the BCA Journal during the year 2011-12. Mr. Ajit Korde, IRS was awarded the prize for the best article titled ‘What does Settlement Mean?’ which had appeared in the November 2011 issue of the BCA Journal. Govind Goyal and C. B. Thakar, Chartered Accountants received the prize for the best feature titled ‘VAT’.

A publication ‘Gita for Professionals’ was released at the hands of K. C. Narang, Past President. This publication illustrated the concepts of ‘duty and ethics’ by parables and anecdotes which at times seem autobiographical. Author of the book Chetan Dalal, Chartered Accountant expressed his appreciation to the Society and spoke briefly about the contents of the book. Mayur Nayak and K. C. Narang, Past Presidents, also spoke a few words about the book.

Thereafter, the outgoing and incoming Presidents Pradip Thanawala and Deepak Shah, respectively, addressed the members.

 In the end several members shared their views, appreciation, suggestions and future vision for the society and also complimented the outgoing President Pradip Thanawala and his team.

64th Founding Day Celebration

 The 64th Founding Day of the Society was celebrated on 6th July 2012 at Rangswar Hall, Y. B. Chavan Pratishthan, Mumbai Chief Guest Lt. General Syed Ata Hasnain addressed the members on the topic of ‘Inspirational Leadership – Models from the Armed Forces adaptable in Corporate World’. He shared his personal experiences with the audience and and how the same were applicable in a corporate environment. He spoke about the concept of success and victory and how in the armed forces a second position is not acceptable. The audience greatly benefited from his talk.

 On this occasion, a special issue of the BCA Journal was released by K. C. Narang, Past President. The special issue was based on the theme of Profession.

 It contained articles by professionals from other fields such as M. L. Bhakta, Advocate & Solicitor, Kaiwan Mehta, Architect & Author, and Anupam Kher, Actor. A new publication ‘Advance Rulings Law And Procedures – A Compilation’ authored by Mr. Rajan Vora, Mr. Hemen Chandariya and Ms. Vikita Shah, Chartered Accountants was released by Lt. General Syed Ata Hasnain. This publication aims to give a broad idea of the law, purpose, and procedure for seeking an advance ruling from this authority, set up by Income Tax administration. It also covers a summary of the cases of last three years. This publication was released under the auspices of Shailesh Kapadia Memorial Publication Fund.

Outgoing President Pradip Thanawala’s Speech

Dignitaries on the dais, off the dais and friends,

Exactly a year ago I assumed office as the President of this great institution. I was conscious of the responsibility entrusted to me. My seniors had reposed their fullest confidence in me, but I knew that I had my own limitations.

The moment I became a President-elect, I decided to do my best so that the impeccable reputation of the Society was maintained if not enhanced.

Today I stand before you having completed my tenure and I leave it to you to judge my performance. When I bowed to my elders for their blessings, they advised me that I should accept with humility all that came my way, respect the viewpoints expressed by others and show my gratitude for the faith my peers had reposed in me. I tried to conduct myself bearing in mind these words of wisdom.

While the annual report contains the entire details of the events as they unfolded, I feel it would be worthwhile to recapitulate a few of the significant ones which took place in the year gone by. For the first time, the Bombay Chartered Accountants Society started accepting corporate members and though it has been a small beginning, I am hopeful that this change will augur well for the Society’s future. The referencer has been a prized publication of the Society, and this year it was celebrating its golden jubilee. The referencer with the theme “Back to the future” is a collector’s item. The International Tax and Financial conference which has gained tremendous popularity over the past decade was held at the Infosys Centre. When we all witnessed the state-of-the-art facilities, it left no doubt in one’s mind of the technical excellence our Corporates have achieved.

All these landmark events were organised by the Society’s committees which are headed very ably by the past Presidents. It is this aspect that has made the Society unique and distinct from many other organisations. While the Society is always quick to embrace change in technology, law and be abreast of all developments in the professional field, it has a respect for tradition. The Society has been built on the sacrifices of many eminent professionals and their association with the Society will always continue. While we are all indebted to our past Presidents, one cannot forget the honorary services of the Society’s auditor Shri P.M.Dharia under whose watchful eye the accounts are finalised from year to year. This year the society felicitated Shri Dharia for his dedicated honorary services rendered for more than four decades.

In every aspect of the Society’s affairs its seniors are pillars of strength. In fact, it is because of the foundation that they have laid and the heights that they have achieved, that the President of the society is well-respected. As an eminent philosopher had remarked “I seem tall, because I stand on the shoulders of my forefathers.” While respecting elders the Society is conscious that students are the future of the profession. The Society holds many programmes for students culminating in the Annual day which is a mega event.

Though the credit for achievements goes to the leader of the team, the entire contribution is that of the team members. I have had excellent support from my office bearers consisting of Deepak Shah, Nitin Shingala, Chetan Shah and Raman Jokhakar. Apart from these office bearers I must thank Nayan Parikh, Rajeev Shah, Bharat Oza and Mukesh Trivedi for their unstinted support. I would also like to thank all the staff members of the Society for their support and co-operation throughout my tenure of two years. I do not know whether they will miss me or not, but I will certainly miss them all. I also acknowledge support of three staff members who left during the year namely Netra, Khorshed, Madhuri. And last but not the least my family who endured my absence and relieved me of domestic responsibilities over the entire last year.

I will be failing in my duty if I do not acknowledge the co-operation and guidance received from my dear friend Anil Sathe for providing necessary inputs for my VP Communication as well as Presidential message. Thank you Anil.

In today’s world, maintaining professional excellence is like running a marathon race. An individual has neither the strength nor the stamina to complete the race on his own steam and therefore it is to be run like a relay race. The skill in a relay is to hand over the baton seamlessly to the successor. The Society is such a mature organisation that this handing over and taking over happens each year very smoothly. Mr Deepak Shah will take over the reins as the President of the society and Naushad Panjwani will be his deputy. Deepak is an able leader and Naushad is brimming with innovative ideas. I wish both of them and their team a successful year ahead. I am now a relieved man and would like to end my speech with Kabir’s doha.

Incoming President Deepak Shah’s Speech
Om Namah Shivay Dear Members,

President Pradip Thanawala, Vice President elect Naushad Panjwani, Nitin Shingala, Raman Jokhakar, Chetan Shah, distinguished past Presidents of the Society, other Seniors in this profession, colleagues from other associations, and fellow members.

I am deeply honoured and humbled to wear this crown of office as I stand before all of you today. It is a responsibility that I pledge to carry with dedication, diligence and dignity in the coming year.

I know it is a significant commitment, and I shall fulfill the Society’s mission to spread knowledge, and support, promote and protect the interests of the profession and the public at large. I would at all times dedicate myself to work assiduously for the overall interest of our Society, and our noble Profession. In my activities, I will be guarded by no other principles than those of the vision of our Society.

I am confident, for I have the blessings of God, and my parents. I am thankful to the fact that I am surrounded by colleagues who are supportive and ready to give their best. Together with me, are my seniors and friends, who are ever willing to stand by me in all my endeavors. Together we form a perfect circle of mutual support & growth. I am also blessed with a wonderful family, who have always encouraged and supported me, and are proud as I am today.

After the completion of my graduation, and after marriage, I joined the firm of Ladhawala & Shah, Chartered Accountants. My intention was not to pursue Chartered Accountancy, but to get working experience in areas such as Income Tax and Sales Tax, which would then help me in my family business. The partners of the firm, my parents and friends encouraged me to sign my articles and pursue CA course. Initially I was hesitant, as to begin pursuing the rigorous CA curriculum after marriage, is an uphill task. I knew that I would have to sacrifice a lot. But, let me share the fact that the real sacrifice was made by my wife Nita during that important phase of our life. She stood steadfast beside me, and during those 3 years, constantly inspired and supported me. Today I am blessed with the presence of Shri I M Ladhawala and Shri M M Mehta, and I am thankful to them for their presence and support.

My association with BCAS started in the year 1997-1998, when a very dear friend Rajeshbhai Muni introduced me to BCAS, and I became a member of Publication Committee. Since then I started taking active interest in one of the most prestigious publications of the Society, the BCAS REFERENCER, and I got the chance to interact with many past presidents, core group members, and other fellow chartered accountants.

In the year 2001-2002 under the tenure of Pradipbhai Kapasi, I was inducted as a Managing Committee member, and during the tenure of Rajeshbhai Kothari in the year 2007-08, I became an Office Bearer.

Since the time I joined the core group I observed everyone working selflessly for the organisation, and at every stage, I felt that there is a lot to learn. My association with BCAS taught me that everything is achievable if our efforts have complete focus and dedication. It has made a meaningful difference to the lives of many and, I am not an exception.

BCAS has, over the past six decades, set a benchmark in all aspects of its services and activities. And with every accolade that has come its way, BCAS has constantly raised the bar on the quality of its practices and services.

The bygone year has been full of momentous activities, and the wisdom of past Presidents, enthusiasm of core group members and support of the BCAS staff has given that impetus to me to provide quality services. I look forward for the same continued and proactive support from all, to carry forward the good work.

Success is always a great motivator. We need to ensure that we do not rest on our past laurels, and we must strive again for excellence in everything we set out to do.

Thomas Jefferson once said –

That the dreams of the future are as powerful Motivators, as successes of the past.

The plan for 2012-2013 circulated to you, highlights the focus areas. Needless to say, that the ongoing knowledge development activities such as Lecture Meetings, Seminars, Workshops, Long duration study courses, RRC’s , Crash Course for Students, Clinics etc. will be regularly conducted by respective committees.

It is my privilege to take you all through the thought process behind the plan presented for the ensuing year.

If I have to describe my plan for the Year in one line
I would put it as :

We have a strategic plan – it’s called doing things.

While I sat to prepare this plan, I asked myself – What is the need of the hour. The answer was – To be JAGRAT – Jagrat, is a powerful word in Sanskrit literature. The nearest equivalent in English for it would be alertness or vigilance. The times in which we live are such that being Jagrat is absolutely decisive. The world is moving fast as never before. The rapidity and quantum of change that we witness are unparalleled in history. To keep pace with the change is a challenge for anyone at any time. It is said “even to be just standing where you are, you need to keep running twice as fast”. In this flux of time, to stand still is to invite a certain setback. So it’s extremely important to move forward and to keep pace with the rapidly changing laws, and for that, one must be alert at all times.

The year 2012-13 will bring about many changes, and will offer immense opportunities for the entire CA community. Direct Tax Code and GST may see the light of day, and age old Companies Act is all set to be replaced by the Companies Bill 2011. The Service Tax regime has changed completely with negative list coming into play.

But the problem with changes is that, the changes we witness end up being lopsided. It leads to large scale dissatisfaction, unrest and unwarranted litigation too.

Here I feel that BCAS has a very significant role to play.

BCAS provides a foundation of knowledge, skills, and professional values which enables CA’s to continue learning and adapting to changes throughout their professional lives.

“Give a man a fish and you feed him for a day. Teach him how to fish and you feed him for a lifetime” – The wisdom of this timeless adage defines BCAS approach towards professionals.

The annual plan is prepared on the basis of these thoughts, and have been deliberated by various committees over the past few days. I have witnessed that in each committee, all core group members were enthusiastic to implement innovative and quality driven programmes. I’d like to specially mention and appreciate all the outstation members who are part of the core group, for participating in committee meetings in person or through the conference call facility.

The words of Vince Lombardi, truly fits here:

Individual Commitment to a group effort- that is what makes a team work, a society work.

I would describe some aspects from each of the focused areas presented in the plan :

1)    MEMBERSHIP – I strongly believe that there has to be a fervent exercise of deepening BCAS roots. At the Society, a number of members through selfless and devoted work have created and are creating a large reservoir of knowledge.

I would aim to see that the water from this reservoir is being reached to many. It would be our endeavor to find ways and means to achieve this by reaching prospective members, specially the members from the industry.

And the solution to reach members in Industry is to promote BCAS Corporate Membership.

We have to ensure that corporates avail the benefits of BCAS membership.

For that We need to communicate :

What’s in it for them?

How the Corporate membership be an asset to them?

2) RELATIONSHIP :

a)    At this juncture, I look forward to the like-minded professional organisations to work in harmony, because as an organisation, we have a common cause of spreading knowledge, boosting professional development and lifelong learning for our membership.

b)    We also intend to closely collaborate with other organisations – Be it professional organisations in other streams or business and industry organisations.

c)    I for one, believe that, we need to have aggressive Interaction with Government and regulatory authorities on regular basis, to address and find solution to areas concerning the industry and public at large. The idea is to have more efficient evolvement, and administration of laws.

3) MENTORSHIP :

a)    On this front, all efforts will be made, to educate and provide up-to-date information and guidance to members on new laws and areas of practice, and planning Industry-specific programs for our members the in industry. During the year, we will work on means to reach more and more members, in particular the outstation members through the medium of technology, by creating web-based knowledge management.

b)    Study Circles : It is the platform which is regularly talked about by seniors and past Presidents even today. Efforts will be made to make them more vibrant, and spreading its wings to boost young talents.

c)    Publications:  This  year  we  have  a  separate Publication Committee, which will work towards the requirement, to publish books on regular basis.

d)    Research: Research is an area where we can, and must do a lot. I wholeheartedly invite members to participate in this area.

e)    Service to Students: We have many student members who dream of being part of BCAS.
We shall inspire, encourage, influence and help them recognise and appreciate the value of their unique talents, so they can fulfill their dreams.

Once dreams are fulfilled, they will see that they owe much of what they’ve accomplished, to their involvement with BCAS. And we all know how word of mouth is the best way to further promote experiences. That will help us in two ways – to harness young talents at BCAS, and to induce new ones.

I believe that as an organisation with clear values and beliefs, – What is good for Profession is good for BCAS, we can strive forward proudly.

God works through people they say. He doesn’t require us to succed, he only requires that You try. I assure you that me and my colleagues – Naushad, Nitin, Raman and Chetan, alongwith the dedicated staff, added by the strength of the experience of the managing committee, will at all times work with you at the Society.

The recognition and respect this Society has garnered over the years would not have been possible without the patronage and support of our valued members. I urge all members to come forward for an active participation in all our efforts and programmes organised by the Society, and share your views and expectations.

As your President, I endeavour to:

  •     Be Committed to the success of BCAS.
  •     Turn ideas into reality.
  •     Lead with a passion for BCAS.
  •     Be True to my name – DEEPAK by spreading the light of knowledge.

I once again thank all of you, for making this day special by giving me this great opportunity to lead, and advance the professional organisation of an immense repute, and take it to a greater height.

PART A : Decision of the H.C.

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Section 24 of the RTI Act

In the BCAS of July 2011, the Government’s Notification dated 09.06.2011 was reported under which the Central Board of Investigation (CBI) was exempted from the purview of the RTI Act (the Act) by including the CBI in the Second Schedule to the Act.

Above notification was challenged by a PIL before the High Court of Madras on the ground that it is ultra vires Article 14 of the Constitution of India.

According to the petitioner, in the light of the various scams, the country has become rudderless in the war on corruption and at this juncture, the Government instead of becoming more transparent has become reactionary by resorting to Section 24 of the Act by granting blanket exemption to the CBI. The petitioner further contended that respondents had over looked the first proviso to Section 24(1) of the Act under which information pertaining to allegations of corruption and human rights violation cannot be exempted under Section 24 of the Act. Further, Section 24 exempts only intelligence and security agencies and CBI which is an investigating agency cannot be granted a blanket exemption. It was also contended that the plea that investigative data requires confidentiality has been adequately taken care of in Section 8(1) (g) and (h) of the Act. It wass further submitted that Section 24(3) of the Act mandates that every notification issued under Section 24(2) shall be laid before each house of Parliament, and failure to do so renders the exemption null and void. It was the case of the petitioner that the exemption is bound to create chaos as several writ petitions will be filed challenging the orders passed by the Central Information Commission in their decisions against the CBI, since the CIC has no power to set aside the notification.

In reply, Union of India filed the counter affidavit inter alia contending that the exemption to the CBI under Section 24 is not a blanket exemption inasmuch as it is subject to the provisos to Section 24 of the Act. The exemption was granted after the Government received representation from the CBI stating that difficulty was being faced by it in its working and the legal opinion was received that opined that the CBI qualifies as a security and intelligence organisation under Section 24 of the Act.

The judgment of the High Court dismissing the writ petition runs into 21 printed pages and is very interesting. However, I herewith reproduce only the concluding part of it.

“We find no justifiable reasons to depart from such findings which appear to have been arrived at after considering all material placed before the Government, taken note of by the Committee of Secretaries and other authorities prior to issuance of the impugned Notification. Admittedly, there is no allegation with regard to the decision making process or that there was any arbitrariness in the procedure adopted so as to offend Article 14 of the Constitution. It is submitted by the learned Additional Solicitor General appearing for the first respondent that Notification has been placed before both Houses of Parliament and would be taken up for consideration in the ensuing Session.

In view of the above, we hold that the impugned Notification is neither ultra vires section 24 of the RTI Act nor violative of the provisions of the Constitution of India.

In the result the Writ Petition fails and same is dismissed. No costs, Consequently, connected Miscellaneous Petition is closed.”

[S. Vijaya lakshmi vs. Union of India & another w.p. 14788 of 2011 & M.A.1 of 2011 dated 09.09.2011.- Reported in RTI R1 (2012) 106-126]

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ICAI News

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(i) CA NKP SALVE is no more

CA NKP SALVE, an eminent member of our profession, passed away on 1st April, 2012 at the age of 91. He was a member of Lok Sabha from 1967 to 1977. Later he was a member of Rajya Sabha from 1978 to 2002. He was also a Minister in the Union Government and held Chairmanship of various committees of Parliament. He was fond of cricket and headed various Cricket Associations including BCCI. During early years he played cricket in Ranji Trophy and Common Wealth Matches. He was accorded State funeral by the Maharashtra Government. We pay our respectful tribute to the departed soul with a prayer that his noble soul may rest in peace.

(ii) Job Fair for SME firms of Chartered Accountants

ICAI has structured campus placement programme for firms of Chartered Accountants for recruitment of newly qualified Chartered Accountants. Details are published on pages 1755-1756.

(iii) New Publications

(a) Technical Guide on Internal Audit of Mining and Extractive Industry

(b) Technical Guide on Internal Audit of Not-for- Profit Organisations (page 1625)

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EAC opinion

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Facts:

A company is a joint venture company of three public sector enterprises and is engaged in transportation of petroleum through underground pipeline. The company is following depreciation policy of its fixed assets on Straight Line Method (SLM) at applicable rates as prescribed in Schedule XIV to the Companies Act, 1956. The company is charging average rate of depreciation on plant & machinery and main pipeline considering single shift @ 4.75% double shift @ 7.42% and triple shift @ 10.34% as per the rates specified in Schedule XIV to the Companies Act, 1956. Zero depreciation was considered for shutdown period as no rate has been specified for shutdown period in Schedule XIV to the Companies Act, 1956. The methodology has been followed consistently since commissioning from the financial year 2003-04 onwards.

During the supplementary audit conducted by the Comptroller and Audit General of India (C&AG) for the financial year 2009-10, it commented that extra shift depreciation was worked out on 365 days instead of actual number of 329 working days and applied the average rate of depreciation of 7.381% against required 8.547%. The above have resulted in understatement of depreciation for the year and overstatement of net block of fixed assets by Rs.6 crores.

Query:

The company has sought the opinion of the Expert Advisory Committee on the adoption of the method of depreciation on extra shift working to comply with the minimum depreciation as per Schedule XIV to the Companies Act, 1956.

Opinion:

The committee after considering definition of the term ‘Depreciation’ as provided in paragraph 3.1 of Accounting Standard (AS) 6, ‘Depreciation Accounting’ noted that depreciation arises due to several factors including efflux of time and wear and tear due to use. Accordingly, depreciation occurs with the passage of time, even if concerned assets is not in use. The Committee noted that Schedule XIV to the Companies Act specifies separate rates of depreciation in respect of single shift, double shift and triple shift.
As regards depreciation to be charged in respect of extra shift working, the Committee, after considering clauses 4 and 6 to Notes to Schedule XIV of the Companies Act, is of the view that physical wear and tear of a depreciable asset, which is operated for more than a shift, is generally higher than the one, which is used on a single-shift basis. Accordingly, Schedule XIV to the Companies Act prescribes higher rates of depreciation for the assets operating for extra shifts. Further, it prescribes methodology to compute ‘extra depreciation’ for the assets operating for extra shifts. The Committee is further of the view that the rates of depreciation specified in respect of single shift have been determined based on two factors — effluxion of time and wear and tear. However, in case of double shift and triple shift, the factor of effluxion of time remains constant. Therefore, rates for extra shifts include only the incremental/extra depreciation due to extra wear and tear. Thus, the Committee is of the view that single shift depreciation rate should be applied for the time period when the asset is held by the company irrespective of the fact whether such asset is in use or not. As regards ‘extra depreciation’ to be computed for items of plant and machinery operating for extra shifts, the incremental depreciation should be determined by applying the differential rate of depreciation, i.e., depreciation rate as specified for the relevant shift less the rate specified for the single shift in the proportion which the company worked for the double/triple shift bears to the number the number of days on which the factory or ‘concern’ actually worked during the year. The formula for arriving at the ‘depreciation’ shall be as under:
Depreciation for single shift working + (Depreciation for double/triple shift working — Depreciation for single shift working) x (Number of days worked double or triple shift/Normal working days during the year).
The Committee further noted that clause 6 of Schedule XIV to the Companies Act requires that for ‘extra depreciation’, normal number of working days would be the number of working days on which the factory or ‘concern’ actually worked during the year. Thus, it is not the working days of individual plant and machinery item, which should be considered for the purpose of computing extra shift depreciation rather it is the working days of the factory or ‘concern’. In this regard, it may be mentioned that various units/departments/mills/factories should be taken as separate concerns. Accordingly, the Committee is of the view that ‘normal number of working days’ should be calculated after deducting shut down period of the factory or ‘concern’.
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Code of ethics

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The Ethical Standards Board of ICAI has given answers to some of the ethical issues raised by our members. These are published on pages 1634- 1636 of CA Journal for May, 2012. Some of these issues are as under.

(i) Issue: Whether a member in practice is permitted to undertake the management of NRI funds? A member is not permitted to undertake such assignment because the same is not covered under ‘Management Consultancy and other Services’ permitted to be rendered by the practising members of the Institute.

(ii) Issue: Can a Chartered Accountant provide ‘Portfolio Management Services’ (PMS) as part of CA practice? Explanation to Clause (xix) of the definition of ‘Management Consultancy and other Services’ expressly bars the activities of broking, underwriting and Portfolio Management.

(iii) Issue: Whether a Chartered Accountant in practice is required to obtain any trade licence for practising? A Chartered Accountant in practice is not required to obtain any trade licence for practising as a professional. The certificate of practice issued by the Institute is the only requirement to practise as a Chartered Accountant.

 (iv) Issue: Can a Chartered Accountant in practice work as a ‘Collection Agent/Recovery Agent’? A Chartered Accountant in practice cannot work as a Collection Agent. However, he can act as a Recovery Consultant as provided in clause (xxv) of the definition of ‘Management Consultancy and other Services’.

(v) Issue: Whether a practising Chartered Accountant can agree to select and recruit personnel, conduct training programmes and P. N. Shah H. N. Motiwalla Chartered Accountants icai and its members work studies for and on behalf of a client? The expression ‘Management Consultancy and other Services’ defined by the Council includes both personnel recruitment and selection and conducting training programmes and workstudies. Therefore, a Chartered Accountant in practice shall not commit any professional misconduct by rendering such services for and on behalf of the client.

(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 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 is more than one, would constitute professional misconduct. However, exemption has been given to members practising in hilly areas, subject to certain conditions.

It is to be noted that the requirement of section 27 with regard to a member being in charge of an office of a Chartered Accountant in practice or a firm of such Chartered Accountants shall be satisfied only if the member is actively associated with such office. Such association shall be deemed to exist if the member resides in the place where the office is situated for a period of not less than 182 days in a year, or if he attends the said office for a period of not less than 182 days in a year, or in such other circumstances as, in the opinion of the Executive Committee, establish such active association. It is necessary to mention that the 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 paid assistant. If he is a paid assistant, he must be in whole-time employment with him. However, a member can be in charge of two offices if they are located in one and the same accommodation.

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FROM THE PRESIDENT

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Dear Members,

Kudos, to our young TEAM INDIA for lifting the ICC Under 19 Cricket World Cup. As of date, India holds both the Senior and Junior O.D.I. World Cup titles. A proud moment for every Indian.

The months of August and September are festival months. Last month, we saw different festivals being celebrated all across the country. Rakshabandhan, Janmashtami, Nowruz, Ramzan Id, and Paryushan were celebrated with the same zest. This diversity of culture is one thing of which we are proud of. These festivals were celebrated by distinct religious groups, while Independence day was celebrated by one and all.

With Ganesh Chaturthi less than a fortnight away, millions of devotees of the elephant god are eager to celebrate the 11 day long festival, which is observed with great fervour. I pray to Lord Ganesha to shower his blessings on all, to overcome the hectic Audit season without any stress.

On the Society front, I am happy to share with you that the Indirect Tax and Allied Laws Committee of BCAS had made a timely representation to the Government of Maharashtra, on the most debated and controversial issue of VAT Liability on builders and developers, on the sale of Flats in construction buildings. This tax affects a large number of flat purchasers across the state. In response to the said representation, the office of the Commissioner of Sales Tax, has released FAQ which would be of great help.

Last month, we had various programmes like seminars and lecture meetings on varied topics of current interest, and the ITF Conference at Goa. I, on behalf of the Society, am grateful to all those who contributed to the success of these events. The enthusiastic participation of members motivates us to plan more programmes. I would request you all to give your suggestions and feedback, which will help us to serve you better and give what you desire.

In this communiqué, I would like to express my thoughts on issues related to our youth, in general and to those in our CA fraternity in particular. The idea arose when I read an article last month about United Nations’ International Youth Day (IYD) which is celebrated worldwide on 12th August.

Just as other awareness days, it is an awareness day meant as an opportunity for the Government and others to draw attention to youth issues worldwide, and to develop and engage in partnership with and for the youth. Many activities and events take place around the world on IYD to promote the benefits that young people bring to the world.

Talking about our Youth, we have pretty amazing statistics. 51% of Indians are less than 25 years of age. Recently, the Indian Government drafted a proposal to cap the age of ‘youth’ at 30 – scaling it down from previous limit of 35.

Young people represent a growing class, that is yearning to have its voices heard and make its presence felt. Today, the feeling is that we have failed to provide young people our constant support, and the opportunity to realise their basic aspirations. Their growth is hampered by the problems we all face, from security issues and the economy to changes in governments and society.

We have all witnessed, over the last few years, that the youth are shaping the political landscape in other countries. It has been seen that young people are driving innovations, and economic and social entrepreneurship in every region of the world. I believe that the best solutions to our problems will come from supporting and harnessing the energy and creativity of our youth.

Today, everyone sees in the youth a lot of talent and innovative minds. At the same time we do feel that the attitude of the Youth constantly harp on the line – if it directly doesn’t affect our life, it’s not our problem.

So the challenge before us is to find out : What does the young Indian care about the most ??

Coming to the Youth in our Profession, as per the latest statistics, as of April 2012, ICAI has more than 192,000 registered members, out of which around 53% are below the age of 35, and around 12% in the age group of 35-40. Further, the number of youths wanting to take up CA is increasing as never before and we have about 10 lakh CA students.

Hon’ble Prime Minister Mr Manmohan Singh recently said, “An Indian CA is recognised worldwide as being among the best and the brightest in the profession, and I sincerely hope the best is yet to come.”

The young CAs have a distinct advantage today. Almost all the major laws where CAs work (in Industry or practice) are changing substantially , viz Ind AS( IFRS), Service Tax, Companies Bill, Direct Tax Code , Goods and Service Tax. The older CAs have issues of time, as also unlearning what they have learnt and practised for number of years. New CAs will not be carrying the same burden viz., they will have time to learn the new changes and will also have an open mind to accept the same. So, together we need to work towards developing the necessary knowledge, insights, network & commitment to take advantage of these opportunities. Thus, the world of young CA is expanding its horizon.

At the same time, we see that young Chartered Accountants today face pressing challenges such as high level of competition, placements, etc on account of recession in industry, and to some extent because of Government policy paralysis. The only soothing factor is that we CAs are better off than others.

The other issue is that a majority of our young CAs prefer to work in the industry rather than to be in practice. They also shy away from taking up responsibilities and involve themselves in giving their much needed services to voluntary bodies.

It is incumbent on the seniors in profession – to mentor and to cultivate the next generation. It is only through the guidance and support that we can equip young people with the skills, resources, and networks they need, while also empowering them to be agents of change in our profession, and in turn building our nation.

We should thus stand with young CAs everywhere, so as to work to build a brighter future together. For that, a majority of us have to come on board and contribute in developing these young creative minds.

I firmly believe that the full potential of these young CAs has to be tapped and constantly be supported by the experienced ones.

Let us attempt to discover ways to make them more actively involved in making a positive contribution to our noble profession.

I would end by an Inspirational Quote by Swami Vivekanand, that our youth should remember :

“Struggle hard to get money, but don’t get attached to it”.

With warm regards
Deepak R. Shah

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Lecture Meetings

Service Tax & VAT on Sale of under Construction Flats

At this lecture meeting held on 22nd August 2012 at the Indian Merchants’ Chamber, Mumbai, Mr. Vikram Nankani, Advocate, addressed the participants on the subject of the meeting. The speaker covered various judicial decisions such as K. Raheja Development Corporation, Assotech Realty Pvt. Ltd., L&T and MCHI among others and explained several vexed and controversial issues. He also dealt with recent Trade Circular 14T dt. 6/8/2012 issued by Sales Tax Department of Maharashtra directing builders to apply for registration by 16/8/2012, file returns by 31/8/2012 along with payment of taxes and interest and brought out the various intricacies of the topic for the benefit of 400 + participants. Mr. Nankani also touched on the new scheme of Service Tax and its approach through negative list. The webcast of the meeting is available on BCAS WebTV.

Negative List based Taxation of Services – Important Issues Mrs. Puloma Dalal, Chartered Accountant, addressed the participants on the issues pertaining to Negative List of Services at this lecture meeting held on 3rd September 2012 at the Indian Merchants’ Chamber. The speaker discussed in detail finer aspects of the new law such as definition of service, declared services, various aspects and interpretation of negative list and bundled services. Nearly 200 participants attended and gained from the knowledge and experience shared by the faculty. The webcast of the meeting is available on BCAS WebTV.

Other programmes

Monsoon Trekking

The Human Resources Committee of the Society organised a one day trek on Saturday, 25th August 2012 from Dodhani Village near Panvel to Sunset Point at Matheran.

The trek was through a thick jungle, with lots of butterflies and birds, and a good view of surrounding hills in the midst of greenery and Panvel reservoir. The view got better as the participants gained height. Considering that climate on that day was unusually hot and humid, the trek turned out to be little above the ‘easy’ grade. Yet the 40 participants did admirably well, enjoyed the nature and successfully completed the trek under guidance from 5 experienced volunteers from Explorers & Adventurers Club. During the return journey, the group lightened the mood and indulged in singing and antakshari amidst stronger camaraderie and bonding.

ASPIRE – Interactive Session for CA Students – Success Mantras for Success in CA exams

The Human Resources Committee of the Society and the Chamber of Tax Consultants jointly organised this seminar on Saturday, 8th September 2012 at Gulmohar Hall of BCAS Society, Mumbai and was presided over by Mr. Deepak Shah, President of BCAS, and Mr. Manoj Shah, President of CTC.

The object of the seminar was to discuss how to overcome various challenges while studying for the professional course of Chartered Accountant and sharing of “Success Mantras” to achieve spectacular success in exams.

The seminar was addressed by Mr. Atul Bheda, Chartered Accountant, and Rank-holders of May 2012 Batch namely Ms. Devshree Ganantra, Mr. Dharan Gandhi, Ms. Isha Changdiwala, Ms. Radhika Subramanian and Mr. Sunny Gosar, who shared their personal experiences of how they prepared for examinations and handled the stress. Past President Mr.Narayan Varma also motivated the students for coming in the profession with good ethics and integrity. The seminar ended with vote of thanks by Mr. Krishna Kumar Jhunjhunwala, Chartered Accountant, to all the faculties for inspiring the students with valuable Success Mantras and invigorating them.

International Tax & Finance Conference 2012

The 16th International Tax and Finance Conference, 2012 was organised by the International Taxation Committee of the Society from 17th August 2012 to 20th August 2012 in very refreshing atmosphere at Holiday Inn Resort, Goa where the following papers were discussed and presented:

Papers for group discussion:

  • Case Studies on International tax (with special reference to amendments in the Finance Act, 2012) ” by Pinakin Desai, Chartered Accountant.
  •  General Anti-avoidance Rules with Case Studies by Pranav Sayta, Chartered Accountant.
  •  Interpretation of Tax Treaties – Important Principles by Gautam Doshi, Chartered Accountant.

Papers for presentation:

  •  Transfer Pricing Regulations – Amendments made in the Finance Act, 2012 with special reference to “Specified Domestic Transactions” by Sanjay Tolia, Chartered Accountant.
  •  Investment Protection Treaty paper written by Rohan Shah, Advocate, and presented by Mr. Tarun Gulati, Advocate.
  • Service-tax on Cross Border Transactions by A. R. Krishnan, Chartered Accountant.

The Conference received excellent response and was attended by 192 participants from various parts of India and overseas including Hyderabad, Bangalore, Chennai, Coimbatore, Delhi, Ahmedabad, Pune, Goa, Secunderabad, Jamnagar, Kolkata, Karnataka and Dubai besides Mumbai.

The participants witnessed a very high quality of deliberations. Seminar on NBFC Regulations (Including Audit & Tax Aspects) Accounting and Auditing Committee of the Society had organised this seminar on 30th August 2012 at the Indian Merchants’ Chamber, Mumbai to equip members and industry professionals with the overall perspective of NBFCs Regulations and the recent updates with respect to RBI directives, legal, accounting and tax aspects. The seminar was attended by over 120 participants with representatives equally from industry and profession.

Mr. Naushad Panjwani, the Vice President, of the Society, inaugurated the seminar and highlighted the importance of the subject of the Seminar. Mr. Himanshu Kishnadwala, Chairman of the Accounting and Auditing Committee, outlined the contents of the seminar and explained the importance of various topics.

Ms. Archana Mangalagiri, General Manager, Reserve Bank of India (RBI), briefed the participants about the recent developments and initiatives taken by RBI in the field of NBFCs and gave RBI’s perspective in respect of various recent developments in the NBFC regulations.

Mr. Anup Shah, Chartered Accountant, discussed in detail various legal aspects applicable to various categories of NBFCs with focus on various recent notifications and circulars.

Mr. Viren Mehta, Chartered Accountant, covered “Audit Procedures and Reporting” and explained role and responsibility of the auditors under NBFC regulations. Mr. Yogesh Thar, Chartered Accountant, dealt with various contentious issues faced by the NBFCs under the direct tax laws.

Workshop on How to Conduct a Tax Audit

The Taxation Committee of the Society organised this workshop on 31st August 2012 at the Indian Merchants’ Chamber, Mumbai where the following faculties, all Chartered Accountants, enlightened the participants on the topics allocated:

Mr. Anil Sathe – Tax aspects
Mr. Himanshu Kishnadwala – Audit aspects
Mr. Raman Jokhakar
Ms. Sonalee Godbole – Clause-wise analysis of Form 3CD

The workshop concluded with an interactive Brain Trust session that provided guidance to over 325 participants on various controversial and catchy issues. The video recording of this workshop is available at BCAS Web TV.

Professional Accountant Course B atch XIV – Convocation

The Human Resources Committee successfully completed Batch XIV of the Professional Accountant and held Convocation on 4th September 2012 at H.R. College, Churchgate to award Certificates of “Professional Accountant” to 33 students. It was a memorable event for these students having put in hard work to learn practical and theoretical aspects of day-to-day accounting and tax compliance. The course was conducted over 23 sessions during April 2012 to July 2012.


The convocation function was graced by the President Mr. Deepak Shah, Past President Mr. Pradeep Thanawala, Convenor of HR Committee Mr. Hemant Gandhi, Vice Principal of HR College Professor Parag Thakkar and Course co-ordinator Ms. Manori Shah.The students acknowledged and appreciated valuable learning from this course that will help them in their career. They also gave valuable feedback to help make this programme more effective.Advanced FEMA Conference

The Conference was inaugurated by the chief Guest Mrs. Rashmi Fouzdar, Chief General Manager, RBI (FED Section). In her keynote address, she expressed her views in regard to various important issues which have arisen on account of current trend and fiscal and monetary policies.


In the first session Mrs. Rashmi Fouzdar and other senior officers from the Foreign Exchange Department of RBI including Mrs. Vanitha Venugopala, General Manager, and Mr. Ajay Vij, Dy. General Manager, answered various important questions raised by the participants.In the second session, Mr. Dilip Thakkar, Chartered Accountant, covered “Practical issues arising from FEMA including on LRS, Immovable properties, etc.”. In the third session, Dr. Pravin P. Shah, Chartered Accountant, dealt with the topic of “Issues on overseas outbound investments”. In the fourth session, Mr. Shabbir Motorwala, Chartered Accountant, covered “Issues on borrowing and lending including ECB, Trade credits, etc.”. In the fifth and last session of the conference, Mr. N.C. Hegde, Chartered Accountant, dealt with “FDI – recent changes and issues” and educated the participants in respect of various issues thereon including issues arising from changes made in the current year in the FDI Policy.The Conference offered deep insight into advance level issues on cross border transactions and enlightened the participants on various intricacies on the said subject.

TDS: Jurisdiction of Ao: Sections 201(1) and 201(1A) of Income-tax Act, 1961: Assessee assessed at New Delhi having PAN and TAN allotted by AO at New Delhi: Ao at mumbai has no jurisdiction to pass an order u/s.201 r.w.s. 201(1A), treating the assessee as assessee in default.

[Indian Newspaper Society v. ITO, 247 CTR 193 (Bom.)]

The assessee-company’s operational, administrative and management activities were controlled and directed from New Delhi. The assessee-company has consistently filed its returns of income at New Delhi and has been assessed by the Assessing Officer at New Delhi. The PAN and TAN issued u/s.139A and u/s.203A were allotted by the Assessing Officer at New Delhi. The assessee-company lodged TDS returns at New Delhi. The assessee was allotted certain land in Mumbai by MMRDA for which the assessee had paid lease premium. The Assessing Officer at Mumbai passed order u/s.201(1) r.w.s. 201(1A) dated 29-3-2011 holding the assessee to be an assessee in default.

On a writ petition challenging the order, the Bombay High Court quashed the order and held as under:

 “(i)  Evidently, on the facts and circumstances, it cannot be denied that jurisdiction would lie not with the Assessing Officer at Mumbai, but with the competent authority at New Delhi.

  (ii)  The petitioner’s contention that the jurisdiction lies with the authorities at New Delhi was brushed aside on the ground that the assessment was getting time barred on 31-3-2011 and it is not possible to transfer the case papers to the authorities at New Delhi. This could be no ground whatsoever valid in law to pass an order us.201/201(1A) when there is complete absence of jurisdiction on the part of the Assessing Officer at Mumbai.

  (iii)  The impugned order of 29-3-2011 is set aside only on the aforesaid ground. The order shall not preclude the competent authority having jurisdiction over the case from adopting such proceedings as are available in law.”

Anupam kher & the profession of acting

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Excerpts from interview With anupam kher

Most of us know Anupam Kher as an actor par excellence. Mr. Kher is renowned for his versatile acting, both in the world of theatre and films and his stage is truly the whole world. What many of us may not know is his love and commitment to the profession of acting that has culminated in starting an acting school called ‘ACTOR PREPARES’. The school, founded in 2005, now operates in Mumbai, Chandigarh, Chennai and the UK with a mission to prepare competent and professionally committed actors, skilled in every aspect of an actor’s art and craft – physical, mental and emotional. It lays the foundation for a self-fulfilling and meaningful career as a performer.

On a warm Monday afternoon of June 11, 2012, we (Ameet Patel and Nandita Parekh) had the rare opportunity to meet with Anupam Kher to understand from him the profession of acting, the commitment required, the opportunities and challenges and the future of the profession. We share with you, his thoughts, as communicated to us . . . . . .

Unfortunately, we cannot share with you the eloquence with which he dealt with each question and the warmth with which he received us in his ever-busy schedule.

BCAJ – Is ‘performing arts’ just an art or a profession?

Anupam Kher (AK) – To me, performing arts, be it dancing, singing, acting – is a profes-sion. Art is an expression of one’s emotions, one’s feelings and to that end, everyone is an artist. All of us have drawn pictures as children, but that does not make any of us professional artists. Similarly, most people will have an ability to dance or sing or even act – but that does not make them professional performers. One of the differences is that a professional artist shares his work or his art with others, and pursues it as the main purpose of his life. For a professional artist his art is not just an expression of his emotions, but a driving force of his life, a source of livelihood combined with a compelling need to share. To this end, I am of the view that performing arts in general and acting in particular is definitely a profession that needs specialised skills, training and orientation.

 BCAJ As I understand, the acting school founded by you – ‘Actor Prepares’ is committed to helping talented individuals become professional actors. How much of the acting profession as you see around you has gone through some professional training? And is it very different in other countries in Europe or the USA?

AK -We are a young country; we got our independence in 1947. Before that for 200 years we were ruled by the British and before that by the Mughals. Yet, if you see, art in its various forms is an integral part of our culture and the early architecture – the carving of Ajanta, the miniature paintings . . . . all depict scenes of dancing, singing and other forms of performing arts. Each state has its own folk art and thus, we are a culturally rich country in terms of various forms of performing arts that have been handed down from earlier eras. As a country, we have given to the world the earliest available book on acting and stage craft called the ‘Natya Shastra’, written somewhere between 200 BC and 200 AD. In the early periods after independence, the country had many priorities – agricultural reforms, industrial reforms, poverty eradication, education and so on – acting and performing arts were clearly not a national priority. On the other hand, the people of the country were hungry for entertainment and were ready to lap up anything that was given to them as ‘entertainment’. The audience was not discerning, and hence, we have a situation that many of the movies made in the early post-independence era, we may enjoy today due to nostalgic reasons, but find that the acting skills were often non-existent. In these last 60 odd years, there must be over 20,000 actors who have appeared in our films. How many are remembered for their acting skills? Hardly 10-12, a number we can count on our fingertips. This was mainly because cinema was the primary source of entertainment; the only other option being ‘khetiwadi’ programmes on black and white TV or a once a week show such as ‘Chhayageet’. Watching a movie every weekend was almost a religion for seekers of entertainment during this skewed demand-supply situation. In such a situation, most actors did not have any formal training – professionally trained actors were few and far in between, I being one of them. Interestingly, performing artists in the music and dance space always went through rigorous training, primarily because of the classical forms and schools of music and dance . . . . Or perhaps because it was easier for the audience, however undemanding, to distinguish the good from the bad in these art forms. Today, the scenario has dramatically changed. With globalisation, people in India have a wide choice in the area of entertainment, from multiplexes to multitude of TV channels and live performances by world-renowned artists. So, the person who used to sit at the edge of the seat and watch a movie, today sits back in his chair and says “Okay, let me see what you have!” The audience today is discerning and demanding and that has created a need for professionalism in the performing arts. The ‘fluke’ artists will no longer hold centre stage – the future clearly belongs to actors who are not only trained to be good actors, but are also professional and disciplined in their conduct.

BCAJ -What are the macro changes that are likely to impact the profession of acting?

AK It is only 8-9 years back that cinema was given the status of ‘industry’ by the Government of India. Till that time, the Government did not even recognise cinema as an industry. With this recognition, there is a sea change in the way the movie industry is viewed. The access to commercial financing, the corporatisation within the cinema industry, the international platform for screening Indian movies – all this has led to professionalism all around. This includes the technology used, the distribution systems, the pricing and also, the acting. Otherwise, till recently, anyone with a trace of talent believed that ‘I too can act’. And, perhaps that is somewhat true – because I believe that anyone who can lie, can act; for lying is the first form of acting. So, most of us can act!

BCAJ -On that note, we would like to know how do you deal with situations where you are required to act in a role or propagate a message that you don’t personally subscribe to. Does this create a conflict in your mind? And if so, how do you deal with it?

AK Acting always requires you to portray yourself as a person you are not. It is my job as an actor to represent the character that I am required to portray. When I am Dinanath or Asgar Ali in a movie, that is not who I am. Anupam Kher the actor is not the same as Anupam Kher the person. When I fight against corruption and go on stage with Anna Hazare – that is me as a person. Thus, an actor will play roles that are different from what he stands for, what he may be as a person – and, in my mind, there is no conflict in this respect. Acting is part of my life, it is not my life. (For us, at BCAS, Anupam Kher who voluntarily and readily agreed to speak to demotivated CA students after a very dismal examination result and helped them regain their self confidence – is Anupam Kher, the person!)

BCAJ -An actor has a great influence on the audience and to that end a greater social responsibility. In that light, does it matter what kind of roles you choose to do?

AK – A movie or a play is entertainment, not education – it is not good, not bad, just entertainment. The meaning that a viewer derives from the movie is his prerogative. Also, an anti- hero or a villain is required to show the contrast. A ‘Raam’ is viewed in comparison to a ‘Raavan’; without ‘Raavan’, ‘Raam’ has limited significance. I do not think that people judge an actor by the roles he plays. The well-known villains of the Indian film industry are some of the best individuals that I have come across and I believe they are well respected by society. I have played a diverse set of roles and not restricted myself to the role of a hero or a villain or a comedian. There are nine emotions and as an actor it is important for me to express a variety of emotions – for that it is important to do different roles.

BCAJ – Do you think that there is adequate mentoring in your profession for the newcomers that helps them to clearly understand the distinction between their real life and their reel life?

AK –
While acting is a profession, cinema is an industry. It is for each actor to determine his personal philosophy on how he wants to treat his reel life and real life – there is no reason for any mentoring in that respect. A profession requires training – and with that training how you pursue your profession, whose guidance you seek and who you choose as your role models is your personal choice.

BCAJ – Actors have a capacity to create a significant public influence and opinion. The profession of acting trains you to communicate very effectively with your audience and hence, gives you an ability to reach out to a vast audience effectively. But, on the other hand, the private acts of a well-known personality are also minutely examined by the public. Do you think there is a need for actors to conduct them-selves any differently in their private lives?

AK – Well, as a chartered accountant you too have an influence on the public, and so does a leading doctor or a lawyer. It is for each person to decide how he wants to conduct himself in his personal life, irrespective of whether or not he has the ability to influence others. As actors, perhaps we are more conscious of the image that we create of ourselves – but that does not make us any different from others. We all have to conduct ourselves in a manner that suits our conscience, our value system. Also, at a different level, no one forces you to watch a movie – it is a choice that you have. So, the kind of movies you choose to watch is entirely your choice.

BCAJ – Earlier you mentioned that a professional actor needs to be disciplined. We as outsiders often hear that movies get delayed due to the inability of the actors to live up to their committed schedules. Any views?
 

AK – I thought we were to talk about performing arts as a profession – this is a question on individual behavioural traits. However, when you hear that an actor did not meet his schedule there could be a variety of reasons, like the payment that was committed to him is not made, that a number of times when he has blocked his time for a producer there have been last-minute cancellations from the producer’s side and so on. I do not believe that without a valid reason or a serious constraint any actor would not adhere to his commitment, as he too is interested in a timely release of the movie. Further, the time discipline that was not very important till recently is now becoming of paramount importance due to corporatisation of the movie industry and the manner in which it is financed. The word of mouth agreement has been replaced by crisply worded contracts that run into 20-30 pages and there are consequences of not meeting the commitments made. Internationally this has been the practice for a long period now, but in India, we are seeing this now.

BCAJ – Is there adequate opportunity for a new-comer who wants to enter the profession of acting to learn or to acquire structured training? We know that you have founded a school of acting, but are there adequate such institutions? Is there room for consolidation of training, larger institutes and accreditation?

There are many acting schools and many of them are fraud institutions. We are masters at replicating and selling something that has no value. But ultimately the institutes that will draw students are the ones that provide honest, sincere training and make a long-term commitment to training. The product that comes out of the school is the strongest evidence of the quality of training. Also, today’s newcomers have an ability to learn quickly and to gather knowledge and training from a variety of sources. So, the courses that required 3-4 years earlier can now be taught in months. This Internet and Google age has made information easy to seek but has taken away the sense of wonder from today’s generation.

An acting school is not just about teaching the acting skills. It is education and all education teaches primarily one thing – the ability to distinguish the right from the wrong and the good from the bad. Thus, a good acting school also helps an actor make better decisions and choices. Also, training is not something that happens at the beginning of your professional career – it is something you go back to every time you realise the need for further enhancement to your skills. It is an ongoing process to an actor’s career and very often, the persons who seek training have already acted in plays, in TV shows/serials and movies.

I believe that every individual, whether an actor or not, gets at least one chance that will materially change his life – if he is able to rise up to that chance and seize the opportunity when it is knocking at his door, he will have a different future than when he lets that one chance pass.

BCAJ –   What is the future of the profession?

AK – I firmly believe that this is the golden era for professional actors. The audience is educated and has an appetite for a wide range of movies. Earlier, the movies were all made on a standard theme and dialogues such as ‘maine mere haathonse kheer banaayi hai’ ‘kaash tere pita aaj jinda hote’ became so clichéd and predictable. Today, we have movies like Shanghai, Kahaani and A Wednesday that appeal to the audience. The audience is intelligent and appreciates good cinema, good acting. Further, globalisation has also had a big impact on the acting profession. Many Indian movies are screened across the globe and that has created, for some actors, opportunities to work in international films with very credible directors and production houses. This is definitely the most exciting period for an actor who wants to make a mark. But, it is also a period where an actor will have to work hard and display a high level of sincerity and commitment to the profession.

As we ended our meeting, we realised the common string that runs between the acting profession and our profession. A professional actor benefits from training, just as a good articleship makes a world of a difference to a chartered accountant. Further, training imparted at the beginning of the career is not enough – there is a need for ‘Continuing Professional Education’. The times have changed and globalisation has had an impact on the profession of acting, just as it has had on the profession of chartered accountancy. For some, the world has opened up, for others there is a dismal future – for it is in these time that the destiny of a professional, be it a chartered accountant or an actor, will be defined by his training, his hard work, his commitment and most of all, his ability to recognise and seize that one chance that offers him a very different future!

The Everyday Architect

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The word ‘architecture’ always and immediately brings to mind subjects like real estate, home, high-rises, heritage and monuments. However this is sadly a very limited view on architecture, and one could also say a misguided understanding of what ‘architecture’ means. As an extension to this limited and partly faulty understanding of ‘architecture’, the architect remains to be a technician of sorts — someone who has technical knowledge of certain subjects and who uses that to the best of his capacity to ‘make buildings’. In a more romantic understanding the architect tends to be the maverick artist who has put together marvels and embodiments of beauty in brick and stone or concrete and steel. In more contemporary times, where real estate is the only logic to urban development and financial graphs have crazy rises and drastic falls, architect remains only a service-provider in most cases. He, and sometimes she, is expected to make sure the size of the kitchen or work-station is correct to an optimum, the light falls in the right direction, the water drains well, there is some fancy play of colours and materials which can be discussed as the creative quotient of the project and finally a building should ‘look good and sassy’ in advertisements for the people on the street. The architect’s job is done, he can move to the next project and reproduce the same set of correct applications, with a change of some ‘creative’ inputs, and buildings can be rubber-stamped one after the other, still looking different as every exterior is made just to do that — look different!

Having said this, one can also look at the use of the word ‘architect’ — Jawaharlal Nehru is referred to as the ‘architect’ of modern India, or Dr. B. R. Ambedkar is the ‘architect’ of India’s Constitution, or Mahatma Gandhi is the ‘architect’ of India’s struggle to freedom from British rule. In all these cases, the term ‘architect’ is no technician, is no maverick artist, is no façade designer; the architect, clearly in all these instances, is someone who has shouldered responsibility and has been the shape-giver to important ideas — modern nation, constitution and a movement. The term is not engineer of modern India or doctor of the freedom movement, but ‘architect’ is the idea that is used. So then what defines an architect? What job does an architect do? What role does he perform in society? And the answer to all these will depend on — What is architecture?

Architecture is surely a profession at one point, with the architect a trained and licensed professional who is expected to provide a certain set of services to the best of his capacity. However, architecture is also a discipline — it is a subject with its own history, its theory and its ideas on issues of space, beauty, cultural interventions, role within a social set-up, cultural implications, etc. Architecture deals with making of buildings, but it is much beyond the building — architecture is a broad field of ideas and practices. Architecture has always had historians and theorists, critics and writers who discuss architecture and challenge the contemporary practices of their times. So the realm of ideas and thoughts, theories and critical propositions also makes up the world of architecture. Just as the knowledge of materials and plumbing is important to architecture, so is the awareness of issues and theories that challenge the field is very important. One can say, that from nuts and bolts to the realm of dreams, architecture has to deal with it all.

 Architects also work within their own peer pressures. The architect trained in a particular set of ideas and principles of design, is also living and working in particular contexts. Contexts are made up of cultural images, political inclinations, social relationships that you may or may not agree with. These contexts and the architect’s training generates influences on the design board where decisions are judged against popular imaginations, economic constraints, hyped practices like vaastu, personal convictions or lack of it, and desires or aspirations of clients. The studio of the architect is a complex combination of strains and stresses, desires and convictions. Who is the architect addressing his/her questions and designs to – the client, the user (who she/he may never meet), the fraternity, the critic, the economic demands, space crunch, real estate wars, technicians that supply plumbing and electricity? As much as this dilemma is a reality of conditions, and as much as we realise how architecture stretches much beyond making a ‘good building’, the question is not simply a technical issue of how many questions and demands an architect can answer satisfactorily. The point that needs investigation is — what is the idea of architecture that we as thinkers and professionals in the field of architecture subscribe to. Do we understand our responsibility towards ‘architecture’ itself, to begin with?

Architecture is a realm where imaginations and values will have to be resolved. How do universal values of humanity translate into architectural values and imaginations? To acknowledge that architecture operates as the physical fabric within which our homes, neighbourhoods and cities are defined is very crucial. This physical fabric constructs the way we imagine our world, and this physical fabric is inherently visual and material — we see it and we feel it. The visual as well as the material is always a coded logic — if the Mughals used white marble it was to imagine the sense of beauty within the sense of grandeur that political and pristine, making the political an aspect of technology and geometry; if the new stock of corporate towers feel the need to shine in the hot sun as they shoot to crazy heights, tallness and brightness mean something — aspirations to unashamedly compete, rather make competition a value and loudness of domination a virtue is what this architecture signals. Is then at times the patron, the developer, the client the real designer, the real architect? Is then the architect simply a handmaiden to the forces that make his profession possible? But then can the architect simply moan his status in the chain and continue being the handmaiden? Does architecture have the power to reject and change that which is given and practised in the world? Or does architecture simply mirror the culture and society that produces it?

Architecture is a condition much more than a building here and a building there. Architecture, especially with the world taking an urban turn is the site where ideas and cultures are shaped and human societies are constantly shaping and re-shaping. Architecture is no stage for the drama of life, but a constant game-player in this scenario. Architecture, as a dynamic set of ideas and elements, is part of the narrative that we call culture and socio-political world. Whether new buildings are built, or some old ones are conserved, and some others are lost in time, or whether housing in the avatar of slums is demolished — architecture is constantly shaping and redefining itself. One of the most crucial aspects of architecture — Space, is one of the most cov-eted and discussed subject. Space of the family or the space in your colony or mohalla, or the space from where hawkers are thrown out in the name of discipline or beautification, or the space of mills converted to tall apartment blocks — are the versions of space that architecture choreographs and gives it a logic and a language. The architect can be the handmaiden and provide an architectural language that feeds into the popular idea of life and the world provided today by globalization and capitalism, else that architect can use his skills and language of architecture to challenge the dominant ideas. With the design of better homes, flush with appliances and its interiors designed with high-end materials, does family life automatically become better and more affectionate? The idea of architecture constantly weaves through all these situations and events; then is architecture a physical structure any longer or is it just about events and reactions? The sociality of life, as much as it is embedded in architecture, also seems disjointed from the generally and commonly appreciated properties of architecture.

Does the idea of architecture — a discursive field of knowledge on the one hand, a profession on the other — accommodate the notion of ethics? Ethics here is not an issue of morality, but one of integrated principles and convictions guided by vision and a critical understanding of the world and life. Principles are not meant to be stringent and unchanging, but they are guidelines that can be adequately and appropriately changed, redefined and interrogated. Convictions need not be misunderstood as rigid belief, but convictions is a tool box of imaginations and critical argumentation that is built up through a keen observation of life and culture, and a constantly reworked understanding of one’s own field. Visions are not dogmatic and cast-in-stone diagrams, but they should be projections of ideas that can generate a dialogue and argument, that can make us see the world with fresh eyes but not forget that we come from a past that is loaded with dreams and nightmares. Ethics of architecture help us build arguments and methods towards a world, a city that is other wise a chaotic mix of loud voices — demolitions, developments, change, preserve, conserve, beautify. These words for most of us are only images and not concepts that mean certain real-life situations. These words will become valuable ideas to be discussed and debated when a sense of ethics is the basis for their existence.

Architectural ethics are not about which colour looks good, or which building has a fancier façade than the other, but architectural ethics is a way to our understanding of what world and society do we wish to live in. Can we talk of sustainable environments and economies while we view the hawker on the roadside only as a nuisance? Hawking is an essentially urban condition, that produces a set of urban values and conditions, which are also part of existing economic networks. But hawking is also an understanding of values in space, the architecture of reuse and repair. Are gated communities with taller and taller high-rises packed behind tall compound walls and gates the future of living? Have we not enjoyed mohallas and padas where sharing spaces with neighbours and shopkeepers was a way family and city life developed? A sense of architectural ethics will give us ways in which we can innovatively address some old issues. To question the idea of architecture is central to establishing relationships in a society and understanding them. No human life, and no human social or cultural group lives in isolation — with our different eating habits and different religious preferences, we still are a species that needs exchange and interaction with others who are not like yourself to survive a wholesome life.

Architectural ethics of sharing space, understanding quotients of privacy and openness is very important to a healthy social world-space.

Whether we look at questions of women and social space, or issues of caste and cultural space, or theatre and the traditions of space and costume, or whether we simply evaluate how we perceive shared and public space like a railway station in Mumbai or a park or a maidan, we will realise that architecture deals with aspects of value and ethics as much as it deals with scale, colour and materials. The architect is the builder, he is the thinker, he is also often a philosopher — but in the world of today this bleeding of different roles is also the cause for dilemmas and confusions. But these dilemmas need to be occasions for asking questions and thinking — where new meanings for architecture could be discovered, debated and argued. The new meanings will provide new occasions and new tools for the architect to work with. As long as a sense of ethics and values in architecture is understood, the architect can remodel his profession and his field, with growing understanding and an evolving vision.

Challenges Faced by Professional Firms

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The accountancy profession and the legal profession are intertwined. The services rendered by these professions overlap to a large extent. Moreover, when a lawyer is involved in a major corporate takeover transaction, he depends on the financial structure evolved by a chartered accountant and when a chartered accountant is considering and advising on a major financial transaction he would undoubtedly need help and assistance from a lawyer to ensure compliance of legal requirements in the transaction. Shri Gopaldas P. Kapadia, the first President of the Institute of Chartered Accountants of India, who is recognised as the father of the accountancy profession in India always maintained that the accountancy profession and the legal profession are sister professions. He even expressed a dream that at some point of time the two professions would merge under a common umbrella.

In the context of the changes in the business pattern in India during the last two decades both the professions are required to work shoulder to shoulder acting as supplement to the services rendered by each other.

Over the past few years, we have witnessed unprecedented economic advancement and growth, which has resulted in the globalisation of the world’s economies and has opened up the world’s economies. This wave of globalisation and economic progress has resulted in huge opportunities and potential for businesses to expand their footprint all over the world. This, coupled with the rapid growth of the Internet has resulted in a truly global market place. It has literally resulted in a ‘world without borders’. India has been at the centre stage of this economic revolution over the past decade. Over the years, India has witnessed a large amount of both inbound and outbound foreign investments. Today, leading companies from all over the world are either in India, or are queuing up to enter. Similarly, numerous Indian businesses have acquired or are acquiring businesses outside the country. Over and above this, with the inflow and outflow of investments, businesses have begun to scale up and have today reached enormous sizes, scales that could not have ever been imagined a few years ago. All of this has resulted in a huge demand for professional services. The changing economy has resulted in a complete change in the operating dynamics of professionals. I propose to deal with some of the common issues and challenges faced by law and accountancy professional firms in today’s changing times.

The role of a professional has evolved dramatically over the past few years and is far different from what it used to be a few years ago. The increase in demand for professional services has resulted in a very large growth in the professional service space. Every day, there are new entrants in the sector, resulting in intense competition. With the increasing demand of professional services, professionals are facing new challenges and new burdens every day.

Earlier, whilst any professional had to contend with a certain limited number of issues, the number of issues faced by them today have increased greatly. This can be attributed to various factors. With economic progress, business transactions are becoming more and more complex by the day. Businesses are becoming more competitive and focussed on factors like growth, performance, etc. Further, the ever-changing economic landscape and globalisation have resulted in new and complex legislations and regulations being introduced by lawmakers.

As a result, the need for professional advice on business transactions or on legislations has become ever increasing. This has therefore resulted in a great demand for services of professionals and more so for accountants and lawyers. This great demand for the services of professionals has resulted in an unprecedented number of new entrants into both the professions, which has resulted in an increase in competition amongst professionals themselves. Whilst, the entry of an increasing number of professionals in any field is always welcome, it has triggered intense competition amongst rival firms. It may be argued that with the present growth in the economy, there is enough space for a large number of new upcoming professionals to enter into the professions and grow. But at the same time, it is interesting to note that the increasing competition has resulted in various issues, which professionals may not have faced earlier.

Some of the major issues faced by a professional (whether a lawyer or a chartered accountant), in carrying on his profession today are:

(i) Professional ethics

(ii) Professional responsibility;

(iii) Professional liability;

(iv) Building and retaining teams;

(v) Keeping abreast with the latest updates;

(vi) Advertising/promoting services;

 Let us now examine these issues in detail.

(i) Professional ethics

Both the legal and the accountancy professions have their own rules of professional ethics. The Chartered Accountants Act, 1949 and the Regulations made thereunder prescribe certain rules in this behalf. Similarly, the Advocates Act, 1961 and the Bar Council Regulations govern the legal profession. Professional ethics are codes of practice that have been laid down by bodies governing the profession to ensure that the highest standards of integrity and professionalism are maintained in the profession. Each professional organisation must ensure that the ethics and codes laid down in that profession are followed. A professional is a person who is specially trained and possesses specialised skills and knowledge. He must, in providing his services, adhere to the highest standards of ethics to ensure that not only the interests of his client are safeguarded but also that standard of his profession are maintained. Some of the virtues that fall within the ambit of professional ethics are virtues like honesty, integrity, transparency, etc. Of late, various incidents have come to light where leading professionals from large professional service firms have been caught committing certain acts in the course of their professional duties which go against the very basic canon of their profession and against the basic virtues of professional ethics. At this juncture, one would question as to why would a professional who is associated with a multi-national firm at a very senior level, become involved in such acts. The answer to that question is quite simple. With increasing competition amongst professionals, clients often try to pressurise a professional to commit acts or give them advice as per their needs. The professional, in the fear of losing the business of the client, is likely to buckle down under the pressure of the client and do whatever is required of him to retain such a client. This sort of pressure often leads to professionals committing various acts which are against the very basic guidelines/codes that are governing them. Though it is important in today’s time to retain clients and expand, a professional must never forget his duties and must always carry out the same within the prescribed boundaries.

ii) Professional responsibility

Similarly, professionals have a responsibility to their clients. They must act in a responsible manner and must ensure that there is no breach of fiduciary duties on their part whilst dealing with clients. In a large firm, where there are a large number of partners and senior associates, it is possible that the firm may, unknowingly take up an assignments, which is conflicting in interest with some other assignment being handled by the firm. Such a situation must be avoided and the firm must take steps and build systems to ensure that there is no conflict of interest between the firms’ clients. Another important aspect that a firm must safeguard is confidentiality of clients’ information. A firm must ensure that the clients information that has been provided to it must be kept confidential and that the same should not ever be revealed by any person, save and except in the manner prescribed under law or authorised by the client.

(iii) Professional liability

A professional in exercising his duties and advising his clients, must always exercise due care and caution and ensure that he has fulfilled his duties to the best of his ability. A professional must ensure that he has considered and reviewed all possible scenarios before advising the client. Professionals, being experts in their respective fields, are liable to their clients for any act of negligence on their part. A client comes to a professional because a professional is an expert in the field and that he possesses specialised knowledge. At the same time, since a professional is an expert in his field, he must ensure that he takes greater care and caution when advising his client as compared to an ordinary person. A professional would thus be responsible to his client in the event that a client suffers and harm or prejudice as a result of any act of negligence on the part of the professional.

(iv) Building and retaining teams

With increasing competition amongst professionals today, a major challenge faced by firms is that of attracting and retaining the best manpower. Over the years, the number of persons entering various professions has greatly increased. This has resulted in a huge pool of manpower being made available to firms to choose from. Even then, there is an intense competition amongst firms to select the best talent that is available. Firms today invest huge amount of time, effort and money in training associates to ensure that they are able to offer best services to the clients. However, with increasing competition and increasing amount of work, there is always a dearth of good talent that is available at any time. Competing firms are always looking out for good talent. A firm must ensure that it retains good talent by not only offering good remuneration but by also providing a good working environment.

(v) Updated knowledge
As stated above, with the ever-changing economic climate and with new developments taking place practically on a daily basis, it is important for professionals to always keep themselves updated and abreast with all the latest developments in their fields. With the advent of technology, it has become relatively simple and easy for one to keep updated with the latest developments at all times. Referring to and using tools like the Internet, e-mail, news media, academic journals, etc., are helpful in ensuring that one is updated with the ever-changing situation in ones profession at all times.

(vi) Advertising

The increasing demand for professional services and the increase in the number of professionals offering such services has resulted in intense competition amongst rival professionals. In India, till date, both the legal and accountancy professions have restrictions on advertising, which by and large restrict professionals from advertising their services. Recently, Bar Council of India which governs the legal profession has allowed lawyer/law firms to set up websites but with limited information. Of late, we have also witnessed a large number of professional firms being associated with various events organised by various bodies, chambers, societies, etc. now whereby representatives of such firm make presentations/speak at such events. Another practice that is gaining quick popularity amongst professionals is of publishing articles/research papers/reports across various media like newspapers, journals, magazines and on the Internet.

From the above, we can see the number of common issues and challenges faced by both the professions in todays times. Whilst, the picture is rosy and there is great potential on the horizon for both the professions, the professions of lawyers and chartered accountants have largely benefited by the recent upturn of economy and increase of high-value business transactions. Both the professions have been working as complimentary to each other and as a result, the client gets the advantage of double expertise. Let us hope this sangam will get stronger day by day.

Before I end, I would like to refer to one recent trend which I consider to be against the interest of the clients and may even term it as dangerous. Some chartered accountant firms have been keeping lawyers on their role and try to render legal services to the clients including drafting of complicated documents while some law firms have recruited chartered accountants on their staff, with a view to extend the services to be offered to the clients. It is felt that the junior-level assistance availed in this way may not do proper justice to the clients and is even likely to affect the quality of the services needed in a particular case. It would be in the ultimate benefit of the clients if each profession sticks to its own expertise without trying to encroach upon the field of the other.

XBRL Assurance

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Last couple of years have witnessed an increased pace of adoption of XBRL as a standard for digital financial reporting across the world. Various regulators and government bodies are increasingly implementing XBRL for regulatory filings viz. The Securities Exchange Commission of USA, Her Majesty Revenues & Customs of UK, The Canadian Securities Administrators of Canada, FSA of Japan, and The Securities Regulatory Commission of China, etc. The Ministry of Corporate Affairs of India has also mandated submission of financial statements by selected companies in XBRL format.

The anticipated growth of XBRL use and its potential to replace traditional financial statements and electronic version of such financial statements in HTML or PDF format raises important assurance issues related to the information in ‘XBRL Instance Documents.’ Many companies that are currently providing their information using XBRL are doing so with limited quality assurance due to a lack of guidance on the best practices and limited auditor involvement. This poses a significant threat to the reliability and quality of XBRL-tagged financial data.

Auditors currently attest to the material accuracy of the financial statements using generally accepted principles of accounting (GAAP) as the criteria against which the financial statements prepared by the management are evaluated. Attestation on the financial statements does not apply to the current process of creating XBRL Instances, and it is not clear what criteria would be used by the auditors or others as they provide assurance services in XBRL environment. In contrast to a traditional financial audit, the subject-matter in an XBRL assurance engagement would be on the XBRL ‘documents,’ which are computer-readable files created in the tagging process.

There is a misconception that tagging of information in XBRL is similar to converting a Word document into PDF file and that tagged XBRL data is as accurate as the underlying information in the source documents from which it has been created and hence Assurance on XBRL Instance is like the original to a zerox copy being certified. This is an inappropriate analogy, because the process of tagging involves judgment and there is potential for intentional or unintentional errors that could result in inaccurate, incomplete, and/or misleading information. This is a problem because it is the XBRL-tagged data that will ultimately be consumed and used for decision-making purpose. Therefore, completeness, accuracy or consistency of the XBRL-tagged data is of paramount importance.

Potential risk in XBRL instances

XBRL instance documents provide financial data for a company for a particular reporting period along with comparative financial data for previous reporting period. The potential errors in an XBRL instance document which contribute risk in XBRL instance document in an open taxonomy (where taxonomy extensions are allowed) or closed taxonomy (where taxonomy extensions are not allowed) environment could be as under:

  • Information on Identity of reporting entity could be wrong or might have changed from previous year. It will make the retrieval and comparison of financial data more difficult for the users.

  • Nature of financial data could be wrong e.g., audited or unaudited, budged or actual, revised or re-grouped or re-casted, etc. It will make the comparison of financial data difficult.

  • Information on reporting period could be wrong e.g., an XBRL instance document with a reporting period of Q 3 2011 erroneously puts the reporting period as Q 3 2001. ? Currency could be wrong e.g., an XBRL instance document filed in India with all monetary values in US Dollars will make the task of comparison difficult. Of course the comparison can be done after converting all monetary values in Indian Rupees, but then there is a risk involved in the currency conversion.

  • Precision or scaling in monetary values contained in an XBRL instance document could lead to inaccurate data not suitable for comparison and analysis purposes e.g., Turnover of Rs.1,65,85,987 will be rounded off to Rs.2 crores if the precision measure taken in XBRL Instance document is ‘Rs. in Crores.’

  • Segment information could be wrong or might have changed from previous year. It can make the segment comparison difficult for the user.

  • Technical reference information in XBRL Instance document can point at wrong taxonomy which will make it difficult to compare with other XBRL filings.

  • XBRL validation is a pre-requisite for the regulators and users of XBRL data. They can’t commence using XBRL data unless XBRL Instance document passes the validation test.

  • Base reference information could be wrong e.g., pointing to XBRL taxonomy on computer’s hard disk instead of official XBRL taxonomy.

  • Selection of wrong tags for reporting financial data in XBRL instance document will not only make the XBRL data inaccurate, but will also make it less usable.

  • Reporting wrong data in XBRL instance document even though the tag selection is right, will make the XBRL data inaccurate and less reliable.

  • Failing to mark-up a concept will lead to some vital information missing in XBRL instance document.

  • Closed taxonomy risks mainly consist of integrity and accuracy of data. Since, taxonomy extensions are not allowed in a closed taxonomy, the filer needs to tag the financial data with the residuary tag which could lead to wrong conclusions e.g., if a filer doesn’t find any suitable tag for a line item in his Profit & Loss Account, he needs to tag it with ‘Other Income’ or ‘Other Expenditure’. The filer could also use a wrong version of taxonomy for XBRL instance generation.

Open taxonomy risks mainly relate to creation of a new taxonomy element (taxonomy extension). The filer could create a duplicate element for a concept that already has an element in the base taxonomy or could create an inappropriate or misleading taxonomy element. The taxonomy extension may not comply with the rules of XML and XBRL. The filer could use prohibited name in taxonomy extension.

Evaluating the quality of XBRL formatted information

The quality of XBRL files is an important concern to the users of these files. The errors in XBRL files will have varying consequences based on the potential errors that could occur while preparing XBRL files; the following four principles and criteria have been developed for assessment of quality of XBRL files:

Completeness
All required information and data as defined by the entity’s reporting environment is formatted in the XBRL Instance document and is complete in all respect.

Mapping

The elements viz. line items, domain members and axis selected in the XBRL file are consistent with the associated concepts in the source documents.

Accuracy
The amount, date and other attributes e.g., monetary units are consistent with the source documents.

Structure

XBRL files are structured in accordance with the requirements of the entity’s reporting requirements.

Approach to XBRL assurance
Srivastava & Kogan had presented a conceptual framework of assertion for XBRL instance documents for XBRL filings at SEC.

The auditor needs to carry out Agreed Upon Procedures (AUP) and report his findings on the followings:

  • Whether the XBRL instance document has captured all the facts and data of the financial statement in traditional format or not?

  • Whether the XBRL instance document contains any fact or data which is not present in the financial statement in traditional format or not?

  •     Whether all the element values and attribute values (context, unit, etc.) in XBRL instance document correctly represent the data in the financial statement in traditional format or not?

  •     Whether the XBRL instance document complies with all XML syntax rules or not?

  •     Whether the XBRL instance document complies with all rules of XBRL and referenced XBRL taxonomies or not?

  •     Whether the XBRL tagging in the instance document properly represents the fact/data in the financial statement in traditional format or not?

  •     Whether the XBRL instance document references correct version and industry specific taxonomy or not?

  •     Whether the taxonomy extensions created and used in the XBRL instance document comply will all rules of XML and XBRL or not?

  •    Whether the new elements in the XBRL taxonomy are not duplicate or misleading or not?

  •     Whether the Linkbases used in the XBRL taxonomy extensions are appropriate or not?

Control Tests and Substantive Tests
Control Tests and Substantive Tests need to be designed and applied to mitigate the risks in XBRL instance documents.


Control tests

The Auditors are familiar with internal controls over the accounting processes. However, in the case of assurance over XBRL instance document, internal controls over XBRL tagging process need to be checked. The control tests need to be applied on:

(i)    the effectiveness of the XBRL tool that has been used to generate XBRL instance document; and
(ii)    the effectiveness of the validation tool

Substantive tests

In traditional audit sampling, the auditor is expected to specify either tolerable error or tolerable deviation rate and a desired reliability in order to determine a sample size sufficient to meet the audit objectives. However, in the case of audit of an XBRL instance document, since the objective of sampling is to determine whether tagging process has resulted in a material misstatement; an attribute sampling approach would not be appropriate. One can imagine a situation where a single wrong tagging results in a material misstatement or where numerous wrong tagging aggregates to an immaterial amount of error.

Materiality

The current auditing processes for examining and reporting on financial statements are designed to ascertain that, ‘taken as a whole’, the financial statements are free from any material misstatement and present a ‘true and fair view’ of the state of affairs of any company. The concept of materiality in the context of traditional audit of financial statements refers to the probable impact on the judgment of a reasonable person of an omission or misstatement in financial statement. In conjunction with auditors risk assessment, materiality’s role in planning a financial statement audit is to determine the allocation of audit efforts and in the opinion formation phase of the audit to evaluate the implications of the audit evidence on the financial statements ‘taken as a whole’. However, in case of XBRL, where a single inappropriate or mis-leading tag could result in the XBRL document ‘taken as a whole’ being materially misstated, the concept of materiality can’t be applied the way it is being applied to the audit of traditional financial statements.

In audit of XBRL instance document, two kinds of materiality need to be considered:

(i)    Materiality for the entire financial statement; and
(ii)    Materiality for each line item in the XBRL instance document.

Since the materiality concept used in the audit of financial statement is at the aggregate level, the implied materiality in the XBRL instance document is also at the aggregate level. However, since users of XBRL data are going to use each line item separately in their decisions, they will perceive each line item to be accurate in isolation. This would lead to erroneous decisions.

Conclusion

The focal point of XBRL assurance is the evaluation of the accuracy and validity of the XBRL tags applied to the line items in the financial statement of the company. In order to perform these evaluation, the auditors need to have the knowledge of what constitutes an error in XBRL instance document, what is the potential risk in XBRL instance document, how control tests and substantive tests should be applied in XBRL environment, and how materiality should be conceived and applied to XBRL instance document.

References
1.    Bovee, M., A. Kogan, K. Nelson, R. Srivastava, M. Vasarhelyi. 2005. Financial Reporting and Auditing Agent with Net Knowl-edge (FRAANK) and extensible Business Reporting Language (XBRL) Journal of Information Systems, Vol. 19. No. 1
2.    Boritz, J. E. and W. G. No. 2007. Auditing an XBRL Instance Document: The Case of United Technologies Corporation

3.    Plumee & Plumee (2008) Assurance on XBRL for Financial Reporting

4.    AICPA — Proposed Principles & Criteria for XBRL Formatted Information

5.    Rajendra P. Srivastava & Alexander Kogan (2008) — Assur-ance on XBRL Instance Document: A Conceptual Framework of Assertions

6.    AICPA — Performing Agreed Upon Procedures Engagements That Address The Completeness, Accuracy or Consistency of XBRL Tagged Data
7.    ICAEW  —  Draft  Technical  Release  for  Performing Agreed Upon Procedures Engagements That Address XBRL Tagged Data Included Within Financial Statements Prepared in An iXBRL Format.

Delmas France v. ADIT ITA No 9001/Mum./2010 Article 5(5)/(6), 7 of India France DTAA Dated: 11-1-2012 Present for the appellant: F. V. Irani Present for the Department: Malthi Sridharan

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Under India-France DTAA as long as it is shown that the transactions between the agent and the principal are made under arm’s-length conditions, the agent would be treated as that of independent status even if he deals exclusively for one principal.

The ‘profit neutrality’ theory on account of arm’s-length remuneration to a dependent agent PE (DAPE) may not always hold good as the dependent agent (DA) may not be compensated for entrepreneurial risks that may arise to the principal.

Facts:
Taxpayer, a French company (FCO), is engaged in the business of operation of ships in international traffic.

FCO carried on operations in India through agents who handled the work at most of the Indian ports. The agents were responsible for all clearances from Government departments.

The Tax Department held that as business of FCO was carried out through a fixed place by an agent in India, wherein the agent was to maintain the office for the principal duly equipped, it could be said that FCO had PE in India. The Tax Department attributed 10% of the gross receipts from India to agency PE.

FCO contended that it did not have a PE in India under the DTAA, hence its business profits could not be taxed in India. In any case, due to arm’slength principal, there was no attribution of profit.

Held:
As the Dispute Resolution Panel (DRP) upheld the AO’s contention, appeal was preferred to ITAT. ITAT accepted contentions of FCO and held that FCO did neither have basic rule PE, nor agency PE. On Basic PE rule

The Agency PE rule specifically overrides the Basic PE rule.

The very business model of business of FCO being carried out through an agent is such that it does not ordinarily admit the possibility of a PE under the Basic PE rule.

In case of Airlines Rotables Ltd.2, UK it was observed that the following three criteria are embedded in the definition of the Basic PE rule:

  • Physical criterion i.e., existence of a physical location.

  • Subjective criterion i.e., right to use that place.

  • Functionality criterion i.e., carrying out of business through that place.

In the agency business model, the above three parameters are not satisfied. Under such a model, the business of the foreign enterprise is carried out by the agent, and the principal does not have the powers, as a matter of right to use the agent’s place for carrying out its business, nor does it have the right of disposal of that place.

On DAPE
The France DTAA in Article 5(5) and Article 5(6) contains the scope of the DAPE. Article 5(5) provides the situations in which business being carried on through a DA creates a PE.

Under Article 5(6) of India-France DTAA even when an agent is wholly or almost wholly dependent on the foreign enterprise, it would still be treated as an independent agent, if the transactions are at arm’s length.

The sine qua non for constituting a DAPE under the France DTAA is the finding that the transaction is not carried out at arm’s length. No such finding was given by the Tax Department.

In absence of findings by the Tax Department or the DRP, FCO does not have a PE in India.

On profit attribution

One of the issues raised was about tax neutrality for the taxpayer even assuming there is emergence of PE. The ITAT ruled that the issue is academic in the facts of the case as DAPE did not exist. ITAT did however caution that the tax neutrality theory (i.e., once the agent is paid at arm’s length no further attribution can be made to PE) on account of existence of DAPE may not always hold good, as the DA may not be compensated for the risks that may arise to the principal.

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Sepco Electric Power Construction Corporation AAR No. 1011 of 2010 Section 245Q(1), 245R(2), 197 of Income-tax Act Dated: 25-8-2011 and 15-11-2011 Present for the appellant: N. Venkataraman, Satish Agarwal Present for the Department: Sanjay Kumar, Dipi Agarwal

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AAR application is not maintainable when applicant has already filed return of income under ITA and/or assessment/reassessment proceedings are pending before the Income-tax Authorities.

Pendency of a proceeding u/s.195 or 197 of the Act, or even a final order under any of these sections, cannot invalidate an application for advance ruling being entertained.

Facts:
Applicant, a tax resident of China (FCO), entered into an offshore supply contract with an Indian company (ICO) in 2006.

FCO filed an application before the AAR on 18 November 2010 on the issue of taxability of the amounts received/receivable by it under the offshore supply contract.

As on the date of filing the application, status in respect of the years covered by the application was as under:

  • Order u/s.197 of the Act was subject to revision proceedings;

  • Issuance of assessment notices in response to returns filed;

  • Issuance of reassessment notice

The Tax Department raised a preliminary objection regarding the admissibility of the application u/s.245R(2) on the ground that for each of the years proceedings are pending.

FCO contended that the application was maintainable and mere filing return before approaching the AAR would not mean that the question raised in the application is already pending before the Tax Department. Reliance was also placed on the ‘Hand Book’ on Advance Rulings.

Held:

AAR rejected FCO’s contentions and held that the bar u/s.245R(2) would operate for the following reasons:

Mere pendency of a proceeding u/s.195 or 197 of the Act, or even an order under any of the sections, would not invalidate an application for advance ruling being entertained. However, where a return of income is furnished and the proceedings for assessment are going on, all the claims raised by the taxpayer are before the tax authority for consideration and decision.

It cannot be said that the issue of taxability of one of the items of income returned has not arisen or not pending before the Tax Authority merely because the same has not been raised in general or specific questionnaire issued by the Tax Authority to the applicant. There is no restriction on the power of the Tax Authority to inquire.

Proviso to section 245R(2) of the Act creates a specific bar on the jurisdiction of the AAR to give a ruling once it is found that there subsists pendency of proceedings. In the circumstances, the application is liable to be rejected.

The ‘Hand Book’ on Advance ruling relied on by FCO itself provides that it should not be construed as an exhaustive statement of law. Even otherwise, what is stated in the ‘Hand Book’ cannot control the rendering of a decision with reference to the relevant provisions under the ITA.

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ADIT v. Warner Brother Pictures Inc ITA No. 3160/Mum./2010 Section 5, 9(1)(vi) of ITA, Article 12(2) of India US DTAA Dated: 30-12-2011 Present for the assessee: Jitendra Yadav DR Present for the Department: W. Hasan

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Consideration received by non-resident taxpayer from Indian company, for granting exclusive rights of distribution of cinematographic films, not taxable as royalty u/s.9(1)(vi).

Business income of foreign company not taxable in absence of a PE in India.

Agency PE cannot be created by an Indian company acting independently.

Facts
Taxpayer, a non-resident company (FCO) of USA, is engaged in production and distribution of films.

FCO entered into an agreement with an Indian company (ICO) to grant exclusive rights of distribution of cinematographic films to ICO. The agreements were signed outside India. ICO had no right to broadcast films on TV or radio and it was an admitted fact that the consideration was for distribution of films. The payment was also made to FCO outside India.

According to FCO, the income was not taxable in India, as the payment was specifically excluded from royalty definition of ITA and once income was not taxable in terms of specific source rule of royalty taxation, the amount was not chargeable u/s.9(1)(i) of the Act.

The contentions were rejected by the Tax Department. Aggrieved by the order of CIT(A), Tax Department further appealed to ITAT.

Held:
ITAT accepted FCO’s contentions and concurred with the CIT(A)’s order for the following reasons:

The definition of royalty u/s.9(1)(vi) excludes payment received for sale, distribution and exhibition of cinematographic films. Hence amount received by FCO cannot be considered as royalty under ITA.

When there is a special source rule dealing with a specific type of income, such provision would exclude applicability of general provision dealing with the income accruing or arising out of any business connection in India.

Consideration received by FCO is also not taxable as business income, as FCO does not have business connection in India. Even if FCO has business connection, profits only to the extent attributable to PE can be taxed in India. However, since FCO does not have PE in India, such income will not be liable to tax in India.

ICO, to whom the licence was granted by virtue of agreement, cannot be considered as Agency PE as it is not exclusively dealing for FCO, but also for other non-residents.

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Nuclear Power Corporation of India AAR No. 1011 of 2010 Section 245R(2), 195 of Income-tax Act Dated: 21-12-2011 Present for the appellant: S. E. Dastur, Sr. Advocate, Nitesh Joshi, Advocate Present for the Department: None

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When tax proceedings are pending against payee, the admission of application is barred by limitation of pendency of proceedings. Advance Ruling is not just applicant-specific, but also transaction-specific and binds payee as also the payer.

Determination of payee’s taxability is a primary question and not incidental while determining withholding obligation of payer u/s.195.

Facts:
The applicant, an Indian public sector company (ICO), entered into various offshore supply and service contracts with a company incorporated in Russia (FCO), for setting up a power plant in India.

In terms of the contract between ICO and FCO, it was agreed that FCO had primary obligation to pay taxes in India and ICO was required to reimburse the same. Effectively, tax obligation in respect of FCO’s income was on ICO.

For the purpose of TDS obligation, ICo had contended that the income from onshore service contract alone was taxable in India and the income from offshore supply contract was not taxable in India.

The AAR, before considering ICO’s application, raised primary question of whether the application filed by ICO was maintainable having regard to the bar imposed u/s.245R(2) (i), wherein AAR is precluded from ruling on a question, which is already pending before any Income-tax Authority, Appellate Tribunal or any Court.

Held:
AAR rejected ICO’s contention and held:

AAR ruling is binding not only on the applicant (payer), but also for the transaction for which the ruling is sought.

An AAR ruling is sought by ICO in relation to a transaction between resident and non-resident and not in terms of the other provisions of ITA which could have entitled ICO to claim tax implications of its own. This ruling is in relation to ‘transaction’ and, hence, pendency of proceedings in the case of any party to the transaction would operate as a bar against the other in approaching AAR.

Reliance was placed on Foster’s ruling1 wherein it was held that if a proceeding in respect of a transaction to which the applicant (as a payee) was a party, was pending before the Tax Authority in the case of the other party (payer) to the transaction, the application would be barred for the reason that the question posed before the Tax Authority and the AAR would be the same.

Withholding tax provisions under ITA obligate a payer to withhold tax on every payment to a non-resident, provided the same is chargeable to tax in India. Thus, the liability of the payee to pay tax on the payment received is not a question that is incidental to the issue of whether the payer is bound to withhold tax; this question is primary and not incidental.

As the issue of whether the payment made under the transaction was taxable under the ITA was already pending before the Tax Authority in the case of FCO before ICO approached the AAR, the application was not maintainable.

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Professionaly Speaking…

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The Australian Council of Professions defines a profession as: ‘A disciplined group of individuals who adhere to high ethical standards and uphold themselves to, and are accepted by, the public as possessing special knowledge and skills in a widely recognised, organised body of learning derived from education and training at a high level, and who are prepared to exercise this knowledge and these skills in the interest of others.’ On a lesser idealistic plane, a profession is an occupation, which necessitates widespread training and study, and generally has a professional association, ethical code and the procedure of certification or licensing.

Classically, there were three recognised professions – divinity, medicine and law (not considering the oldest profession of the world!) Over a period, with the development of specialised bodies of knowledge and technology, other occupations came to be recognised as professions or started claiming the status of profession. It is a process of evolution and today in the expanded meaning of profession, one would include many other occupations although they may not possess all the characteristics of a profession. In that sense, professionalism is a matter of attitude.

Professionals enjoy a high status and esteem, because the society considers the work that they do, functions that they perform as vital and valuable to the society.

Professionals and professional associations often have a power – power to regulate members of the profession and guard and protect their area of specialisation. To that extent, an organised profession is monopolistic. This is often considered necessary to maintain the high standards of learning, expertise and capability to exercise the profession.

Till about 50 years back, the line between profession and business was clear and well understood. In the recent years, this line is becoming increasingly hazy and blurred. There could be many reasons for this. A profession renders services where it has a monopoly as well as services that even a person who is not a member of the profession renders. A professional rendering unregulated service finds competing in such an environment a disadvantage and knowingly or unknowingly crosses the `Laxman Rekha’. With technological advances the investment required for exercising the profession has increased manifold. This is particularly true with the profession of medicine where expensive equipment plays a major role in diagnosis and at times even in the treatment.

Often the equipment has a short life due to obsolescence. This makes the medical professional or the institutes engaging them think on the lines of business rather than profession. Possibly due to this, the way the professions are excised today has also changed. In the past, a professional practised individually or in small partnerships.

Today, mammoth organisations of professionals or those engaging professionals are dominating. This is a reality of the ever-changing world. What one needs to ensure is that while the size and the type of organisations change, the profession retains its high ethical standards. Traditionally, there has always been a wide variance between earnings even within a profession. In a lighter vein, there were always two types of `outstanding lawyers’ – those who excelled in their profession and those who stood outside the courtrooms to solicit clients. This is true with all professions.

On a serious note, this gap is only increasing. One needs to debate whether this is desirable, is it inevitable or it is the market’s way of enabling the talented younger members of the profession to gain a foothold by charging lower fees. As professionals, we often tend to stay in the ivory tower forgetting what is society’s perception about our profession, what the society expects and what the profession offers or delivers. It is a fact that professionals today enjoy a diminished level of respect and esteem. True, every profession has a few black sheep whose behaviour gives a bad name to the whole profession inspite of exemplary work by the majority. Consider the recent TV episode of Satyamev Jayate hosted by Amir Khan.

While the viewers felt that the programme depicted the reality, there is a muted outrage within the medical profession. Certainly, all medical professionals are not engaged in unethical practices. But all professions need to introspect whether the black sheep amongst us are increasing in numbers and do we need to do something about it. Do professional bodies need to strengthen their disciplinary mechanism?

It is a matter of pride that amongst various professions, Chartered Accountants have a very sound and effective disciplinary mechanism. A weak self-regulation will sooner or later prompt the government to assume the power of regulation. In a globalised world competition has become the key word. Agreements or arrangements promoting monopolies or curtailing competition are struck down as illegal. World Trade Organisation (WTO) agreements, domestic laws on the subject foster competition.

These will pose challenges before professions. For example, whether recommended schedule of fees breaches the Competition law? Internationally these aspects are being debated. Traditionally, professionals did not advertise or market their services, in many jurisdictions they were prohibited from charging success-based fees, sharing fees with even members of allied professions. Today, these restrictions are being questioned. Increasingly, professionals are facing action under various Consumer Protection Laws.

Professions need to think about these issues. We believe that there is a common thread running through various professions. A few years back BCAS even attempted to form an organisation of various professions. We feel that it is necessary to give a thought to various issues facing professionals. With this objective in mind, we bring this issue to you with two articles, one from Mr. M. L. Bhakta a respected advocate and solicitor and one from Mr. Kaiwan Mehta a renowned architect.

We also bring you an interview with Mr. Anupam Kher who may not fit into the classical definition of a professional but is a professional in true sense. Going forward we hope to bring to you periodically, articles dealing with issues faced by professionals.

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Life And Death

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The cycle of birth, life and death goes on. What is born has to die. Both birth and death are not in our hands at all. As Saigal sang in good old days . . .

(Readers are requested to listen to excellent rendering of this ghazal by K. L. Saigal)

Both birth and death are not in our hands. But having been born, it is better to do something in our lives, instead of wasting it and lamenting when our end comes that I have not done anything worthwhile in my life. Bhagvad Gita says . . .


Even if Gita says that rebirth is always there, we cannot postpone living, hoping to catch up with life in the next birth. We have to consider that we are not playing the first inning of a test match, where a second inning is possible, but are playing an ODI knowing that there is no second inning and overs too are limited.

The basic question is: ‘how must one live’? Should we follow the policy of ‘eat, drink and be merry’? That would not have been the purpose of life. The scriptures tell us that to be born as a human being is very fortuitous — a rare happening and one cannot waste this priceless gift of God.


“You don’t get to choose how you are going to die, You can only decide how you are going to live” — Joan Baez

Oddly many times one finds the right answer, of all the things, in film songs! One remembers the song written by Sahir Ludhianvi and sung by Mukesh.

We must live a life that brings true happiness to us and all around us. In this journey, we will meet several cotravellers who need our help. Helping does not necessarily have to be in terms of money. One only needs richness of the heart. As we go along, we must wipe the tears of those who are suffering and bring back happiness in their lives. Even a smile can make someone’s day. Let us lead a life whereby, people will remember when we are no more. The objective of living should be:


I recollect the words found in the diary of a young girl who died in a house collapse in an earthquake.

“Life is short

Make it sweet
Keep not all the flowers
For the grave”

Many times attachment to our family members holds us back from serving others. One remembers the lines sung by Mukesh in that unforgettable duet he sung with Sudha Malhotra.

We have to remember that a good life is one that is used in serving others. True happiness comes from selfless service. Therefore, lead a life, so that when death comes there are no regrets, as we have lived a life of service with a smile.

This is a small poem written in the last letter of Ensign Heiichi Okabe, a Japanese Kamikaze (Suicide Bomber) pilot to his family before he left for his last suicide bombing flight to crash his bomb, laden plane on an American battleship in the last stages of the second World War:

“Like cherry blossoms
In the springs
Let us fall
Clean and radiant”

Let us then learn to live and die like a cherry blossom flower.
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Tax Implications of Liaison Office in India

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The activities of liaisoning per se should not result in any tax implication in India. However, when such activities cross the threshold of liaisoning, they would constitute Permanent Establishment and proportionate profits attributable to its activities in India may be subjected to tax. Several cases by Tribunals, Courts and AAR have been decided and in this Article, various aspects concerning taxability of liaison offices have been dealt with.

1.0 Introduction

1.1 Meaning of the term ‘Liaison’

The dictionary (Collins Thesaurus) meanings of the term ‘liaison’ are: ‘communication, connection, contact, go-between, hook-up, interchange, intermediary’.

A ‘Liaison Office’ (LO) is a representative office set up primarily to explore and understand the business and investment climate. Such office is not permitted to undertake any commercial/trading/industrial activity, directly or indirectly, and is required to maintain itself out of inward remittances received from the parent company through normal banking channels.

1.2 Meaning of the term ‘Liaison Office’ as per FEMA

Clause 2(e) of the Notification No. FEMA 22/2000-RB, dated 3rd May 2000 pertaining to Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000 defines ‘Liaison Office’ as under:

“ ‘Liaison Office’ means a place of business to act as a channel of communication between the Principal place of business or Head Office by whatever name called and entities in India but which does not undertake any commercial/trading/industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel.”

Schedule II of the said Notification lists activities which are permitted to a Liaison Office in India as follows:

(i) Representing in India the parent company/group companies;

(ii) Promoting export import from/to India;

(iii) Promoting technical/financial collaborations between parent/group companies and companies in India;

 (iv) Acting as a communication channel between the parent company and Indian companies.

Thus, in essence, a ‘Liaison Office’ (LO) is nothing but a representative office of the non-resident entity in India, whose activities are confined to dissemination of information, facilitate/promote trade and/or to act as a communication channel between group companies and Indian companies. A liaison office is not supposed to undertake activities which cross the threshold of doing business in India, such as raising invoice, effecting delivery of goods, conclusion of contracts, etc. But when such activities are carried on, they may result in tax incidence.

2.0 Taxability of Liaison Office under the provisions of the Income-tax Act, 1961


Section 5 read with section 9 of the Income-tax Act, 1961 (the ‘Act’) provides that income of a non-resident is taxed in India when the same is received or is deemed to be received or accrues/arises or is deemed to accrue/arise in India. Section 9(1) lists the situations under which income of a non-resident is deemed to accrue or arise in India.

The ambit of clause (i) of section 9(1) is wide enough to cover “all income accruing or arising, whether directly or indirectly, through or from any business connection in India or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India”.

Of all the different incidences of income covered by section 9(1)(i) above, the following are most relevant for our discussion:

— Income arising through “business connection in India”; and
— Income arising through any source of income in India.

Certain activities of an LO would not attract any tax liability in view of the specific exemptions provided u/s.9, which are as follows:

9(1)(i) Expl. 1. (b) : Activities which are confined to the purchase of goods in India for the purpose of export; Expl. 2 : Activities which do not qualify the test of ‘Business Connection’ (This explanation defines ‘Business Connection’ on the lines of ‘Agency PE’ under Tax Treaty Provisions).

2.1 Business Connection (BC)

The most celebrated CBDT Circular No. 23 of 1969 (since withdrawn w.e.f. 22-10-2009) had explained the concept of ‘Business Connection’ in depth. Even though the Circular stands withdrawn, the principles enunciated therein still hold good. The Circular clarifies that “the expression ‘business connection’ limits of no precise definition. The import and connotation of this expression has been explained by the Supreme Court in their judgment in CIT v. R. D. Aggarwal and Co. and Another, (56 ITR 20). The question whether a nonresident has a ‘business connection’ in India from or through which income, profits or gains can be said to accrue or arise to him within the meaning of section 9 of the Act has to be determined on the facts of each case. However, some illustrative instances of a non-resident having business connection in India, are given below:

(a) Maintaining a branch office in India for the purchase or sale of goods or transacting other business.

(b) Appointing an agent in India for the systematic and regular purchase of raw materials or other commodities, or for sale of the non-resident’s goods, or for other business purposes.

(c) Erecting a factory in India where the raw produce purchased locally is worked into a form suitable for export abroad.

(d) Forming a local subsidiary company to sell the products of the non-resident parent company.

(e) Having financial association between a resident and a non-resident company.”

The Circular further states that wherever the transactions are on a principal-to-principal basis, as well as on arm’s-length basis, between a subsidiary and a parent company, the same cannot result into BC. In other words, the concept of BC carves out an exception in respect of transactions between the principal and independent agent.

The Apex Court in the case of R. D. Aggarwal and Co. held that the expression ‘Business Connection’ means something more than a business, that it pre-supposes an element of continuity between the business of the non-resident and the activity in the taxable territory, though a sporadic or isolated transaction may not be construed as such, for the connection may take several forms, like carrying on a part of the main business or activity incidental to the non-resident through an agent or it may merely be a relation between the business of the non-resident and the activity in the taxable territory which facilitates or assists in the carrying on of that business. Applying this test in the case of Western Union Financial Services Inc., (2007) 291 ITR (A.T.) 176, wherein the assessee (Western Union) was engaged in the business of transfer of monies in India from abroad through various agents (including Department of Post, NBFCs, banks, travel agents, etc.), the Delhi Tribunal held that there exists BC in India.

The Supreme Court in the case of Anglo-French Textile Co. Ltd. v. CIT, (1953) 23 ITR 101 (SC), held that where there was a continuity of business relationship between the person in India, who helps to make the profits and the person outside India who receives the profits, BC exists.

In the case of GVK Industries Ltd. v. CIT, (1997) 228 ITR 564 (AP), the Andhra Pradesh High Court enumerated the following principles in respect of BC after examining various case laws:

(i) “Whether there is a business connection between an Indian company and a non-resident (company) is a mixed question of fact and law which has to be determined on the facts and circumstances of each case;

(ii)    the expression ‘business connection’ is too wide to admit any precise definition; however, it has some well-known attributes;

(iii)    the essence of ‘business connection’ is the existence of close, real, intimate relationship and commonness of interest between the Non-Resident Company (NRC) and the Indian person;

(iv)    where there is control of management or finances or substantial holding of equity shares or sharing of profits by the NRC with the Indian person, the requirement of principle (iii) is ful-filled;

(v)    to constitute ‘business connection’, there must be continuity of activity or operation of the NRC with the Indian party and a stray or isolated transaction is not enough to establish a business connection.”

From the above legal analysis it is clear that if the activities of an LO are such that they constitute BC, there would be incidence of tax in India. However, if the activities of the LO are confined to purchase of goods in India for the purpose of export [as per section 9(1) (i) Expl. 1(b)], then there will be no tax incidence in India. Let us examine, under what circumstances, activities of the LOs were held to be covered by the exclusion of section 9.

2.2    Activities confined to purchases from India for the purpose of exports

Cases in favour of assessee
2.2.1 In a number of decisions, viz. Angel Garments Ltd., [287 ITR 341 AAR; (2006) 157 Taxman 195 (AAR)], Gutal Trading Est., [278 ITR 63 (AAR)], Ikea Trading (Hong Kong) Ltd., [2008 TIOL 23 (AAR); (2009) 308 ITR 0422 (AAR)], and DDIT v. Nike Inc., [2009 TIOL 143 (Bang. ITAT)], ADIT (IT) v. Fabrikant & Sons Ltd., (2011 TII 46 ITAT-Mum.-Intl.), it has been held that where the activities of the Liaison Office in India are confined to purchase of goods in India for the purpose of export, the income therefrom cannot be brought to tax in India.

Cases against assessee
2.2.2 The Delhi Tribunal made interesting observations in case of Linmark International (Hong Kong) Ltd., [2011 TII 05 ITAT-Del-Intl], wherein it held that the purchase exclusion [section 9(1)(i) Expl. 1(b)] only scales down the extent of incomes that are deemed to accrue or arise in India. Such a limitation cannot be read into the provision which deals with income that accrues or arises in India. In this case it was found that the Indian LO was doing substantial business activities on behalf of a BVI company which was a non-functional entity. The Tribunal placed reliance on the Supreme Court decision in the case of Performing Rights Society Ltd. & Another v. CIT & Others wherein it was held that, where income has actually accrued in India, there is no requirement to further examine whether the income is covered by the provision that deems income to accrue or arise in India.

2.2.3 In case of Columbia Sportswear Company, (2011) 337 ITR 0407 (AAR) (applicant), on the facts of the case, the AAR held that there was a Business Connection, observing that “in the matter of manufacturing of products as per design, quality and in implementing policy, the liaison office is actually doing the work of the applicant. The activities of the liaison office are not confined to India. It also facilitates the doing of business by the applicant with entities in Egypt and Bangladesh. A person in the business of designing, manufacturing and selling cannot be taken to earn a profit only by sale of goods”.

Two interesting observations made by AAR in the case of Columbia Sportswear are:

(i)    All activities (including purchase) other than actual sale cannot be divorced from the business of manufacture; and
(ii)    If the activities of the Indian LO supports businesses in other countries as well (in the present case it was Egypt and Bangladesh), then it cannot be stated that the operations of the applicant in India are confined to the purchase of goods in India for the purpose of export.

2.2.4 Nokia Networks OY, Finland (NOY), [No. 2005 TIOL 103 ITAT Del-SB; 95 ITD 269 (SB) (Del. Tribunal)], is a tax resident of Finland. NOY had a liaison office (‘LO’) in India. Further, NOY had a 100% subsidiary in India by name Nokia India (P) Ltd. (NPL). NOY entered into an agreement with an Indian Company for supply of telecom equipment (hardware with software embedded therein). NPL, the Indian subsidiary of NOY, entered into an agreement for installation of the said equipment supplied by NOY.

It was held that NOY had a Business Connection under the Act, not because NOY had liaison office in India, but because it had its own subsidiary (NPL) in India and there was intimate business connection based on facts. There was a service agreement and a technical support agreement between NOY and NPL and other Indian Cos. which support the NOY’s activity of supplying telecom equipments. NPL having a live link with NOY, was held to be the business connection in India.

2.3    Activities in addition to or incidental to purchases
Many a time, activities of LOs extend beyond merely purchases. In such a scenario, can the assessee take shelter under the exclusion of section 9(1)(i) Expl. 1(b)? By and large, the Tribunals/AAR/Courts have held that if other activities are incidental to the activity of purchases for the purpose of exports, then there will not be any incidence of deemed income u/s.9 of the Act.

The table below shows what kind of activities were held to be incidental to purchases and which were not so:
 

Sr.

Nature of activities

Whether held as deemed income u/s.9(1) of
the

Case Law

No.

 

Act?

 

 

 

 

 

1

Training of the employees of

No

DDI
v. NIKE Inc

 

the manufacturers (to ensure

 

(Indian
Liaison Office)

 

quality) who supplied goods

 

2009 TIOL 143 ITAT-Bang.

 

to the affiliates of the LO.

 

 

 

 

 

 

2

Negotiation of prices, assort-

 

ADIT
v. Fabricant & Sons Ltd.

 

ment of diamonds.

No

(2011 TII 46 ITAT-Mum.-Intl)

 

 

 

 

3

Material management, mer-

Yes. It was held that in the matter of
manufac-

Columbia
Sportswear

 

chandising, production man-

turing of products as per design, quality
and in

Company

 

agement, quality control and

implementing policy, the liaison office is
actually

(2011) 337 ITR 0407 (AAR)

 

administration support consti-

doing the work of the applicant.

 

 

tuting teams from finance,

 

 

 

human resources and infor-

 

 

 

mation systems.

 

 

 

 

 

 

4

Facilitation by the liaison of-

Yes. As activities were not confined to India,
the

Columbia
Sportswear

 

fice in doing business with

exclusion provided in section 9(1)(i) Expl.
1(b) will

Company

 

entities in Egypt and Bangla-

not be applicable.

(2011) 337 ITR 0407 (AAR)

 

desh.

 

 

 

 

 

 

5

Indian office rendering sup-

Yes & No

Aramco
Overseas Company BV

 

port services to the non-

The AAR held that to the extent Indian
Office

(AAR No. 825 of 2009)

 

resident parent company and

engaged in purchases for its non-resident
principal

2010 TIOL 14 ARA-IT

 

its group company.

there is no income u/s.9(1). But income is
attribut-

 

 

 

able to the activities of the Indian Office
for the

 

 

 

group company as the applicant failed to
establish

 

 

 

that the Indian Office worked as an agent of
the

 

 

 

group company.

 

 

 

 

 


3.0    Taxability of Liaison Office under the provisions of DTAA

Under Article 5 of the DTAA if the activities of an LO are considered to be PE in India, then under Article 7, the income of the non-resident attributable to such PE in India would be liable to tax in India.

Article 5 of the UN and OECD Model Conventions deals with the definition of a Permanent Establishment (PE). Paragraph 4 of Article 5 contains a list of exclusions i.e., activities, which will not constitute a PE.

The following activities are not regarded as PE:

(a)    the use of facilities solely for the purpose of storage, display, of goods or merchandise belonging to the enterprise;

(b)    the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display;

(c)    the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

(d)    the maintenance of a fixed place of business solely for the purpose of purchasing good or merchandise or of collecting information, for the enterprise;

(e)    the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary nature;

(f)    the maintenance of a fixed place of business solely for any combination of activities, men-tioned in sub-paragraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary nature.

It may be noted that in respect of activities mentioned in paragraph (a) and (b) above, the scope of the OECD Model Convention is wider than UN MC in that “the use of facilities or the maintenance of stock of goods or merchandise for the purpose of delivery” would not constitute a PE. In the case of UN MC, delivery of goods or merchandise would constitute PE.

The OECD Model Commentary makes it clear that a fundamental feature of these activities is that they are all of a preparatory or auxiliary nature.

3.1    Meaning of preparatory or auxiliary services

Paragraph 4 of Article 5 on PE, in both the MCs, list activities which are excluded from the definition of PE. Besides specific exclusions (e.g., maintenance of stock of goods, facilities used for storage, display, fixed place of business solely for the purpose of purchasing goods or collecting information, etc.), clauses (e) and (f) of the said paragraph provide that the maintenance of a fixed place of business would not result in PE, if the activities of the enterprise are of a preparatory or auxiliary in nature. However, which of the activities would constitute of preparatory or auxiliary in nature and which would not, is difficult to determine at times for the reason that it would also depend upon the facts and circumstances of each case.

The main and indeed, the decisive criterion would be whether or not the activity of the fixed place of business by itself forms an essential and significant part of the activity of the enterprise, as a whole. If the activities of the fixed place are identical with the general purpose and object of its parent, then such activities cannot be regarded as preparatory or auxiliary in nature, e.g., the parent company is engaged in the business of supply of auto components and its fixed base, too, is the engaged in supply of auto components, then such activity of PE cannot be regarded as of auxiliary or preparatory in nature.

It would be worth noting that preparatory or auxiliary activities, which are exclusively for the enterprise by itself, would not result in PE. “If the same are rendered for a consideration and for third parties, then they may constitute the enterprise’s main object and the corresponding facilities may well be PE.” (Klaus Vogel on Double Taxation Conventions — M. No. 116 a — page 321)

The AAR in the case of UAE Exchange ascertained the nature of activities carried on by Indian liaison office by interpreting the term ‘auxiliary’ as used in common English usage, meaning, “helping, assisting or supporting the main activity.”

The Special Bench of the Delhi Tribunal in case of Motorola Inc. v. DCIT, Non-Resident Circle, 95 ITD 269 (Delhi Tribunal), held that the activities carried on by the employees of Motorola, Sweden, through the office of its Indian subsidiary were of preparatory or auxiliary in nature. These activities were carried on prior to commencement of business in India. Activities included such as market survey, industry analysis, economy evaluation, furnishing of product information, ensuring distributorship and their warranty obligations, ensuring technical presentations to potential users, development of market opportunities, providing services and support information, procurement of raw materials for Motorola, accounting and finance services, etc. for a period of one year.

If the activities of the LO are confined to preparatory or auxiliary, then it would not result in PE. Fundamentally, as per FEMA provisions LOs are not supposed to cross the threshold of preparatory or auxiliary activities as they are barred from carrying on any activities of commercial or industrial in nature. They are supposed to restrict themselves to the activities of liaisoning, dissemination of information, export promotion, etc. etc. However, in actual practice when it is found that LOs have crossed this limit, they have been held to be PE in India.

3.2  Can LO be regarded as PE?

Let us examine the various case laws on this aspect:

Cases where it was held not to be PE

3.2.1 In IAC v. Mitsui and Co. Ltd., (1991) 39 ITD 59, Special Bench, ITAT Delhi, has held that the LO cannot be regarded as a PE and a similar view was taken by the Delhi Bench in BKI/Ham V. O. F. v. Additional CIT, (2001) 70 TTJ 480.

3.2.2 In the case of Western Union Financial Services Inc. the Delhi Tribunal held that since the assessee did not have an outlet of its own in India, there was no fixed place of business and therefore there is no PE. It further held that installation of software, use of credit cards or display of names of the Principal by its agents in India does not give rise to a PE.

3.2.3 In the case of K. T. Corporation v. DIT, [23 DTR 361 (AAR) (2009) 180 Taxman 395 (Bom.)], the AAR held that as per provisions of Article 5(4)(d) [Article 5(4)(d) of the India-Korea Tax Treaty reported at 165 ITR (St). 191], collecting information for an enterprise by an LO located abroad is considered an auxiliary activity, unless the collecting of information is the primary purpose of the enterprise. Accordingly, preparation of reports dealing with India’s market scenario in mobile as well as broadband segments, etc., which were in the nature of ‘aid’ or ‘support’ of the main activities, were held to be preparatory and auxiliary activities. While holding on to the facts stated by the applicant that there is no PE, the AAR added a caveat that if the activities of the LO are enlarged beyond the parameters fixed by RBI or if the Department lays its hands on any concrete materials which substantially impact on the veracity of the applicant’s version of facts, it is open for the Department to take appropriate steps under law. Even though the last observations by the AAR were not warranted, it shows that activities of LO are always under close radar of the Income-tax Department.

Cases where it was held to be a PE

3.2.4 In the case of Nokia Networks OY (NOY) (supra) its subsidiary was held to be a PE in India because Nokia virtually projected itself in India through Nokia India Private Ltd. (NPL), as NOY was able to monitor its activities in India through NPL.

3.2.5 The AAR in the UAE Exchange Centre LLC, (2004) 268 ITR 09, held that the Indian LO is the PE of the UAE Enterprise. On the facts of the case, the AAR held that an activity of printing cheques/drafts in India and dispatching the same to the addresses of the beneficiaries by the Indian LO could not be said to be of an auxiliary nature.

3.2.6 In case of Columbia Sportswear Company, (2011) 337 ITR 0407 (AAR), the AAR held that “if an establishment satisfies provisions of Article 5.1 of a DTAA which defines a PE to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on, there is no need to go into the question whether the establishment cannot be brought within the inclusive part of the definition in sub-article 2. Once the definition in Article 5.1 is satisfied, the only inquiry to be undertaken is to see whether it is one of those establishments excluded by sub-article 3”. The AAR held that the LO constituted a fixed place of business within the meaning of Article 5.1 of the India-US DTAA and considering the nature of activities of the LO, it held that the LO would constitute PE in India. The AAR observed that the LO was practically involved in all the activities connected with the business of the applicant, except the actual sale of the products outside the country.

3.2.7 The Karnataka High Court in case of Jebon Corporation India, [2011 TII 15 HC-Kar-Intl], on the facts of the case held that the LO was carrying on the commercial activities of procuring purchase orders, identifying the buyers, negotiating and agreeing on the price, ensuring material dispatch to the customers, following up payments from customers and also offering after sales support. Consequently, the High Court held that the Indian LO is a PE under Article 5 of the India-Korea tax treaty. Some of the interesting observations made by the High Court are as follows :

(i)    The mere fact that buyers placed orders and made payments directly to HO and the HO directly sent goods to the buyers is not sufficient to establish that there is no PE;

(ii)    When the facts clearly showed that the LO was engaged in trading activity and therefore entering into business transactions/contracts, the mere fact of them being not signed by the LO would not absolve it of liability;

(iii)    Just because RBI did not take any action against the LO for carrying on the alleged commercial activities, would not render the findings, recorded by the Income-tax Authorities under the Act, as erroneous or illegal.

4.0    Conclusion
The activities of LOs are under Income-tax Department’s scanner for quite some time now. Even though RBI permits restricted activities for the LO, in actual practice, it has been found that some LOs are crossing the threshold of liaisoning and carries on full-fledged business activities in India.

RBI generally, relies on the CA certificate about the nature of activities carried on by LOs in India. Thus, a CA certifying that LO’s activities are confined to what is permitted by RBI assumes colossal responsibility. In case of Jebon Corporation (where it was found that the LO was engaged in the trading activity), the Karnataka High Court observed that the facts revealed on investigation will be forwarded to the RBI for appropriate action in accordance with law. In the light of these developments, we, CAs, need to be more vigilant and careful in issuing certificates about the activities of LOs. The clients should be advised to convert their LO in to a branch/subsidiary, if so warranted, as undertaking non-permitted activities would result in penal consequences, in a addition to tax implications, in India.

Refund to exporters on specified services used for export of goods — Notification No. 52/2011-ST, dated 30-12-2011.

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This Notification supersedes Notification No. 17/2009- ST, dated 6th July, 2009 w.e.f. 3-1-2012. Vide this Notification exemption has been granted to specified taxable services received by an exporter of goods and used for export of goods, subject to the conditions and procedure laid down in the said Notification.

The exemption shall be claimed either on the basis of rates specified in the Schedule to the Notification or on the basis of documents. The procedure for claiming refund under both the options has been prescribed.

The exemption by way of refund shall be available only where no CENVAT credit of service tax paid on the specified taxable services used for export of the said goods has been taken under the CENVAT Credit Rules, 2004.

The exemption shall not be available to a Unit or Developer of a Special Economic Zone.

Where any refund of service tax paid on specified taxable service utilised for export of said goods has been allowed to an exporter, but the sale proceeds in respect of export of goods are not received by or on behalf of the exporter, in India, within the period allowed by the RBI including any extension of such period, such refund shall be deemed never to have been allowed and recovered, as if it is a recovery of service tax erroneously refunded.

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Deferment of Levy on Service provided by Government Railways — Notification No. 49/2011, 50/2011 & 51/2011-ST, all dated 30-12-2011.

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Vide above Notifications levy of service tax on taxable services provided by Government Railways to any person in relation to transport of goods by rail [Section 65(105)(zzzp)] has been deferred the to 1st April, 2012.
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Clarification on levy of Service Tax on distributors/ sub-distributors of films and exhibitors of movie — Circular No. 148/17/2011-ST, dated 13-12-2011.

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The Central Government in the light of recent changes in the law and CBEC Circular No. 109/03/2009, dated 23-2-2009 has clarified the taxability of profit/ revenue-sharing arrangement in case of distribution of films and exhibition of movies in the following manner: 1. Where the arrangement between the distributor/sub-distributor/area distributor and the movie exhibitor/theatre-owner in exhibiting the film produced by the producer (the original copyright holder) is on principal-to-principal basis, service tax liability would be as under:

(a) If the movie is exhibited by the theatre-owner or exhibitor on his account — i.e., the copyrights are temporarily transferred — Service tax would be levied under copyright service to be provided by distributor or sub-distributor or area distributor or producer, etc., as the case may be.

(b) If the movie is exhibited on behalf of distributor or sub-distributor or area distributor or producer, etc. i.e., no copyrights are temporarily transferred — Service tax would be levied under business support service/renting of immovable property service, as the case may be, to be provided by theatre owner or exhibitor.

2. Where the arrangement between the distributor/ sub-distributor/area distributor and the movie exhibitor/theatre-owner is on unincorporated partnership/ joint collaboration basis, services provided by each of the persons i.e., the ‘new entity’/theatreowner or exhibitor/distributor or sub-distributor or area distributor or producer, etc. as the case may be, would be liable to service tax based on the nature of transaction under applicable service head.

It is further clarified that the arrangements mentioned in this Circular will apply mutatis mutandis to similar situations across all the services taxable under the Finance Act, 1994.

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MVAT Rules amended — Notification No. VAT-1511/CR-138/Taxation-l, dated 5-12-2011.

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By this Notification, MVAT Rules, 2005 have been amended on the following aspects to be effective from 1-4-2012:

(i) Deemed dealer

Deemed dealers whose tax liability during the previous year was Rs.1 crore or less subject to permission of joint commissioner were filing yearly return. Now they will be required to upload returns on six-monthly basis within 30 days from the end of the six-monthly period and required to furnish details for the entire year in Annexure J1, J2 that is party-wise sales & purchases and Annexure C & D that is TDS Certificates received and issued, within 90 days from the end of the financial year along with 2nd half-yearly return.

(ii) Dealers not covered under Mvat Audit

Dealers not covered under Mvat audit are now required to furnish annual details in Annexure JI & J2 that is party-wise sales & purchase and Annexure G, H & I that is for declaration forms received and not received along with last monthly, quarterly or six-monthly returns within 90 days from the end of the financial year. These details are also required to be furnished for the first year of registration and last year, that is, year in which RC is cancelled where Mvat audit is not applicable.

All the dealers covered under these amendments will be required to make payment of tax within 21 days in case of monthly or quarterly returns and within 30 days in case dealers are required to file returns on half-yearly basis.

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Electronic payment under the Professional Act, 1975 — Trade Circular 1 of 2012, dated 11-1-2012.

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From 1st January, 2012 Professional Tax Registration certificate holder and professional tax enrolment certificate holder can make the payment of professional tax electronically, at their option. For making payment on website of the Department PTRC holder should first get enrolled for professional tax e-services, no such requirement for PTEC payment. Detailed instructions are given in the Circular.

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(2011) 132 ITD 338 (Del.) Innovative Steels Pvt. Ltd vs. ITO A.Y. : 2006-07 Dated: 31-05-2011

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Section 115WC – The word ‘construction’ used in the section will have to be given its ordinary meaning, and cannot be restricted to civil constitution.

Facts:
1. The assessee company was engaged in the business of manufacturing of specialised equipment of solid waste and a liquid waste treatment for industries.

2. The A.O was of the opinion that assessee is not engaged in the business of construction hence the benefit of 5% value of fringe benefit should not be given to the assessee. The CIT(A) upheld the order of the A.O.

3. Aggrieved the assessee filed an appeal to the Hon’ble ITAT.

Held:
1. The word used in section 115WC(2)(b) is ‘construction’ and not ‘civil construction’.

2. The word ‘construction’ is not defined in the Act. Hence, the ordinary meaning of the word construction shall be considered.

3. The dictionary meaning of the word construction and construct are:
Construction:
A bridge under construction building, erection, elevation, assembly, framework, manufacture, fabrication. Construct: Construct a housing estate/construct a bridge, build, erect, put up, set up, raise, elevate, establish, assemble, manufacture, fabricate, make.

4. Referring to the above definitions, it was clear that it refers to not only construction of a building but it also includes activities of assessee i.e manufacturing of specialised equipment which included fixation of some equipment to land and certain degree of civil construction.

5. Thus it was held, the assessee was said to be engaged in the business of construction and therefore covered by section 115WC(2)(b).

Note: Though the above decision relates to fringe benefit tax, it brings out an important difference between ‘construction’ and ‘civil construction’.

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Circular No. 3/2012, dated 12-6-2012 giving gist of the official amendments to the Finance Bill, 2012.

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Circular No. 3/2012, dated 12th June, 2012 giving gist of the official amendments to the Finance Bill, 2012 as reflected in the Finance Act, 2012 (Act No. 23 of 2012) which was enacted on 28th May, 2012

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Notification No. 20/2012, dated 12-6-2012 — DTAA between India and Nepal notified.

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The Double Tax Avoidance Agreement signed between Nepal and India on 27th November, 2011 has been notified to be entered into force on 16th March, 2012. The treaty shall apply from 1st April, 2013 in India.

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Notification No. 21/2012 [F. No. 142/10/2012- SO(TPL], dated 13-6-2012.

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The following specified payments can be made after 1st July, 2012 without deduction of tax at source u/s.194J of the Act: Payment by a person for acquisition of software from another resident person, where —

 (i) the software is acquired in a subsequent transfer and the transferor has transferred the software without any modification,

(ii) tax has been deducted — (a) u/s.194J on payment for any previous transfer of such software; or (b) u/s.195 on payment for any previous transfer of such software from a non-resident, and

(iii) the transferee obtains a declaration from the transferor that the tax has been deducted either under sub-clause (a) or (b) of clause (ii) along with the Permanent Account Number of the transferor.

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CBDT has issued a clarification [F. No. 500/111/2009-FTD-1(Pt.)], dated 29-5-2012.

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The CBDT has issued a clarification [F. No. 500/111/2009-FTD-1(Pt.)], dated 29-5-2012 stating that in case where assessment proceedings have been completed u/s.143(3) of the Act, before the first day of April, 2012, and no notice for reassessment has been issued prior to that date, then such cases shall not be reopened u/s.147/148 of the Act on account of the clarificatory amendments in section 2(14), section 2(47), section 9 and section 195 introduced by the Finance Act, 2012. However, assessment or any other order which stand validated due to the said clarificatory amendments in the Finance Act 2012 would of course be enforced. Copy of the letter is available on www.bcasonline. org.

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India has entered into a Tax Information Exchange Agreement (TIEA) with Bahrain for sharing of information.

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India has entered into a Tax Information Exchange Agreement (TIEA) with Bahrain for sharing of information, including banking information between the tax authorities of the two countries. The Agreement was signed on 1st June, 2012.

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Notification No. 19/2012 (F. No. 506/69/81- FTD.1), dated 24-5-2012.

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Amendments to Article 11 of India-Japan Double Tax Avoidance Agreement have been notified. The amendment is effective from 1st April, 2012.

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TDS UNDER SERVICE TAX?

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A proposal of the Government:

A Study Group was appointed by the Government to examine the feasibility of introducing TDS provisions under service tax law. Comments were invited on the following aspects from the affected parties:
  • The feasibility of the introduction of TDS as a method of tax collection in service tax.
  • Whether this method should be applied uniformly to all taxable services or to certain specific/sensitive taxable services, and if only selectively, then to which categories of service providers/services receivers.
  • The extent to which service tax collections would be augmented by adopting the TDS method of tax collection.
  • The modalities of implementation of TDS method of tax collection.
  • The changes necessary in the present legal and administrative framework, to adopt the TDS method of service tax collection.
Government’s rationale behind the proposal:
Some of the reasons, for the introduction of TDS under service tax cited by the Government are as under:
  • Despite the fact that there are 14 lakh registered service providers, only 6 lakh service providers are paying tax.
  • According to a study carried out by the Directorate General of Central Excise Intelligence, there is a 70% increase in the service tax evasion in the last two years; and
  • TDS system followed under Income tax is found to be a very efficient way of collecting tax. Hence, the same needs to be replicated for service tax to achieve efficient tax collections.

TDS provisions under service tax neither desirable nor administratively feasible:
It would neither be desirable to introduce TDS provisions under the service tax law, nor would it be administratively feasible to do so for various reasons set out hereafter.
No justification for introducing TDS provisions after introduction of Point of Taxation Rules, 2011 (POT Rules):
Hitherto, service providers had to deposit the service tax only after receipt of payment from the service receiver. As a result, the payment of service tax to the Government was postponed until and contingent upon the actual receipt of payment from the service receiver. However, after the introduction of POT Rules, the trigger for payment of service tax has shifted to the point of taxation as specified in the POT Rules, irrespective of realisation from clients. Thus, once an invoice is issued, the service provider has to deposit the tax with the Government by the 5th day of the following month/quarter, whether he receives the payment from the service receiver or not.
It is pertinent to note that despite the introduction of POT Rules, unlike income tax, there are no provisions under the service tax law permitting adjustments in case of bad debts (either fully or partly). This has an adverse impact on the service providers who have to bear the burden of tax in addition to the loss caused due to non-realisation.
Further, in cases where advances are received by a service provider, service tax is to be collected at the point of receipt of advance. This position continues even after introduction of POT Rules.
Therefore, there is no postponement in payment of tax to the Government in the existing structure. However, this appears to be one of the principal objectives behind the proposal.
As a matter of fact, the proposed introduction of TDS provisions would only bring about unnecessary complications and hardships for service providers as well as service receivers without any corresponding increase in Government collections.
Adequate powers under the service tax law to enforce recovery:
Under the present service tax law, there are stringent provisions to penalise tax evasions, delay in payment of tax to Government by a service provider and recovery of tax. Some of the more important provisions are as under:

Provision under service tax law

Section

 

of
the Finance

 

Act,
1994

 

 

Recovery of service tax not levied/

 

paid or short-levied/short-paid

 

or erroneously refunded.

73

 

 

Service tax collected
from any

 

person required to be deposited

 

with the Government.

73A

 

 

Interest on amount collected

 

in excess.

73B

 

 

Provisional
attachment to protect

 

revenue in certain cases.

73C

 

 

Interest on delayed
payment of

 

service tax to Government

 

at 18% p.a.

75

 

 

Penalty for failure to pay service

 

tax.

76

Penalty for suppressing value of

 

taxable services.

78

 

 

Power to search premises.

82

 

 

Recovery of any
amount due to

 

Government.

87

 

 

Prosecution provisions.

89

 

 

Further, the service tax registration (which is PAN-based) and filing of returns in all cases is now required to be carried out electronically. This is introduced essentially to bring efficiency in tax administration under service tax.

In light of the foregoing, there is no justification whatsoever for introduction of TDS provisions under service tax, on the ground that there is a widespread evasion. Instead, efforts ought to be made by the Government to bring efficiency in tax administration and strengthen intelligence machinery.

TDS provisions have no place in the context of a Value Added Tax (VAT) such as service tax:

Service tax, like VAT levied on the sale of goods, is an indirect tax, meaning that the ultimate burden of the tax is to be borne by the consumer, i.e., the service receiver. This fact marks a crucial distinction between the service tax and income tax, which is the only tax under which TDS provisions are applicable. In the case of other indirect taxes such as Central Excise, VAT, etc., TDS provisions are not generally prevalent.

However, under some of the State VAT laws in India, there are TDS provisions in regard to payments made to contractors for works contracts. These provisions are essentially made, considering the fact that under the peculiar nature of the business, sub-contractors are existing in large numbers in the unorganised sector and are scattered and widespread across the country.

In the context of service tax, it has been clarified by the Government and it is reasonably settled that sub-contracted service providers are to be treated as independent service providers and their taxability determined accordingly. Further, with CENVAT credit mechanism in place, service tax charged by a sub -contractor can be availed as credit by the main contractor subject to satisfaction of conditions. Hence, large section of sub-contractors are now charging service tax to avoid possibilities of demands in future with interest and penalties.

Since service tax is an indirect tax, the ultimate burden is borne by the service receiver. If the liability of depositing the same is also imposed on service receivers, there will be a dual burden of compliance on trade and industry, in that both service receivers and service providers will have to face the burden of procedural formalities in relation to service tax simultaneously for the same transactions.

Especially in those cases in which the price is cum duty, service receivers will also be hard put to arrive at the stand -alone value of the services for the purposes of complying with TDS provisions, which will result in additional administrative difficulties.

Furthermore, since service tax is leviable at each level of value addition, this will result in a duplication of work for the Government and the assessees.

International practices:
The VAT/GST regimes in most progressive countries worldwide do not contain TDS provisions. Given that the transition to GST is in the offing, the Indian indirect tax regime should be aligned as far as possible with international practices which have been developed over decades of experience. On this ground, introduction of TDS provisions under service tax does not appear to be meaningful.

CENVAT Scheme is a self-policing mechanism:
In the context of service tax, it is wholly unnecessary to introduce TDS, considering that in view of the CENVAT credit mechanism in place, the payment of service tax has a self-policing mechanism. There is a clear and established paper trail required to be maintained for each and every transaction and it is already in the interest of service providers as well as service receivers to charge the service tax as applicable and have it paid to the Govern-ment so that credit can be availed.

There are stringent provisions of interest, penalties and prosecution for wrong availment/utilisation of CENVAT credit. Further there is regular scrutiny/ audits by the Service Tax Department as well. Hence, mechanism itself ensures that onus is clearly on the persons availing credits to establish entitlement/correctness should the need arise.

Under this backdrop, introduction of TDS system under service tax is totally unjustified and unwarranted.

TDS provisions with a CENVAT credit mechanism will result in huge accumulations of credit:

As TDS will be calculated on gross turnover, this will create an additional pool of tax credit for service providers. As the actual tax payable by a service provider is to the extent of value addition made by him which is ensured by the CENVAT credit mechanism, which permits a service provider to avail credit on his input side and utilise the credit to pay tax on his output liability.

TDS provisions will result in accumulation of huge credits and consequent blockage of funds. This will increase costs of businesses and hence, have adverse impact on the trade and industry generally.

Refunds:
Presently, there is a threshold limit of 10 lakh under service tax. This is basically done to ensure that efforts of tax administration are focussed on high tax potential taxpayers. If TDS provisions are introduced, service providers availing threshold exemption would get covered in the tax net. They would have to get registered to claim refunds. This would adversely impact small-scale services sector.

TDS system would result in a service provider availing credit of taxes paid on inputs/input services as well as TDS credits. In cases where the value addition is low, depending on the TDS rate, it would result in large refund claims by service providers.

After the introduction of POT Rules as stated earlier, since the entire tax would have already been paid before the TDS is made, the same would lead to anomalous situations and service providers will have to seek for refunds in large number of cases.

As seen in the case of income tax, claiming refunds from the Tax Department invariably creates hardships/difficulties to taxpayers. If TDS provisions are introduced under service tax, service providers will have to face severe hardships in getting their refunds, which involves cumbersome procedural compliances. This would again result in blockage of funds and increase business costs.

Administrative difficulties, procedural compliances and increase in transaction costs:

Many service recipients are individuals/households/ small businesses who are not conversant with tax compliance. Introduction of TDS provisions will result in unnecessary administrative difficulties, especially for such service recipients, without any increase in revenue to the Government.

As seen in the case of income tax, assessees are required to file TDS returns, thereby requiring each business to make the deductions and deposit the tax, as well as complete other related formalities. Even thereafter, assessees often face difficulties in terms of objections raised for technical infractions. If TDS provisions are introduced under service tax law, all these issues would come into play for service receivers as well.

Hence, TDS provisions would substantially increase additional compliances for all the three parties i.e., service providers, service recipients and the tax authorities without any benefit as is being perceived by the Government.

Further, introduction of TDS provisions under service tax would increase transaction costs of conducting business.

Potential for tax evasion:

Given the extent of paperwork that would be generated due to the introduction of TDS, administrative difficulties may pose a risk to the revenue, as there is possibility of evasion of service tax through false TDS credits being claimed. These risks could substantially outweigh the benefits of speedy tax recovery as perceived by the Government.

Additional litigations:

If TDS provisions are introduced, both service providers and service recipients will be required to analyse whether the service rendered is a taxable service, classification thereof, etc. This will result in multiple litigations which will increase costs for businesses and for the Revenue.

Reverse-charge mechanism:

There are provisions under the present service tax law, wherein the service recipient/person making the payment is made liable to comply service tax provisions instead of the service provider. The aforesaid provisions are existing in the following cases:

  •     All instances of services provided from outside India.
  •    Commission payments to agents by insurance companies.
  •    Specified persons making payment to a Goods Transport Agency (GTA).
  •    Mutual fund or asset management company making payments to mutual fund distributors or agent.
  •     Payments made by body corporate of firms availing sponsorship service.

These provisions were specifically introduced for GTA, keeping in mind the high potential of tax evasion, inasmuch as the said services providers exist in large numbers in the unorganised sector across the country.

Compared to TDS system, reverse-charge mechanism is an easier system to administer inasmuch as under reverse charge only the service receiver is liable for tax compliances, whereas under TDS system both the service providers as well as service receivers would be saddled with compliances and paperwork associated therewith.

Since, reverse charge mechanism is already in place under the present service tax law, instead of introducing TDS provisions, it may be desirable to consider expansion in the scope of this mechanism in regard to services where tax evasion is apprehended by the Government.

Conclusion:

If TDS provisions are introduced under service tax, it would substantially increase compliance burdens at the end of service providers/service recipients, increase transactions costs, result in blockage of funds and generally have adverse impact on trade and industry without any benefit as perceived by the Government.

All trade and professional bodies need to collectively voice their protest, in case the Government decides to go ahead with the introduction of TDS provisions under service tax, either fully or partially.

The Finance Bill, 2012.

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The Finance Bill 2012, received the Presidential Assent on 28th May, 2012.

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Circular No. 2/2012 [F. No. 142-01-2012- SO(TPL)], dated 22-5-2012 regarding Explanatory notes to the provisions of the Finance Act, 2011.

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Copy of the Circular available on www.bcasonline. org

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Annual Statement to be filed by liaison offices — Notification No. 5/2012, dated 6-2-2012.

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The Finance Act, 2011 has directed all liaison offices to submit an annual statement to the Tax Department in the prescribed form and manner. The CBDT has inserted a new Rule 114DA vide Income-tax (2nd Amendment) Rules, 2012 wherein a Form 49C has been prescribed for filing such annual statement within 60 days from the end of the financial year. This Form needs to be verified by a CA or a person authorised by the non-resident to sign such form. It needs to be furnished electronically, digitally signed and the related rules shall be formed by the DGIT (Systems).

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Direct Tax Instruction No. 1/2012, dated 2-2- 2012 — F.No. 225/34/2011-ITA.II — Instructions for processing returns for A.Y. 2011-12 (reproduced).

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The issue of processing of returns for the A.Y. 2011- 12 and giving credit for TDS has been considered by the Board. In order to clear the backlog of returns, the following decisions have been taken:

(i) In all returns (ITR-1 to ITR-6) where the difference between the TDS claim and matching TDS amount reported in AS-26 data does not exceed Rs.1 lac, the TDS claim may be accepted without verification.

(ii) Where there is zero TDS matching, TDS credit shall be allowed only after due verification. However, in case of returns of ITR-1 and ITR-2, credit may be allowed in full, even if there is zero matching, if the total TDS claimed is Rs.5000 or lower.

(iii) Where there are TDS claims with invalid TAN, TDS credit for such claims are not to be allowed.

(iv) In all other cases, TDS credit shall be allowed after due verification.

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Notification No. 18/2012 (F. No. 142/5/2012- TPL), dated 23-5-2012 — Income-tax (6th Amendment) Rules, 2012 — Insertion of Rule 10AB.

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For the purpose of computation of arm’s length price, section 92C(1) of the Act provided for five methods and the sixth method was ‘such other method as may be prescribed by the Board’.

 Rule 10AB is inserted to provide the ‘other method’. Rule 10AB shall come into force with effect from 1st April, 2012 and shall apply to A.Y. 2012-13 and subsequent years.

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Akber Abdul Ali v. ACIT ITAT ‘B’ Bench, Mumbai Before J. Sudhakar Reddy (AM) and V. Durga Rao (JM) ITA No. 5538/Mum./2008 A.Y.: 2005-06. Decided on: 28-12-2011 Counsel for assessee/revenue: N. R. Agarwal/P. K. B. Menon

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Section 40(a)(ia) r.w. section 194A — Disallowance of interest for failure to deduct tax at source — Payment of disputed amount with interest as per the Court order — Interest paid without deduction of tax at source — Whether AO justified in disallowing the same — Held, No.

Facts:
The assessee was liable to pay the sum of Rs.68.54 lakh to one of its creditors. On account of his failure to pay, the suit for recovery was filed by the said creditor. The Court passed the decree settling the amount at Rs.55 lakh, which also included the sum of Rs.18.5 lakh towards interest.

In the return of income filed by the assessee, the amount paid by way of interest was claimed as deduction. Since the assessee had not deducted tax at source, the AO disallowed the claim u/s.40(a)(ia). The CIT(A) on appeal upheld the order of the AO.

Before the Tribunal, the assessee contended that the amount was paid in accordance with the decision of the High Court. The interest payable under the decree of the Court was a judgment debt, therefore, he was not obliged to deduct tax at source.

Held:

In view of the ratio laid down by the Bombay High Court in the case of Madhusudan Shrikrishna v. Emkay Exports, (188 Taxman 195), the Tribunal agreed with the assessee and held that the assessee had no obligation to deduct tax at source on the interest amount of Rs.18.5 lakh paid to the creditor.

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Direct Tax Instruction No. 4/2012, dated 25- 5-2012 — F. No. 225/34/2011-ITA.II — Instructions for processing of returns of A.Y. 2011-12 — Steps to clear backlog.

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The Board has decided to withdraw Instruction No. 01/2012 issued on 2nd February, 2012 on the above subject with immediate effect. The following decisions have been taken in this regard:

 (i) In all returns (ITR-1 to ITR-6), where the difference between the TDS claim and matching TDS amount reported in AS-26 data does not exceed Rs.5,000, the TDS claim may be accepted without verification.

(ii) Where there is zero TDS matching, TDS credit shall be allowed only after due verification.

(iii) Where there are TDS claims with invalid TAN, the TDS credit for such claims is not to be allowed.

(iv) In all other cases TDS credit shall be allowed after due verification.

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HV Transmissions Ltd. v. ITO ITAT ‘H’ Bench, Mumbai Before R. V. Easwar (President) and P. M. Jagtap (AM) ITA No. 2230/Mum./2010 A.Y.: 2001-02. Decided on : 7-10-2011 Counsel for assessee/revenue: Dinesh Vyas/ Goli Sriniwas Rao

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Section 147 — Even an assessment completed u/s.143(1) cannot be reopened unless there is fresh material

Facts:
The assessee company, engaged in the business of manufacturing heavy gear boxes, filed its return of income, on 31-10-2001, declaring a loss of Rs. 73,57,95,273. This return of income was processed u/s.143(1) on 28-1-2003. The assessee filed a revised return of income on 27-3-2003 declaring a loss of Rs.74,22,78,281 after revising its claim u/s.35DDA in respect of employee separation cost. The AO, from the balance sheet filed by the assessee along with its return of income observed that the assessee had incurred expenses towards ERP software amounting to Rs.95,14,000 and although 20% of the said expenses were only debited in P&L account, the entire amount of Rs.95,14,000 was claimed as a deduction in computation of total income. He, accordingly, entertained a belief that to this extent income has escaped assessment and the assessment was reopened by issuing a notice u/s.148 on 3-3- 2006.

In an order passed u/s.143(3) r.w.s. 147, the AO assessed the loss to be Rs.50,17,47,153 after making addition inter alia on account of disallowance of expenses incurred on ERP software treating the same as of capital nature. He also disallowed claim for depreciation at 100% in respect of pollution control and energy saving devices at 100% valued at Rs.29.27 crore holding that the same had been earlier used by sister concern of the assessee-company.

Aggrieved the assessee preferred an appeal to the CIT(A) challenging the validity of the said assessment and also the various additions/disallowances made therein. The CIT(A) upheld the validity of reassessment proceedings and also the addition on account of disallowance of expenses incurred on ERP software treating the same as capital in nature. He, however, allowed relief in respect of depreciation at the rate of 100% on pollution control and energy saving devices.

Aggrieved, the assessee preferred an appeal to the Tribunal challenging inter alia the validity of the assessment on the ground that initiation of reassessment proceedings was bad in law.

Held:
The Tribunal on perusal of the reasons recorded by the AO noted that there was no new material coming to the possession of the AO on the basis of which the assessment completed u/s.143(1) was reopened. The Tribunal also noted that in the case of Telco Dadaji Dhackjee Ltd. v. DCIT, (ITA No. 4613/ Mum./2005, dated 12th May, 2010) (Mum.) (TM), the Third Member, had relying on the decision of the Supreme Court in the case of CIT v. Kelvinator of India, (256 ITR 1) (SC), held that while resorting to section 147 even in a case where only an intimation had been issued u/s.143(1)(a), it is essential that the AO should have before him tangible material justifying his reason that income has escaped assessment. The Tribunal held that the TM decision of the Tribunal in the case of Telco Dadaji Dhackjee Ltd. (supra) is squarely applicable to the present case. Following this decision, it held that the initiation of reassessment proceedings by the AO itself was bad in law and reassessment completed in pursuance thereof is liable to be quashed being invalid.

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DCIT v. Pioneer Marbles & Interiors Pvt. Ltd. ITAT ‘A’ Bench, Kolkata Before Mahavir Singh (JM) and C. D. Rao (AM) ITA No. 1326/Kol./2011 A.Y.: 2008-09. Decided on: 17-2-2012 Counsel for revenue/assessee: Amitava Roy/ J. N. Gupta

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Section 271AAA — Immunity u/s.271AAA cannot be denied only because entire tax, along with interest, was not paid before filing of income-tax return or, for that purpose, before concluding the assessment proceedings.

Facts:
The assessee was subjected to search u/s.132 of the Act on 30-8-2007. During the course of the search, the assessee declared Rs.50,00,000 as undisclosed income. This sum was included in the return filed by the assessee after the search. The Assessing Officer (AO) initiated penalty proceedings while finalising the assessment u/s.143(3) on the ground that the assessee has not paid full taxes and interest on disclosure made u/s.132(4).

In the penalty proceedings, the assessee submitted that while filing the return of income due to an inadvertent error, the assessee had not computed interest u/s.234C, as a result self-assessment tax was underpaid by Rs.46,132 and this shortfall was paid within the time mentioned in notice of demand issued u/s.156 of the Act. This contention was rejected by the AO. He levied penalty u/s.271AAA.

Aggrieved the assessee preferred an appeal to the CIT(A) who deleted the penalty levied by the AO.

Aggrieved the Revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that under the scheme of section 271AAA there is a complete paradigm shift so far as penalty in respect of unaccounted income unearthed as a result of search operation carried out on or after 1st June, 2007 is concerned. Section 271AAA levies penalty @ 10% of undisclosed income. This levy, unlike section 271(1)(c), is without any reference to findings or presumptions of concealment of income or the findings or presumptions of furnishing of inaccurate particulars. S.s (2) grants immunity from levy of penalty u/ss (1), subject to satisfaction of conditions mentioned therein. While payment of taxes, along with interest, by the assessee is one of the conditions precedent for availing the immunity u/s.271AAA(2), there is no time limit set out for such payments by the assessee. Once a time limit for payment of tax and interest has not been set out by the statute, it cannot indeed be open to the AO to read such a time limit into the scheme of the section to infer one. The Tribunal held that there is no legally sustainable basis for the stand of the AO that in a situation in which due tax and interest has not been paid in full before filing of the relevant income-tax return, the assessee will not be eligible for immunity u/s.271AAA(2).

Section 271AAA does not require any subjective satisfaction of the AO to be arrived at during the assessment proceedings, and, therefore, the outer limit of payment before the conclusion of assessment proceedings will not come into play.

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Vijay Corporation v. ITO ITAT ‘F’ Bench, Mumbai Before N. V. Vasudevan (JM) and R. K. Panda (AM) ITA No. 1511/Mum./2010 A.Y.: 2005-06. Decided on : 20-1-2012 Counsel for assessee/revenue: Ashok J. Patil/ Shantam Bose

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Section 143(3), section 292B — Assessment order without AO’s signature is void. The omission to sign the order of assessment cannot be explained by relying on the provisions of section 292B of the Act.

Facts:

The assessment of total income of the assessee-firm was completed u/s.143(3) of the Act by making various additions. While the notice of demand, computation form, etc. attached with the assessment order were signed, the assessment order was not signed by the AO.

The assessee filed an appeal before the CIT(A) challenging the additions and also raised a ground that the order of assessment is not valid in law since the AO did not sign the same. On this objection the CIT(A) called for the remand report from the AO. The AO did not dispute the fact that the assessment order was not signed. The CIT(A) observed that the notice of demand, computation form, etc. attached along with the assessment order were signed and carried proper stamp and seal of the AO. He held that the omission in signing the order cannot invalidate the order and the irregularity is curable in terms of the provisions of section 292B of the Act.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The case of the assessee is squarely covered by the decision of the Apex Court in the case of Smt. Kilasho Devi Burman (219 ITR 214) (SC), in favour of the assessee. In the absence of a signed order of assessment, the assessment is invalid. The provisions of section 292B cannot come to the rescue of the Revenue. Provisions of section 143(3) contemplate that the AO shall pass an order of assessment in writing. The requirement of signature of the AO is therefore a legal requirement. The omission to sign the order of assessment cannot be explained by relying on the provisions of section 292B of the Act. Tax computation is a ministerial act as observed by the SC in the case of Kalyankumar Ray v. CIT, (191 ITR 634) (SC) and can be done by the office of the AO if there are indications given in the order of assessment. But the notice of demand signed by the office of the AO without the existence of a duly signed order of assessment by the AO cannot be said to be a omission which was sought to be covered by the provisions of section 292B of the Act. If such a course is permitted to be followed, then that would amount to delegation of powers conferred on the AO by the Act. Delegation of powers of the AO u/s.143(3) of the Act is not the intent and purpose of the Act. An unsigned order of assessment cannot be said to be in substance and effect in conformity with or according to the intent and purpose of the Act. The Tribunal held the order of assessment to be invalid.

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Acounting of Foreign Currency Fluctuations

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This case study is to consider the appropriate accounting of forex fluctuations arising from the various transactions in USD and Euros and the forward contracts entered into by a company and the auditors verification process for the same.

Facts
Force India Ltd. (FIL) is a public company having two divisions:

(a) Manufacturing Division where high-tech products are manufactured for the IT sector. This division has two plants employing more than 500 employees. Exports constitute more than 50% earnings for this division. Most of the manufacturing equipment required for the two plants are imported;

(b) ITES Division where medical transcription and medical billing services are rendered. This division is spread over three locations and employs more than 700 employees. The entire billing of this division (on monthly basis) is to customers located outside India and in most cases, there are long-term contracts entered into with these customers.

Transactions of imports/exports of the manufacturing division are predominantly denominated in USD, whereas for the ITES division entirely denominated in Euros.

In view of the multi-currency exposure, the recent volatility in the exchange rates and since the CFO of FIL had a deep understanding of the forex markets, FIL has entered into the following contracts:

(i) Forward contracts for USD for the net exposure of the manufacturing division for the next 18 months. These contracts mature on a monthly basis and have no co-relation to the payments to be made for imports or export realisations.

(ii) Forward contracts for Euros for the receivables of the ITES division (including projected receivables for future billings). These contracts mature on a monthly basis.

(iii) Contracts at the MCX for USD.

FIL closes its financial statements on 31st December every year. As at 31st December 2011, the following information is available:

(a) Net realised and unrealised loss on forward contracts in USD Rs.15 lakh and Rs.160 lakh respectively;

(b) Net realised and unrealised loss of forward contracts in Euros Rs.5 lakh and Rs.75 lakh, respectively;

(c) MTM loss on open contracts at the MCX Rs.20 lakh.

Discuss the treatment of the aforesaid losses as well as the foreign currency exposures for receivables/ payables of FIL in the financial statements for the year 2011.

Discussion and solution

1. An entity can have exposure to foreign currency fluctuations in the following situations:

(a) Long-term or short-term forex loans taken for acquisition of fixed assets — whether from India or outside India;

(b) For sales/purchases in forex;

(c) On forward contracts entered into by the entity for hedging its exposure to forex fluctuations;

(d) On forward contracts entered into for speculative purposes.

2. In the given case, the company has exposure to foreign currency fluctuations on account of the following:

(a) Sales from manufacturing division and services rendered from ITES division;

(b) Imports of equipment for the manufacturing division;

(c) Forward contracts entered into in USD for the manufacturing division;

(d) Forward contracts entered into in Euros for the ITES division;

(e) Contracts entered into at MCX.

3. In each of the above cases, the company has realised gains/losses during the year 2011 as well as unrealised or mark-to-market (MTM) losses as at 31st December 2011.

4. Accounting treatment of forex exposures is primarily determined by the following:

(a) Accounting Standard (AS) 11 ‘The Effects of Changes in Foreign Exchange Rates’ as notified by the Companies (Accounting Standards) Rules, 2006;

(b) Amendments thereto by Notifications issued in March 2009, May 2011 and December 2011;

(c) Announcement by ICAI in March 2008 on ‘Accounting for Derivatives’.

(d) Accounting Standard 30 ‘Financial Instruments: Recognition and Measurement’ issued by ICAI. Though AS-30 is not yet notified under the Companies (Accounting Standards) Rules, 2006, the same can be voluntarily adopted so far as it does not conflict with any other notified accounting standard or any existing regulatory and statutory requirement.

5. The amendments to AS-11 as referred to in 4(b) above relate to accounting for forex fluctuations for loans (other than short-term) in foreign currency for acquisition fixed assets. In the given case study, there are no such loans obtained by FIL and hence these amendments are not applicable.

6. Monetary items are defined by para 7.11 of AS-11 as ‘money held and assets and liabilities to be received or paid in fixed or determinable amounts of money’. In the given case, debtors arising from export sales as well as rendering of services and creditors arising from imports would be monetary items since they would be received or paid in fixed or determinable amounts of money.

7. As per para 13 of AS-11, ‘exchange differences arising on the settlement of monetary items or on reporting an enterprise’s monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognised as income or as expenses in the period in which they arise’.

8. The above-referred para 13 of AS-11 would be applicable to foreign currency fluctuations as referred to in para 2(a) and 2(b) in the case above. All exchange differences on settlement of these items or on restatement at the year-end would thus need to be transferred to the statement of profit and loss.

9. Accounting treatment for forward contracts in foreign currency entered into by an entity is to be done as per paras 36 and 37 of AS-11. The said paras are as under:

“36. An enterprise may enter into a forward exchange contract or another financial instrument that is in substance a forward exchange contract, which is not intended for trading or speculation purposes, to establish the amount of the reporting currency required or available at the settlement date of a transaction. The premium or discount arising at the inception of such a forward exchange contract should be amortised as expense or income over the life of the contract. Exchange differences on such a contract should be recognised in the statement of profit and loss in the reporting period in which the exchange rates change. Any profit or loss arising on cancellation or renewal of such a forward exchange contract should be recognised as income or as expense for the period.

37. The risks associated with changes in exchange rates may be mitigated by entering into forward exchange contracts. Any premium or discount arising at the inception of a forward exchange contract is accounted for separately from the exchange differences on the forward exchange contract. The premium or discount that arises on entering into the contract is measured by the difference between the exchange rate at the date of the inception of the forward exchange contract and the forward rate specified in the contract. Exchange difference on a forward exchange contract is the difference between (a) the foreign currency amount of the contract translated at the exchange rate at the reporting date, or the settlement date where the transaction is settled during the reporting period, and (b) the same foreign currency amount translated at the latter of the date of inception of the forward exchange contract and the last reporting date.”

10.    As can be seen from the above, paras 36 and  37 of AS-11 prescribe the treatment for forward contracts which are backed by transactions as on the settlement date. In case, however, an entity has entered into contracts which are intended for trading or speculation, these paras would not be applicable. Thus, in all cases where paras 36 and 37 are applicable, the realised and/or unrealised profits/losses on such contracts would need to be recognised in the statement of profit and loss.

11.    Paras 38 and 39 of AS-11 further state as under:

“38. A gain or loss on a forward exchange contract to which paragraph 36 does not apply should be computed by multiplying the foreign currency amount of the forward exchange contract by the difference between the forward rate available at the reporting date for the remaining maturity of the contract and the contracted forward rate (or the forward rate last used to measure a gain or loss on that contract for an earlier period). The gain or loss so computed should be recognised in the statement of profit and loss for the period. The premium or discount on the forward exchange contract is not recognised separately.

39.    In recording a forward exchange contract intended for trading or speculation purposes, the premium or discount on the contract is ignored and at each balance sheet date, the value of the contract is marked to its current market value and the gain or loss on the contract is recognised.”

12.    As can be seen from the above, paras 38 and 39 of AS-11 prescribe the treatment for forward contracts which are intended for trading or speculation purpose. Thus, in all cases where paras 38 and 39 are applicable, the gain/loss computed in terms of these paras would need to be recognised in the statement of profit and loss.

13.    Besides contracts covered by paras 36, 37, 38 and 39 of AS-11, there could be other forward con-tracts which a company may enter into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction. Accounting treatment for such contracts is not covered by AS-11 since these are neither backed by actual transactions, nor intended for trading or speculation.

14.    Accounting of such contracts which are entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction would be covered by the ICAI announcement of March 2008. The said announcement lays down 2 options which can be followed by a company to account for such contracts. The 2 options are:

(a)    The mark-to-market (MTM) loss in case of such transactions should be provided for in the statement of profit and loss following the principle of prudence as enunciated in AS-1 ‘Disclosure of Accounting Policies’ — the gains arising on MTM, however, need not be provided;
(b)    Adopt AS-30 on a voluntary basis. Paras 80 to 113 of AS-30 provide for recognition and measurement of forward contracts intended for hedging and which are not covered by AS-11. These paras provide that in case the forward contracts fall within the definition of an ‘effective hedge’ within the meaning of AS-30, the MTM gains/losses on such contracts can be transferred to a ‘Hedging Reserve Account’ and carried forward in the balance sheet rather than recognise them in the statement of profit and loss account. To qualify as an ‘effective hedge’, however, there has to be close relationship between the date of maturity of the forward contract and the realisation of the underlying ‘hedged item’ i.e., the export receivables. There are also stringent documentation requirements laid down by AS-30 to prove the effectiveness of a hedge. On settlement or cancellation of these contracts, the eventual gains/losses would need to be transferred to the statement of profit and loss account.

15.    The ICAI announcement also mentions that in case one of the above 2 options is not followed and there is a MTM loss as at the year-end on such contracts, appropriate disclosures should be made by the auditor in his report. Since the announcement only mentions ‘appropriate disclosures’, such disclosures may not amount to a qualification in the report of the auditors.

16.    In the given case, in the situation mentioned in para 2(c) above, the company has entered into contracts to cover its exposure in USD for exports of goods and import of equipment. As per the information available, these contracts do not have any co-relation with the receivables/payables, but they are backed by actual transactions of exports/imports since these are entered into in respect of the net exposure of the manufacturing division. In such a case, the accounting treatment would need to be as per paras 36 and 37 of AS-11 (as discussed in paras 9 and 10 above). Thus, the realised as well as unrealised losses on such contracts would need to be accounted for in the statement of profit and loss.

17.    In the given case, in the situation mentioned in para 2(d) above, the company has entered into contracts to cover its exposure in Euros for exports of services. As per the information available, some of these contracts are backed by actual export receivables, but the remaining contracts are to cover future exports of services. Since these contracts mature on a monthly basis, there seems to be a co-relation between the receivables (as in most cases of export of ITES services the billings are on regular pre-determined intervals).

18.    The accounting treatment for contracts which are backed by receivables would be covered by para 36/37 of AS-11 and would be as discussed in para 16 above. However, in case of contracts which are for future billings, these would be in the nature of hedge for the foreign currency risk of a firm commitment or a highly probable forecast transaction. These would be accounted as per the ICAI announcement (as discussed in paras 14 and 15 above). Thus, FIL would have an option to either provide the MTM loss on such contracts or adopt AS-30 and transfer the loss to a ‘Hedging Reserve’.

19.    In the given case, in the situation mentioned in para 2(e) above, the company has entered into contracts at the MCX for USD. These contracts, though apparently, entered into for trading or speculative purposes, in this case, seem to be entered into for hedging the forex exposures of FIL. If the contracts were entered into for trading or specula-tive purposes, the accounting treatment would be as per paras 38/39 of AS-11. However the contracts seem to be backed by actual transactions of exports/imports. In such a case, the accounting treatment would be as per paras 36/37 of AS-11. In either case, the realised as well the unrealised (or MTM) losses would need to be transferred to the statement of profit and loss.

20.    The duty of the statutory auditor in the above case would be as under:

(a)    For situations in 2(a) and 2(b) above, verification whether appropriate closing rates are considered for determining the forex fluctuations and whether the same are accounted in the statement of profit and loss;

(b)    For situation mentioned in 2(c) above, verification of open forward contracts in USD and whether the same are clearly backed by actual transactions of exports/imports on a net basis;

(c)    For situation mentioned in 2(d) above:

(i)    Verification and adequate documentation whether AS-11 or AS-30 would be applicable to the forward contracts entered into;

(ii)    verification of open forward contracts in Euros and whether they constitute an ‘effective hedge’ vis-à-vis the receivables/ future receivables as envisaged by AS-30 and whether the company had adequate internal documentation at the time of entering into these contracts so as to constitute an ‘effective hedge’;

(d)    For situation mentioned in 2(e) above, verification of whether the contracts entered into at MCX were towards hedging of open exposures in USD or whether these were for trading or speculation;

(e)    Adequate audit documentation for all the above with reasoning and supporting to be kept as part of audit working papers.

Editor’s Note:
The case study is based on the case studies presented by the author at the Residential Refresher Course of BCA.

Section A : Audit Report isued under SA 700 (Revised ), SA 705 and SA 706

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Compiler’s Note

  • The Institute of Chartered Accountants of India (ICAI) had issued Standards on Auditing (SA): SA 700 (revised) Forming an Opinion and Reporting on Financial Statements,
  •  SA 705 Modifications to the Opinion in the Independent Auditor’s Report,
  • SA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

These standards were effective for audits of financial statements for periods beginning on or after 1st April, 2011. Following these 3 SAs would change the format in which audit reports were to be issued.

ICAI vide an announcement dated 17th April 2012, however, postponed the application of these standards to audits of financial statements for periods beginning on or after 1st April, 2012. The reason for the postponement as mentioned in the ICAI announcement was that regular CPE and other programmes to familiarise the practising members with the requirements of the new standards were necessary and only after ensuring adequate education, publicity and familiarisation, the said standards would be made mandatory.

Some companies, however, had already adopted financial statements before the date of the ICAI postponement and in such cases the statutory auditors had already issued their report in terms of SA 700, SA 705 and SA 706.

Given below is an audit report dated 13th April 2012, issued using the new SAs.

 Independent Auditor’s Report

To the Board of Directors of Infosys Limited (formerly Infosys Technologies Limited)

Report on the Financial Statements

We have audited the accompanying financial statements of Infosys Limited (‘the Company’), which comprise the Balance Sheet as at 31 March 2012, the Statement of Profit and Loss of the Company for the quarter and year then ended, the Cash Flow Statement of the Company for the year then ended and a summary of significant accounting policies and other explanatory information.

Management’s responsibility for the Financial Statements

Management is responsible for the preparation of these financial statements that give a true and fair view of the financial position, financial performance and cash flows of the Company in accordance with the Accounting Standards referred to in s.s (3C) of section 211 of the Companies Act, 1956 (‘the Act’). This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion and to the best of our information and according to the explanations given to us, the financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India:

(i) in the case of the Balance Sheet, of the state of affairs of the Company as at 31st March 2012;

(ii) in the case of the Statement of Profit and Loss, of the profit for the quarter and year ended on that date; and

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

Report on Other Legal and Regulatory Requirements As required by section 227(3) of the Act, 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 purpose of our audit;

 (b) in our opinion proper books of account as required by law have been kept by the Company so far as appears from our examination of those books;

(c) the Balance Sheet, Statement of Profit and Loss and Cash Flow Statement dealt with by this Report are in agreement with the books of account; and

(d) in our opinion, the Balance Sheet, Statement of Profit and Loss and Cash Flow Statement comply with the Accounting Standards referred to in s.s (3C) of section 211 of the Companies Act, 1956. n

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TDS: Assessee in default: Section 195(2). A.Y. 1987-88: Assessee entered into technical assistance agreement with a Japanese company: The assessee was granted no objection certificate u/s.195(2) permitting it to make payments without deduction of tax at source: The assessee could not be treated as assessee in default for not deducting tax at source.

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[CIT v. Swaraj Mazda Ltd., 245 CTR 521 (P&H)]

The assessee entered into a technical assistance agreement with a Japanese company. The assessee had filed an application u/s.195(2) and the requisite no objection certificate was granted permitting nondeduction of tax at source. However, the Assessing Officer held that the payments attracted provisions for deduction of tax at source and treated the assessee as assessee in default u/s.201(1) of the Act, for not deducting tax at source. The CIT(A) and the Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Punjab and Haryana High Court upheld the decision of the Tribunal and held as under:

“(i) The Tribunal has recorded a clear finding that the certificate granted u/s.195(2) was never cancelled u/s.195(4), in absence of which the assessee was not required to deduct tax at source and could not be treated as assessee in default. On the said finding, no question of law has been claimed or referred.

(ii) If the assessee was not required to deduct tax at source and could not be declared as assessee in default, question of whether the payment was in nature of fee for technical services or in nature of reimbursement for expenses incurred or whether DTAA overrides the provisions of the Act, need not be gone into.”

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