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Year: 2012

Hiring of Goods: Declared Service or Deemed Sale?

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Preliminary:

Under the negative list based taxation of services introduced from July 01, 2012, service is defined by section 65B(44) of the Finance Act, 1994 (the Act) to mean an activity carried out by a person for another for consideration and also includes declared services followed by a list of excluded transactions as follows:

? An activity resulting in transfer of title in goods or immovable property by way of sale, gift or in any other manner.

? Deemed sale of goods in terms of Article 366(29A) of the Constitution.

? A transaction only in money (other than activities relating to use of money or conversion of money for which consideration is charged).

? A transaction only in actionable claim.

? Employment contract for service by an employee to an employer.

? Fees payable to a court or tribunal.

In turn, “Declared Service” is defined by section 66E of the Act containing nine activities like renting of immovable property, construction of a complex or a building including one intended for sale to a buyer, temporary transfer of intellectual property rights, design development etc. of information technology software, agreeing to tolerate an act or refraining from an act, transferring goods by hiring without transferring right to use goods, hire purchase transactions, works contract and catering contracts. In this feature, one of the declared services described in subclause (f) of the said section 66E of the Act is discussed below.

Statutory provisions.

Section 66E:

“The following shall constitute declared services: namely:-

(a) ………………;
(b) ………………;

Explanation
(I) ……………….;
(A) …………..;
(B) …………..;
(C) …………..;
(II) ………………;
(c) …………………..;
(d) …………………..;
(e) ………………….;
(f) transfer of goods by way of hiring, leasing, licensing or in any manner without transfer of right to use such goods”

Activity of providing goods on hire:

While explaining the scope of this service, the Government in the Education Guide dated 20/06/2012 issued while introducing Negative List based taxation of services has provided as follows “Transfer of right to use goods is a well recognized constitutional and legal concept. Every transfer of goods on lease, licence or hiring basis, does not result in transfer of right to use goods”. In support of the above statement, it has cited Supreme Court in the case of State of Andhra Pradesh vs. Rashtriya Ispat Nigam Ltd. 2002 (126) STC 0114 (SC) which ruled in the context of the facts of that case that “Transfer of right of goods involves transfer of possession and effective control over such goods” and “Transfer of custody along with permission to use or enjoy such goods, per se does not lead to transfer of possession and effective control”.

The readers may note that the above ruling was pronounced in a case where the machinery belonging to Rashtriya Ispat Nigam Ltd. (the company) was provided to the contractor for the use in the project work of the company on the site of the company and the contractor merely was responsible for the custody of the same. However, the effective control and possession was not transferred to the contractor. The contractor was not free to make use of the machinery for the work other than that of the company. Therefore, the decision that effective control and possession was not passed on by the company to the contractor, is with reference to the facts of the case that the machinery belonged to the company and the contractor was merely retained to operate the same and responsible for its security as the machinery was placed in his custody only for the project work of the company.

It is, thus, true that transfer of right of goods involves transfer of possession and effective control. However, in the above case of Rashtriya Ispat Nigam Ltd. (supra) wherein the custody of machinery belonging to the company was merely provided to the contractor for operation of the same. The machinery was not ’hired’ to the contractor. This does not mean that in every transaction where goods belonging to owner or lessor are provided on hire, there does not occur ‘transfer’ of right to use such goods. The issue therefore is, when an equipment is provided on hire or on operating lease or when tangible or intangible goods are licensed to the licensee for the use of the licensee for a specific period whether “transfer of right to use” occurs and therefore the transaction is considered a “deemed sale” in terms of Article 366(29A) of the constitution, exigible to VAT under State laws and therefore specifically excluded from the definition of ‘service’ or whether there is no ‘transfer’ of right to use occurring and the person uses the goods without enjoying the right to use and therefore, the same is to be considered as a “declared service” as defined above and is subjected to service tax. The issue is complex and requires interpretation of the facts of each case. It has been dealt with by Courts time and again. A few such important decisions are discussed below:

Test laid down by the Supreme Court in BSNL:

The test laid down by the Hon. Supreme Court in the benchmark decision of Bharat Sanchar Nigam Ltd. vs. UOI 2006 (2) STR 161 (SC) provides direction in the matter. This test is recognised by the Government in the Education Guide for determining whether a transaction involves transfer of right to use goods. It has been followed by the Supreme Court and various High Courts. The test lays down as follows:

? There must be goods available for delivery.

? There must be consensus ad idem as to the identity of the goods.

? The transferee should have legal right to use the goods – consequently all legal consequences of such use including any permission or licenses required therefore should be available to the transferee.

? For the period during which the transferee has such legal right, it has to be the exclusion of the transferor. This is the necessary concomitant of the plain language of the statute viz. a “transfer of the right to use” and not merely a license to use the goods.

? Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.

The Education Guide also indicates that whether a transaction amounts to transfer of right or not cannot be determined with reference to a particular word or clause in the agreement laying down terms between the parties, but the agreement is required to be read as a whole to determine the nature of transaction.

Further, the Ministry in the Education Guide has also listed certain illustrations as under:

“6.6.2 Whether the transactions listed in column 1 of the table below involve transfer of right to use goods? (Refer Table on the next page)

The Education Guide states that the list in the Table is only illustrative to demonstrate how Courts have interpreted terms and conditions of various types of contracts to see if a transaction involves transfer of right to use goods. The nature of each transaction has to be examined in totality keeping in view all the terms and conditions of an agreement relating to such transaction.

If the above illustrations and the relied on decisions are perused in the light of the test laid down by the BSNL decision (supra), one may find that conclusions drawn by the Government may not satisfy the above test in the cases illustrated.

Admittedly, the issue has been contentious and there may be a thin line of divide between the facts of one case from the other and which may have led to reach different conclusions by Courts at different times. For instance and as against the decisions cited in the above table, viz. International Travel House and Ahuja Goods Agency ( supra), in the case of K. C. Behera vs. State of Orissa (1991) 83 STC 325 (Ori.), buses were hired by State Transport Corporation (STC). The bus was to be run for STC as per the agreement and under directions of an officer. Transaction of hiring was held as ‘sale’ within its extended meaning. Providing driver etc. notwithstanding, there was a transfer of right to use bus for consideration and effective control, general control and possession of the bus vested in STC. As against this, in Laxmi Audio Visual vs. Assistant Commissioner of Commercial Taxes 2001 (124) STC 426 (Kar), it was held that when there is only hiring of audio visual and multi media equipment, where the equipment is at the risk of the owner and possession and effective control remains with the owner, in such circumstances, it cannot be said that the customer has the right to use the equipment and therefore there was no deemed sale. Similarly, in the background of somewhat different facts, in the case of State of Orissa vs. Dredging Corporation of India Ltd. (2009) 25 VST 522 (Orissa H.C.), the company Dredging Corporation of India engaged its dredgers for dredging the floor of Paradeep Port under the Paradeep Port Trust (PPT) and did not disclose the income from dredging charges as ‘sale’ income. On perusal of the agreement between the parties, the Court held that transfer of right to use any goods is not a bailment, for had it been a bailment, the State would have no power to tax it. It is a sale by a fiction of law engrafted in Article 366(29A)(a) of the Constitution and resultantly in section 2(g)(iv) of the OST Act. So, what is determinative as to whether or not there was a transfer of right to use the chattel (the dredger) is the stipulation in the agreement between the Board and the appellant. The Court also observed:

“The agreement provides as follows:

……….. the Corporation hereby agrees to deploy its Cutter Auction Dredges MOT Dredge-II in the dredging work. There are stipulations to do a work, to dredge the sea-bed with men and machine deployed for the purpose, against a valuable consideration. So find it a works contract without transfer of property in goods in execution of such a contract.” The Court held, “there is nothing in the agreement to prove that there was a transfer of right to use the dredges.”

The readers may consider whether or not in the above case, the contract was that of service of dredging and “hiring of a dredge” was absent?

However, the facts in the case of Deepak Nath vs. ONGC (2010) 31 VST 337 (Gau) may also be examined. In this case, trucks, trailers, tankers and cranes were made available by owner to ONGC under contract in writing for operational charges as agreed to during the contract. It was held by the Division Bench that goods were made available 24 hours a day throughout the contract. Method and manner of using the goods was decided by ONGC, there is a transfer of right to use the goods even though the staff remained under his control.

The case of G.S. Lamba:

The recent decision of the Andhra Pradesh High Court in G.S. Lamba & Sons vs. State of Andhra Pradesh 2012-TIOL-49-HC-AP-CT appears most ex-haustive. It has considered the test laid down by the Apex Court in BSNL, all the significant decisions on the subject matter including those cited in the Education Guide to consider the short point of whether there exists a “transfer of the right to use” in transit mixers to M/s. Grasim Industries Ltd., when Ready Mix Concrete (RMC) manufactured by Grasim was to be transported under a contract by hiring specially designed transit mixers OR as it was pleaded by the petitioner, whether the contract amounted to “transportation service”. Under the contract in the case, the transit mixers are never transferred and effective control over running and using these vehicles as well as disciplinary con-trol over drivers remained with the contractor. The responsibility to obtain route permits, to take the risk or loss of transportation, to decide shifts of driver and vehicles, to maintain and upkeep the vehicles all vests in the contractor. After considering various decisions vis-à-vis facts of each case which interalia included Harbanslal vs. SO Haryana (1993) 88 STC 357 (P&H), 20th Century Finance (2000) 119 STC 182 (SC), IOC vs. Commissioner of Taxes (2009) 22 VST 70 (Gau), R P Kakoty vs. ONGC (2009) 22 VST 136 etc., the Hon. Court in Para 30 observed as under:

“30. From the judicial decisions, the settled essential requirement of a transaction for transfer of the right to use goods are:

(i)    it is not the transfer of the property in goods, but it is the right to use property in goods;

(ii)    Article 366(29A)(d) read with the latter part of the clause (29A) which uses the words, “and such transfer, delivery or supply … ” would show that the tax is not on the delivery of the goods used, but on the transfer of the right to use goods regardless of when or whether the goods are delivered for use subject to the condition that the goods should be in existence for use;

(iii)    in the transaction for the transfer of the right to use goods, delivery of goods is not a condition precedent, but the delivery of goods may be one of the elements of the transaction;

(iv)    the effective or general control does not mean always physical control and, even if the manner, method, modalities and the time of the use of goods is decided by the lessee or the customer, it would be under the effective or general control over the goods; and

(v)    the approvals, concessions, licences and permits in relation to goods would also be available to the user of goods, even if such licences or permits are in the name of owner (transferor) of the goods, and

(vi)    during the period of contract exclusive right to use goods along with permits, licences etc., vests in the lessee.”

Further, the Court followed the principles of interpretation of documents as listed below:

  •     Construe the document as a whole.

  •     To understand the meaning of a document or a part of it from documents itself.

  •     To give literal meaning to the words used in a document.

  •     In the event of intrinsic incongruities and inconsistencies flowing from the words and language used in the document, the intention would prevail over the words used. The intention of the parties has to be determined from the attending circumstances leading to the transaction.

(This principle is an exception to the first three principles. If the language used in the document is very clear, rights and obligation cannot be inferred by resorting to the fourth principle.)

Hon. A. P. High Court inter alia made the following observations while holding that the tax is not on use of goods, but on account of transfer of right to use of goods.

  •    In other words, the right to use goods arises only on the transfer of such right to use goods and that the transfer of right is the sine quo non for the right to use any goods. The contract involved provision of transportation service for shipping RMC by hiring specifically designed transit mixers. The effective control of running the mixers and the disciplinary control remained with the contractor agreeing to provide the above service.

  •     Article 366(29A)(d) would show that the tax is not on the delivery of goods used but on the transfer of the right to use goods regardless of when or whether goods are delivered for use. This is subject to the condition that goods are in existence for use. Delivery of goods is not a condition precedent, but one of the elements of the transaction.

  •     Effective control does not mean always physical control and even if the manner, method modalities and time of the use of goods is decided by the lessee, it would be under the general control over the goods.

  •     During the period of contract, exclusive right to use goods along with permits, licences etc. vests in the lessee. Although the drivers are appointed by the lessor, their roster fixed by them, licences, permits and insurance are taken in their names and they renew them. However, the product is delivered to customers of lessees.

  •     The entire use in the property in goods is to be exclusively utilised for a period under contract by lessee.

  •     The existence of goods is identified and transit mixers operate and are exclusively used for 42 months in the business of the lessee. In putting the property in transit mixers to economic use of the lessee, the lessors figure nowhere. It thus conclusively leads to the conclusion that lessor transferred the right to use the goods to the lessee.

Summing up:

On going through the above, whether a transaction is one of “deemed sale” involving transfer of right to use or is a “declared service” is a question which may not have a definite answer. Professionals may differ from each other. Nevertheless, the test provided in BSNL’s case (supra) appears decisive. Based on it, one may at least be able to answer whether a person can use goods without there being a transfer of ‘right’ to use the same to the exclusion of the lessor or owner on the lines discussed and analysed above in G.S. Lamba & Sons (supra) at least in case of common situations like hiring of vehicles. The Government appears to be tilted towards the view that in an ordinary and common contract of providing a vehicle on hire, the right to use is “not transferred”. In this scenario, it is likely that a law-compliant assessee under service tax law could be visited with recovery action under VAT law of the States and vice-versa. Whether one has to wait till implementation of GST to achieve a finality on the above remains to be seen. In the interim, uncertainty and long drawn litigations appear to be the only visible consequence at this point of time.

Notified rate of interest on Special Deposit Scheme for Non-Government Provident, Superannuation and Gratuity Funds.

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Notified rate of interest on Special Deposit Scheme for Non-Government Provident, Superannuation and Gratuity Funds would be 8.6% p.a. w.e.f. 1st December 2011 — Notification No. 5(4)-B(PD)/2011,
dated 13-3-2012.

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‘PAY Later’ option for payment of ROC fees.

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Through the newly introduced Pay Later payment option, one can create an e-challan and get SRN for any ROC Service instead of the regular Internet or credit card system. Payment thereafter has to be made via Internet banking facility or credit card offered by the Bank in which you hold the account. Service charges if any are borne by the user. The payment for the ROC e-challan is to be made before the e-challan expiry date. Once the time period is over, no payment can be made thereon and it is advisable to pay the amount as early as possible to avoid last-day issues. In case of successful payment the details shall be updated in respect of the SRN in the MCA system.

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In principle approval required for registration of Companies/LLP’s having one of their objects as to carry on the profession of Chartered Accountant, Cost Accountant, Architect, Company Secretary, etc.

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Vide General Circular No. 2/2012, dated 1st March 2012, the Ministry of Corporate Affairs has directed that for registration of Companies or LLP’s which have one of their objects to carry on the profession of Chartered Accountant, Cost Accountant, Architect, Company Secretary or Banking or Insurance, the Registrar of Companies will incorporate the same only on production of in-principle approval/ NOC from the concerned regulator/professional Institutes. Full version of the Circular is available on the website of the Ministry of Corporate Affairs www.mca.gov.in
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Extension of time for filing PAN details for DIN (Allotment of Director’s Identification) under Companies Act, 1956.

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The Ministry of Corporate Affairs vide General Circular No. 4/2012, dated 9th March 2012 has extended the time for filing Form DIN-4 by DIN holders for furnishing PAN and to update PAN details to 30-4- 2012. Full version of the Circular is available on the website of the Ministry of Corporate Affairs www. mca.gov.in

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A.P. (DIR Series) Circular No. 95, dated 21- 3-2012 —Foreign Exchange Management (Deposit) Regulations, 2000 — Credit to Non- Resident (External) Rupee Accounts.

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Presently, an individual resident in India is permitted borrow up to US $ 250,000 or its equivalent from her/his close relatives outside India. The repayment of the said loan has to be by way of credit to the NRO account of the lender.

This Circular now permits repayment of such loans to be credited to the NRE/Foreign Currency Non- Resident (Bank) [FCNR(B)] account of the lender provided the loan was extended by way of inward remittance in foreign exchange through normal banking channels or by debit to the NRE/FCNR(B) account of the lender and the lender is eligible to open NRE/ FCNR(B) account.

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Justice below poverty line – The Supreme Court laments that large sections of people do not have access to legal remedies

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Some appeals that reach the Supreme Court unravel such grim stories that judges find it difficult to write a decent finale.

The first one, New India Assurance vs Gopali, showed how insurance firms not only deny just compensation while raising technical objections but also tire dependents out through endless litigation. The road death in this case occurred in 1992. The victim’s aged parents, wife and five children had been seeking the insured amount since then. Looking into the case’s history, in which courts below had applied wrong formulae, the Supreme Court exercised its inherent, discretionary powers under Article 142 to award Rs 15 lakh. The tribunal had granted only Rs 2.55 lakh.

What is significant in this judgment is the insight into the judicial system through the eyes of the judges themselves. “If the claimants had been members of economically affluent sections of society,” the judges wrote, “they would have engaged an eminent advocate and taken steps for hearing of the matter at an early date, but they do not have the financial capacity and resources and energy to engage any advocate.”

How the cases of corporations and businessmen get priority over those of ordinary people is still a mystery to court watchers. Some time ago, there was a furore over bail granted to a renowned businessman late night on a Supreme Court holiday from a judge’s residence. In one instance, the then Chief Justice, who was in Argentina to attend a conference, constituted a bench to hear the bail application of a noted film star.

This is not the first time the judges wrote such jeremiad. In one judgment, D Navinchandra vs Union of India (1987), the then Chief Justice wrote: “My conscience protests to me that when thousands of remediless wrongs await in the queue for this court’s intervention and solution for justice, petitions at the behest of diamond and dry fruit exporters where large sums are involved should be admitted and disposed of by this court at such quick speed.”

The Supreme Court faces a dilemma. Though it has declared speedy trial as a fundamental right of every person under the Constitution, it has not quashed any trial on this ground. In an earlier judgment, it expressed its apprehension that if prolonged prosecution is made a ground for quashing the trial itself, many unscrupulous people might engineer delays to take advantage of this escape window.

The central government has argued that the court has no power to set a time limit for completion of criminal trials. This can be done only through legislation. The arguments are currently going on, and the court’s decision will affect thousands of people who are on bail or in jail awaiting trial. Though it is apparent that there is violation of a precious fundamental right, no clear remedy is in sight. Imagine, one of the first maxims taught in law colleges is: “Where there is a right, there is a remedy.”

(Source: Extracts from MJ Antony’s Column “Out of Court” in Business Standard dated 01-08-2012)

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CAs and insider trading — ‘guilty unles proven otherwise’ — deeming provisions

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Chartered Accountants (CAs) are in a unique
position of regularly being susceptible to the temptation of insider
trading. It is then not surprising that the strictest of deeming
provisions are made to ensure that they and others in similar position
are presumed guilty in many ways unless they can rebut the charge.

CAs
are often not just close to the Company, but they are close to and
involved with the accounts and finance of the Company where most
pricesensitive information arises first. They are thus close whether as
auditors, working in finance or accounts, advising as merchant bankers,
etc. Furthermore, the financial and analytical skills of CAs make them
more capable in visualising the implications of such information on the
market price than other insiders.

The Securities Appellate Tribunal in Shri E. Sudhir Reddy v. SEBI (decided on 16-12-2011) had observed:

“.
. . . The directors of the company or for that matter even
professionals like CAs and Advocates advising the company on its
business-related activities are privy to the performance of the company
and come in possession of information which is not in public domain.
Knowledge of such unpublished price-sensitive information in the hands
of persons connected to the company puts them in an advantageous
position over the ordinary shareholders and the general public. Such
information can be used to make gains by buying shares anticipating rise
in the price of the scrip or it can also be used to protect themselves
against losses by selling the shares before the price falls. Such
trading by the insider is not based on level playing field and is
detrimental to the interest of the ordinary shareholders of the company
and general public. It is with a view to curb such practices that
section 12A of the SEBI Act makes provisions for prohibiting insider
trading and the Board also framed the Insider Trading Regulations to
curb such practice . . . .”

Oscar Wilde has light-heartedly said
that “The only way to get rid of temptation is to yield to it”, but
yielding to it is what CAs need to strongly resist.

However, the
focus of this article is to highlight that, over a period of time, the
framework of law relating to insider trading has become so strict as to
become even stifling so much so that it may be advisable for CAs
connected with the Company in any manner to simply not carry out any
trades in the shares of that Company. This may be better than facing a
presumptive charge of insider trading and then having to find evidence
to prove it otherwise.

Let us try to understand some aspects of
the law relating to insider trading to understand the difficulties that
the regulator faces in controlling it, the deeming provisions — perhaps
these are regulatory ‘short-cuts’ — adopted by it and the implications
that insiders particularly CAs face.

Insider trading, loosely
and conceptually understood, is misuse of price-sensitive information by
insiders to trade and profit from it. A simple example is, say, the
Company receives a huge profitable contract. When this information is
published, the price of the shares would go up. But the insiders may buy
the shares of the Company before the information is published and,
after publishing the information when the price goes up, they may sell
the shares at the higher price.

While this is easily understood
conceptually, there are difficulties in proving in law whether there was
insider trading and whether a particular insider was guilty of such
offence. Consider some aspects the law will have to provide for
objectively.

(a) What is insider trading? How to define it? Whom
to cover? What type of transactions to cover? Whether and how to cover
sharing of information?

(b) Whether a particular person an insider? Is he in a position to have access to unpublished pricesensitive information?

(c) Whether particular information price-sensitive? Would it affect the market price if it were published?

(d) Was such price-sensitive information published?

(e)
Did the insider deal in the shares directly or indirectly? Did the
insider communicate the unpublished price-sensitive information (UPSI)?

(f) Were the dealings of the insider on the basis of such UPSI? And so on.

It
can be seen even by a cursory glance at such hurdles as also shown by
experience, that they can be difficult to cross and thus insider trading
may be difficult to prohibit and punish. The SEBI characteristically
has used a series of ‘deeming’ provisions whereby a certain state of
affairs is assumed to be true. Consider some examples of this:

(1) Several groups of persons are deemed to be insiders.
(2) Several types of information is deemed to be price-sensitive.
(3)
Information is deemed to be duly published only if it is published in a
particular manner. Even if widely known to the market otherwise, it is
not deemed to be published.
(4) Certain periods before an important
event are assumed to be such where UPSI exists. In effect, as we will
see later, trades during this period are assumed to be insider trading
at least in effect.
(5) Certain transactions of purchase/sale by
specified insiders are deemed to be insider trading and unlike other
deeming provisions such transactions are straight away banned.
(6)
Certain insiders in possession of inside information are deemed to have
acted on the basis of such insider information in carrying out their
trades and thus held guilty of insider trading unless they prove
otherwise.

And so on.

Some of the above
assumptions/deeming provisions are rebuttable in the sense that the
person concerned can demonstrate that, in reality, what is deemed is not
really so. In other cases, the deeming is absolute and non-rebuttable.

The
point being made is that there are numerous provisions whereby a trade
by a person would be deemed to be insider trading and this would be
absolutely held to be so or the person will have to demonstrate that
this is not so. To put it in different words, a person associated with a
listed company may often be held to be guilty unless he proves
otherwise.

It is worth elaborating some of the points made above.

An
insider is defined, in Regulation 2(e) of the SEBI (Prohibition of
Insider Trading) Regulations, 1992 (‘the Regulations’), to begin with,
to include a ‘connected person’. A connected person includes a director.
Thus an Independent Director is an insider. Further, a person holding a
position involving a professional relationship with the Company is a
connected person and thus auditors and lawyers would be connected
persons and thus insiders.

Then there are persons who are deemed to be connected persons. An example is of a merchant banker.

However,
the additional requirement for the offence of insider trading to happen
is that the connected person should reasonably be expected to have an
access to unpublished price-sensitive information. This is to be
determined obviously by evidence.

A transaction is insider trading if it is carried out when in possession of unpublished price-sensitive information (‘UPSI’). While UPSI is defined as information which if published is likely to materially affect the prices of securities of the company, several items of information are deemed to be UPSI. Examples are periodical financial results, any major expansion or execution of new projects, dividends, etc. For such deemed UPSI, the test whether it will materially affect the price of the company is not required to be fulfilled. This may sound strange for financial results where there are no significant changes, where the dividends more or less are as per the past record, etc. A trading on knowledge of such deemed UPSI is insider trading.

If the price-sensitive information is ‘published’, then of course it is no more UPSI. However, information is deemed to be published only if it is published by the Company and is specific in nature. It has been held that the fact that the information may be known to the markets is not generally a valid defence that it is published.

The deeming of certain transactions has been carried to an extreme whereby certain transactions by specified persons in certain situation are straightaway banned clearly on the presumption that these are transactions of insider trading or too near to them.

For example, the concept of trading window is introduced which can be open or closed. It is generally closed in anticipation of certain price-sensitive information being compiled or announced. When it is closed, the employees/directors of the Company are not permitted to trade in the securities of the Company. In this sense, the closed window period is again a period during which it is deemed that transactions that may take place would be insider trading and thus straightaway banned. One cannot carry out a transaction during such period and any attempt to rebut the charge would be virtually impossible.

Further, if an opposite transaction is carried out by directors/officers/designated employees within six months of the earlier transaction, it is effectively deemed to be insider trading and thus absolutely prohibited. Such a transaction too has no rebuttal.

There is a controversy as to whether for a transaction to amount to insider trading, the insider has to merely possess price-sensitive information or the transaction should be on the basis of such price-sensitive informa-tion. The crucial difference is that in the latter case, the onus on SEBI is more as it has to prove a mental element to the transaction. This controversy mainly arises because of mismatch in drafting between the Act and the Regulations. Regulation 3(i) of the Regulations provides that a transaction would be insider trading if an insider carries out while in possession of UPSI. Section 15G of the Act, which levies penalty for insider trading, however, levies penalty if the transaction is carried out on the basis of UPSI. The SAT has held recently in the case of Chandrakala v. SEBI (Appeal No. 209 of 2011 dated 31st January 2012) that once an insider trades while in possession of UPSI, it will be a presumption, albeit rebuttable, that it is ‘on the basis of’ UPSI. It will be up to the insider to prove that it is not so. The SAT observed,:

“The prohibition contained in Regulation 3 of the regulations apply only when an insider trades or deals in securities on the basis of any unpublished price-sensitive information and not otherwise. It means that the trades executed should be motivated by the information in the possession of the insider. If an insider trades or deals in securities of a listed company, it may be presumed that he/she traded on the basis of unpublished price-sensitive information in his/her possession, unless contrary to the same is established. The burden of proving a situation contrary to the presumption mentioned above lies on the insider. If an insider shows that he/she did not trade on the basis of unpublished price-sensitive information and that he/she traded on some other basis, he/she cannot be said to have violated the provisions of Regulation 3 of the regulations.”

The implications of the above decisions are not far to see. Most CAs associated with a company are likely to be insiders or deemed insiders and would have access to UPSI. Their trading would thus be deemed insider trading as a presumption and it would be up to him to prove otherwise.

To conclude, CAs who are associated with listed companies professionally or in employment or in other manner as consultants, etc. may find many of the deeming provisions acting against him. He is likely to be deemed as an insider and his trades deemed to be insider trading. The onus would be on him to prove otherwise and even such opportunity to rebut is not always available. CAs would thus consider whether they should, as a prudent policy, refrain altogether from trading in the shares of such company or ensure that they fall within the clear exceptions, on facts or otherwise.

A transaction is insider trading if it is carried out when in possession of unpublished price-sensitive information (‘UPSI’). While UPSI is defined as information which if published is likely to materially affect the prices of securities of the company, several items of information are deemed to be UPSI. Examples are periodical financial results, any major expansion or execution of new projects, dividends, etc. For such deemed UPSI, the test whether it will materially affect the price of the company is not required to be fulfilled. This may sound strange for financial results where there are no significant changes, where the dividends more or less are as per the past record, etc. A trading on knowledge of such deemed UPSI is insider trading.

If the price-sensitive information is ‘published’, then of course it is no more UPSI. However, information is deemed to be published only if it is published by the Company and is specific in nature. It has been held that the fact that the information may be known to the markets is not generally a valid defence that it is published.

The deeming of certain transactions has been carried to an extreme whereby certain transactions by specified persons in certain situation are straightaway banned clearly on the presumption that these are transactions of insider trading or too near to them.

For example, the concept of trading window is introduced which can be open or closed. It is generally closed in anticipation of certain price-sensitive information being compiled or announced. When it is closed, the employees/directors of the Company are not permitted to trade in the securities of the Company. In this sense, the closed window period is again a period during which it is deemed that transactions that may take place would be insider trading and thus straightaway banned. One cannot carry out a transaction during such period and any attempt to rebut the charge would be virtually impossible.

Further, if an opposite transaction is carried out by directors/officers/designated employees within six months of the earlier transaction, it is effectively deemed to be insider trading and thus absolutely prohibited. Such a transaction too has no rebuttal.

There is a controversy as to whether for a transaction to amount to insider trading, the insider has to merely possess price-sensitive information or the transaction should be on the basis of such price-sensitive informa-tion. The crucial difference is that in the latter case, the onus on SEBI is more as it has to prove a mental element to the transaction. This controversy mainly arises because of mismatch in drafting between the Act and the Regulations. Regulation 3(i) of the Regulations provides that a transaction would be insider trading if an insider carries out while in possession of UPSI. Section 15G of the Act, which levies penalty for insider trading, however, levies penalty if the transaction is carried out on the basis of UPSI. The SAT has held recently in the case of Chandrakala v. SEBI (Appeal No. 209 of 2011 dated 31st January 2012) that once an insider trades while in possession of UPSI, it will be a presumption, albeit rebuttable, that it is ‘on the basis of’ UPSI. It will be up to the insider to prove that it is not so. The SAT observed,:

“The prohibition contained in Regulation 3 of the regulations apply only when an insider trades or deals in securities on the basis of any unpublished price-sensitive information and not otherwise. It means that the trades executed should be motivated by the information in the possession of the insider. If an insider trades or deals in securities of a listed company, it may be presumed that he/she traded on the basis of unpublished price-sensitive information in his/her possession, unless contrary to the same is established. The burden of proving a situation contrary to the presumption mentioned above lies on the insider. If an insider shows that he/she did not trade on the basis of unpublished price-sensitive information and that he/she traded on some other basis, he/she cannot be said to have violated the provisions of Regulation 3 of the regulations.”

The implications of the above decisions are not far to see. Most CAs associated with a company are likely to be insiders or deemed insiders and would have access to UPSI. Their trading would thus be deemed insider trading as a presumption and it would be up to him to prove otherwise.

To conclude, CAs who are associated with listed companies professionally or in employment or in other manner as consultants, etc. may find many of the deeming provisions acting against him. He is likely to be deemed as an insider and his trades deemed to be insider trading. The onus would be on him to prove otherwise and even such opportunity to rebut is not always available. CAs would thus consider whether they should, as a prudent policy, refrain altogether from trading in the shares of such company or ensure that they fall within the clear exceptions, on facts or otherwise.

(2011) 132 ITD 122 (Mum.) Amartara Plastics (P) ltd. v ACIT Assessment Year: 2005-06 Date of order: 19-01-2011

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Section 26B – Revision – Erroneous and prejudicial order-Computation of book profit u/s. 115JB – When the AO passed the assessment order; clause (i) to Expln.1 to section 115JB was not on the statute book – Order u/s. 263 cannot be passed on an issue that is debatable and hence cannot hold that the order passed by the AO is erroneous.

Facts:
The Assessee was a private limited company that had filed a return for A.Y. 2005-06 on 31st Oct, 2005 declaring Total Income as ‘Nil’. The said return was selected for scrutiny and assessment was completed u/s. 143(3) of the Act. The AO determined the Total Income of the assessee under normal provisions as ‘Nil’ and book profit u/s. 115JB as (–) Rs.26,71,922. This Loss included a provision for bad & doubtful debts of Rs.35, 95,508 allowed by the AO. Subsequently, the learned CIT exercised his revisionary powers u/s. 263 of the Act, holding the order passed by the AO as erroneous and prejudicial to revenue. He set aside the order of the AO with a direction to recompute the book profits after adding back provision for doubtful debts.

Held:
The revisionary power u/s. 263 can be exercised only if the CIT considers any order to be erroneous in so far as it is prejudicial to the interest of the revenue. The order passed by the AO allowing the provision for bad and doubtful debts was not erroneous and was in agreement with past Supreme Court judgments that provisions for bad and doubtful debts did not constitute a liability. Further, the clause (i) to explanation 1 to section 115JB was not on statute when the AO passed the order u/s. 143(3) as well as when the learned CIT exercised his power u/s. 263. Hence, the learned CIT did not have any ground to invoke his power u/s. 263 to enhance, modify, cancel or direct a fresh assessment.

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(2011) 132 ITD 98 ACIT v Rolta India Ltd (Mum) (TM) A.Y 1998-99 Date of Order: 04-06-2010

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Section 148 – Reopening of assessment is void ab intio when initiated merely on the fact that the issue was not specifically dealt with in the assessment order.

Facts:
The assessee company had developed a computer software technology internally, which was capitalised in the books of account and claimed as revenue expenditure in the return of income. The assessing officer during the assessment proceedings, had raised a specific query on allowability of expenditure on computer software. The assessee wrote a letter for the same to the AO giving justification and the relevant facts. There was no specific reference to this issue in the assessment order.

Subsequently, the AO was in receipt of the audit report from the revenue audit party, stating that he had completely overlooked the above mentioned facts and legal position in the given case. The AO then issued notice u/s. 148 based on the above finding.

The assessee then challenged the initiation of the proceedings u/s. 147/148 on the basis of reasons recorded by the AO.

Held:
Merely because the issue on which the notice was issued was not specifically dealt with in the assessment order does not give the AO jurisdiction to reopen the assessment, unless there is tangible material before him to come to the conclusion that there is escapement of income.

When no specific reference to the issue was made in the order, it is presumed that the AO had formed an opinion about the allowability of software expenses as revenue expenditure while completing the assessment u/s. 143(3).

The issue was squarely covered by the judgement of the Supreme Court in CIT v Kelvinator of India Ltd. whereby it was held that mere change of opinion by the AO cannot be taken as the “reason to believe” u/s. 147 to reopen the assessment.

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Undisclosed income: Reference to valuation officer: Ss. 69B and 142A: A. Y. 2007-08: When the books of account in respect of construction are maintained and the same are not rejected, the matter could not be referred to the DVO for assessing the value:

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[CIT Vs. Chohan Resorts; 253 CTR 106 (P&H):]

In the balance sheet filed along with the return of income for the A. Y. 2007-08, the assessee had shown investment of Rs. 5,73,000/- in the land account and Rs. 47,43,576/- in the building account. The Assessing Officer referred the case to the Departmental Valuation Officer(DVO) to determine the cost of construction. The DVO assessed the cost of the property at Rs. 1,02,54,500/-. The assessees furnished the copy of its building account as per its books of account along with the copies of the bills of items used in the building and vouchers on account of labour paid. The Assessing officer made an addition of Rs. 55,12,930/- u/s. 69B of the Act, being the difference of the cost shown in the books and the value determined by the DVO. The Tribunal deleted the addition.

On appeal by the Revenue, the Punjab and Haryana High Court upheld the decision of the Tribunal and held as under:

“i) In the present case, we find that the Tribunal decided the matter rightly in favour of the assessee in as much as the Tribunal came to the conclusion that the assessing authority could not have referred the matter to the DVO without the books of account being rejected.

ii) In the present case, a categorical finding is recorded by the Tribunal that the books were never rejected. In the circumstances, reliance placed on the report of the DVO was misconceived.

iii) Learned counsel for the Revenue was unable to justify that when the books of account in respect of cost of construction have been maintained by the assessee and the same were not rejected, how the matter could be referred to the DVO for assessing the value. Wherever the books of account are maintained with respect to the cost of construction, the matter can be referred to the DVO after the books of account are rejected by the Revenue on some legal or justified basis. In the absence of the same, the reference to the DVO cannot be upheld.

iv) In view of the above, we do not find any substance in the appeal. Dismissed.”

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REMEMBERING MAHATMA GANDHI

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Generations to come, it may well be, will scarce believe that such a man as this one ever in flesh and blood walked upon this Earth. —Albert Einstein on Gandhiji’s
70th Birthday Every year, we remember Gandhiji for a day on 2nd October and then forget him for the rest of the year. We should never forget him even for a single day, but we rarely remember him. We know very little about one of the greatest persons whom we call “The Father of Nation”. It is time we know more about his work and his life. It is difficult for the present generation, which is leaderless, to understand how this frail man had the strength to shake the mighty British Empire, how he won our freedom with weapons of Love, Truth, and Nonviolence. It is difficult to envisage his tremendous influence over millions of our people, across the length and breadth of the country. He exercised influence without any authority.

“My life is my message” said Gandhiji.

In the days of our freedom struggle, thousands were arrested. A few of them asked for pardon and got out from jails. There were rumours about terrible tortures being inflicted on our freedom fighters. I had heard a rumour about Dr. Usha Mehta who was caught operating a secret radio station. Dr. Usha Mehta addressed our BCA Society Members, when she talked about this incident. “My mother was a follower of Mahatma Gandhi and was not very highly educated, approached the prison warden, and arranged to send a food parcel to me. In between chapattis, a note was smuggled giving a clear message. “Usha, it is rumoured that you are going to seek pardon of the British Govt. and get released. If ever you do so, never come back to our house again!” – This was the spirit instilled in millions of Indians by Gandhiji. I, Pradeep, have seen many people, who were ordinary persons like you and me who became heroes. They were prepared to sacrifice everything and did sacrifice everything for our country.

Gandhiji’s ability to touch the hearts of people did not end with Gandhiji’s demise. Recently we have the case of Laxman Gole, a young person who had 19 criminal cases pending against him. He changed completely by merely reading Gandhiji’s writings while in jail. He came up clean before the judges and confessed to his crimes. He dedicated himself to spreading Mahatma’s message amongst his fellow prisoners while in jail and later to the outside world. I do not know of any other person who after more than 50 years after his passing away – could influence and change the hearts of men – and change a Walia Robber to a Saint Valmiki.

 Some of us know of his work in India, but very little is known about his work in South Africa. Our knowledge is limited to the incident when he was thrown out of the train at Maritzburg Station. Little do we realise that that was the first event, in a struggle which went on for over 10 years! In fact, it was 13 years later, that this resulted into a mass nonviolence resistance against “The Black Act”. We all believe that he gave a legal practice which was quite small and insignificant. I was stunned to read this very recently that he had 30 juniors working under him and the practice in current rupee value was over 1.5 crores annually.

What should we do to remember Mahatma Gandhi? We must remember what Gandhiji said and act accordingly.

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Refunds, TDS effect etc.: Section 245 of: General problems faced by the taxpayers: Directions by Delhi High Court:

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[Court On Its Own Motion Vs. CIT; (2012) 25 taxman. com 131 (Del):]

By way of suo moto public interest writ petition, the Delhi High Court considered the general problems faced by the taxpayers specially small taxpayers/ individuals regarding issue of refunds, which are denied on the basis of wrong or bogus demand or incorrect record maintenance and the problem faced by them in getting full credit of the tax, which is deducted from their income and paid to the Revenue.

The Revenue/Income tax department, had filed counter-affidavit and acknowledged and accepted that the taxpayers are facing difficulties in receiving credit of Tax Deducted at Source (TDS for short). It is also accepted that taxpayers are facing difficulties in getting refunds on account of adjustment towards arrears.

In the counter-affidavit, steps taken by the revenue to eliminate and rectify the problems and difficulties faced by the taxpayers were mentioned. It is stated that changes in the software and the procedure have been made or are being undertaken so that the problems, glitches and difficulties are eliminated.

The High Court held/directed as under:

“1. Problems faced by taxpayers

1.1 The problems faced by the taxpayers can be broadly classified into two categories. Firstly, failure and difficulties in getting credit of TDS paid. The said amount is deducted from the income earned by the assessee, but even for several reasons not attributable to the taxpayers, they are denied credit. The second category consists of adjustment of past demands or arrears of the tax from the refund payable. The two problems have to be addressed and tackled separately.

1.2 With regard to the second category, it is noticed that the Income Tax Department has initiated process of centralised computerisation of records, centralised computerised filing and processing of returns and issue of refunds, which is to be appreciated and is laudable. The problem is not for the said reason, but because of the wrong and incorrect data uploaded in the centralised computer system. In the counter-affidavit, it is stated that the Assessing Officers were asked to carry out physical verification of the past demands and to create manual arrears D&CR for up to the financial year 2010-11 vide Board’s letter dated 28-4-2010. This was followed by several other letters written by the Board, wherein it was emphasised that the Assessing Officer must verify and correct the arrears recorded in the D&CR. This was necessary as the arrears or demands were to be uploaded in the Central Processing Unit (CPU) at Bengaluru. In the counter affidavit, it is stated that more than 46.23 lakh entries of demand aggregating to Rs. 2.33 lakh crore for the period prior to 1-4-2010, were uploaded on CPU arrear/demand portal pursuant to the information uploaded/furnished by the Assessing Officers.

2. Applicability of section 245

Section 245 envisages prior intimation to the assessee, so that he can respond before any adjustment of refund is made towards a “demand” relating to any other assessment year. Thus, the opportunity of response/reply is given and after considering the stand and plea of the assessee, an order/direction for adjustment when justified and proper is made. The section postulates and mandates a two stage action. Prior intimation, and then a subsequent action when warranted and necessary of adjustment, of the refund towards arrears.

3. Stand taken by revenue in counter-affidavit

3.1 In the counter-affidavit, the revenue had accepted that when a return is processed u/s. 143(1), the CPU itself adjusts the refund due against the existing demand i.e. there is adjustment, but without following the procedure prescribed u/s. 245, which requires prior intimation so that the assessees can respond or give their explanation. It is also stated in the said affidavit that 14.6 lakh communications have been sent by e-mail and 8.33 lakh communications have been sent through speed posts making adjustments of refunds. The total amount adjusted as per the letter dated 21-8-2012 is Rs. 4800 crore.

3.2 At this stage, it is stated that in very few cases prior intimation was sent and the procedure prescribed u/s. 245 was not followed. It is further submitted that in cases where prior intimation was given, the assessees were required to get in touch with the Assessing Officer and file response. But the Assessing Officer did not accept the reply/response on the ground that the assessee should approach CPU, Bengaluru. At the same time, CPU, Bengaluru did not accept the reply/ response on the ground that the assessee should approach the Assessing Officer. It is submitted that the procedure is contrary to statute as an order of adjustment after issue of prior intimation has to be passed by the Assessing Officer. The difference between the first and second stage is being obliterated and the section violated.

4. Directions issued to department

4.1 The department will file an affidavit in this regard explaining the true and correct position. They shall clearly indicate whether prior intimation was sent before adjustment or with the first intimation itself adjustment was made and in how many cases prior intimation was sent or was not sent before making adjustments. They shall also indicate the procedure followed, if an assessee wants to file or has filed a response/reply pursuant to the prior intimation and whether such responses are/were entertained, examined, verified and opinion of the Assessing Officers are/ were taken. It shall be stated whether any adjustment order is subsequently passed by the Assessing Officer.

4.2 Thus, interim directions were issued to the department that they shall in future follow the procedure prescribed u/s. 245 before making any adjustment of refund payable by the CPU at Bengaluru. The assessees must be given an opportunity to file response or reply and the reply will be considered and examined by the Assessing Officer before any direction for adjustment is made. The process of issue of prior intimation and service thereof on the assessee will be as per the law. The assessees will be entitled to file their response before the Assessing Officer mentioned in the prior intimation. The Assessing Officer will thereafter examine the reply and communicate his findings to the CPU, Bengaluru, who will then process the refund and adjust the demand, if any payable. CBDT can fix a time limit for communication of findings by the Assessing Officer. The final adjustment will also be communicated to the assessees.

5. Computerised adjustment of refund without following procedure prescribed u/s. 245

This brings to the problem where adjustments of refund has been made by the CPU, Bengaluru, without following the procedure prescribed u/s. 245 and adjustment has been made for non-existing or fictitious demands. Obviously, the Revenue cannot take a stand that they can make adjustments contrary to the procedure prescribed u/s. 245 based on the wrong data uploaded by the Assessing Officers as question of payment of interest also arises. However, before issuing final directions in this regard, an affidavit as directed above explaining the procedure adopted by them should be brought on record. Opportunity must be given to the Revenue, to adopt a just and fair procedure to rectify and correct their records and issue refunds with interest, without putting a harsh burden and causing inconvenience to the assessee.

6. Problem relating to failure of taxpayers to get credit of TDS
6.1 This brings to the first problem relating to the failure of the taxpayers to get credit of the TDS, which has been deducted from the income pay-able/paid to them. The said problem can be further bifurcated into two categories. The first category relates to cases where the amount is reflected in Form 26AS, but because of incorrect entries in the return or small mismatch with the return data, the taxpayers do not get credit. The second category pertains to the cases where the TDS has been deducted by the deductor, but the taxpayer has been denied and deprived credit for the failure of the deductor to correctly upload the TDS return or details. Thus, the taxpayers do not get credit of the same in spite of payment. Thus, they are forced and compelled to make double tax payment.

6.2 The magnitude of the problem can be under-stood and appreciated, as it is stated that in the financial years 2010-11 and 2011-12, as many as 43% and 39% of the returns processed in Delhi charge were found to be defective. The total demand in Delhi Zone of Rs.3000 crore (approximately) for the financial year 2010-11 was created and the same became arrears payable in the next financial years. After rectification of applications and consequent corrective orders, the figure has come down to Rs.1900 crore, which is still a substantial amount.

6.3 Most of the assessees have a grievance that in spite of writing letters to the deductors to rectify and correct the TDS details, the deductors fail and neglect to do so, as the failure does not entail any adverse consequence or action against them. The deductee being the taxpayer is out of pocket and is harassed, but the deductor does not suffer, when the deductee does not get benefit of the tax paid. The response given by the Revenue is that (i) When returns are processed u/s. 200A by TDS Assessing Officers, the deductors are informed about the errors in such returns. In case of failure to correct such errors by the deductors, no penal provision is provided under the Act. They can only be persuaded to correct such errors. (ii) While processing returns at CPU if any TDS credit claimed by the taxpayer in the return doesn’t match with the details uploaded by the deductor list of such mismatches is sent to the tax deductors total of 20119 such communications had been issued by CPU up to April 2011. A deductorwise consolidated list of such mismatches are sent from CPU to the CIT (TDS) having jurisdiction over the deductor for necessary follow-up with the deductors.

6.4 The response is unconvincing and unsatisfactory. It expresses complete helplessness on the part of the Revenue to take steps and seeks to absolve them from any responsibility.

7.    Applicability of section 272BB

Attention is drawn towards section 272BB, wherein penalty of Rs. 10,000 has been prescribed for failures on the part of the deductor. The Board will examine the said provision and whether the same can be invoked in cases where complaints are received from the taxpayers that in spite of requests, the deductors fail to rectify the defects or upload the correct TDS details. Denying benefit of TDS to a taxpayer because of fault of the deductor, which is not attributable to the deductee, is a serious matter and causes unwar-ranted harassment and inconvenience. Revenue cannot be a silent spectator and wash their hands or express helplessness. This problem is normally faced by the small taxpayers including senior citizens as they do not have Chartered Accountants and Advocates on their pay roles. The marginal amount involved compared to the efforts, costs and frustration, makes it an unviable and a futile exercise to first approach the deductor and then the Assessing Officer. Rectification and getting the corrections done and to get them uploaded is not easy. Most of the assessees will and do write letters, but without response and desired results. This aspect must be examined by the Board and appropriate steps to ameliorate and help the small taxpayers including senior citizens, should be taken and implemented.


8.    Conclusion

There can be small and insignificant mismatches, which if purely technical should be condoned or ignored. After, all tax has been paid or credited in the name of the assessee. Once the amount is correctly and rightly reflected in Form AS26, small or technical mismatch in the return should not be a ground to deny credit of the amount paid. In such cases, if the Assessing Officer feels that benefit of TDS reflected in AS26 should not be given, he should issue notice to the assessee to revise or correct the mistake and only if the necessary rectification or correction is not made, an order u/s. 143(1) should be passed and the demand should be raised. We issue an interim direction to this effect.”

Penalty: Search and seizure: Section 158BFA(2): Addition on estimate basis: Penalty u/s. 158BFA(2) not justified:

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[CIT Vs. Dr. Giriraj Agarwal Giri; 253 CTR 109 (Raj):]

In the assessment pursuant to search, an addition of Rs. 4,82,028 was made on estimate. The Assessing Officer also imposed a penalty of Rs. 2,89,217/- u/s. 258BFA(2) . CIT(A) deleted the penalty and the same was upheld by the Tribunal.

On appeal by the Revenue, the Rajasthan High Court upheld the decision of the Tribunal and held as under:

“i) So far as the case law referred by the learned counsel for the appellant is concerned, it is sufficient to mention that Hon’ble Apex Court in UOI Vs. Dharmendra Textile Processors; 219 CTR 617 (SC), was dealing with the provisions of Central Excise Act, 1944 and learned counsel for appellant is unable to point out that the provisions of section 11AC of Central Excise Act, 1944 and section 158BFA(2) of IT Act are pari materia.

ii) That apart, it is also relevant to mention that imposition of penalty depends on facts and circumstances of each case. In the present case, the AO imposed the penalty on so-called three items of so-called concealed income. Each item was examined, thoroughly and in detail, by CIT(A) as well as Tribunal and by a reasoned order, both came to the conclusion that additions are based on estimation only.

iii) A fact or allegation based on estimation, cannot be said to be correct only, it can be incorrect also. Therefore, in the facts and circumstances of the case, penalty was wrongly imposed by the AO.”

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Deduction u/s. 10A: A. Y. 2006-07: Deduction to be given at the stage of computing the profits and gains of business: Brought forward unabsorbed depreciation and losses of non-10A units cannot be set off against current profit of 10A unit:

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[CIT Vs. Black and Veatch Consulting Pvt. Ltd.; 348 ITR 72 (Bom):]

Dealing with the provisions of section 10A, the Tribunal held that the deduction u/s. 10A in respect of the allowable unit u/s. 10A has to be allowed, before setting off brought forward losses of a nonsection 10A unit.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) Section 10A of the Income-tax Act, 1961, is a provision which is in the nature of a deduction and not an exemption. The deduction u/s. 10A has to be given effect to, at the stage of computing the profits and gains of business. This is anterior to the application of section 72, which deals with the carry forward and set off of business losses.

ii) A distinction has been made by the Legislature while incorporating the provisions of Chapter VI-A. Section 80A(1) stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter, the deductions specified in sections 80C to 80U. Section 80B(5) defines for the purposes of Chapter VIA “gross total income” to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter. Therefore, the deduction u/s. 10A has to be given at the stage, when the profits and gains of business are computed in the first instance.

iii) The Tribunal was right in holding that the deduction u/s. 10A in respect of the allowable unit u/s. 10A has to be allowed before setting off brought forward losses of a non-section 10A unit.”

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Attacking tax havens – Instead of retreating, India needs to do more

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The era of bank secrecy is over,” declared a 2009 G20 communique — except it isn’t, apparently. While black money worldwide has likely decreased following amnesty schemes and stepped-up enforcement in the last three years, it is clear that it has not gone far enough. A just-released report from the non-governmental organisation Tax Justice Network, written by a former chief economist for McKinsey and Company, has used an innovative method to document the size of flows to tax havens from a set of developing and emerging economies. Unlike previous estimates, which relied on data surrounding “trade mis-invoicing” and were open to question, these estimates use Bank of International Settlements and IMF data, along with details available from source countries. The numbers, however, are staggering: anything between $21 and $32 trillion is stashed away.

What, therefore, has been the progress in closing these gaps in the global tax net — and has India contributed what it should have to the effort? It appears that the central problem has been a lack of co-ordination. Although the G20 spoke out on the issue after the global financial crisis, it then left individual countries to their own devices. What this meant was that countries like the United States could renegotiate treaties in their favour with much greater ease than could most other jurisdictions. The US, for example, has succeeded in getting Switzerland to hand over even the names of tax dodgers not covered by treaty, through threats to launch criminal charges against their banks. Other European countries have agreed to provide the details of all accounts held by American citizens to the US. Germany and Britain similarly pushed Switzerland into a treaty by which the latter will tax Swiss bank accounts for them, and introduce a withholding tax on future interest earned. India, while it has been renegotiating treaties, has simply not been that tough or threatening when it comes to forcing tax havens like Switzerland, Leichtenstein or the UK-owned Cayman Islands into giving it similar deals. This must change. At a minimum, the onus of demonstrating bona fides should be shifted to the depositor, as with depositors of other nationalities — instead of on to Indian tax investigators. Nor is it sensible to allow legal protection of the identities of tax evaders.

(Source: The Business Standard dated 25-07-2012)

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Communication with previous auditor

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We are trying to understand the principles of our Code of Ethics through the dialogue between Bhagwan Shrikrishna and Arjuna.

Shrikrishna (S) – Dear Arjuna, how was your vacation? Did you enjoy your outing?

Arjuna (A) – Yes, it was fine. But the last time you told me about the disciplinary action; and whenever I thought of it, my mood used to go off!

S – Why? Was it so frightening? I told you only broad principles. And if you are awake and alert, there is nothing to worry about.

A – When I was away, my manager informed me that we got a new audit and it was to be done urgently. I instructed him to start working on it.

S – Good. But did you write to the previous auditor?

A – Actually, I was at the hill station and was not getting the range on my cell. Still, I managed to speak to the previous auditor. He said, ‘Don’t worry; go ahead’. I have to sign the audit next week. Most of it is already done. I will ask the client himself to obtain his NOC.

S – Oh dear! Don’t take it so lightly. You cannot shift the responsibility to the client or anyone else. You and you alone have to write to him.

A – But the client has promised me. If you say, I have to write, I will give my letter to the client who will deliver it to the previous auditor

S – Hey Partha, never commit such a mistake. And remember, you have to do this before accepting the audit and not before signing it.

A – But we have already commenced the audit. It was urgent. Why waste time in such useless formality?

S – You are mistaken. It is not a meaningless formality. It is extremely valuable.

A – What purpose will it serve? It is the client’s prerogative to change the auditor. Why should anybody object?

S – Arjuna, you belong to a graceful profession – a learned profession. You are not a shopkeeper or a mere businessman. All professionals need to be united. Otherwise, client will take advantage and bring both of you in trouble.

A – How? Each year’s audit is a separate contract. What role has the previous auditor to play?

S – It is possible that the client’s dealings are not proper; or he may be lacking discipline. His records may not be straight. Previous auditor may be reluctant to sign.

A – So what? I will take every care and qualify the audit if I feel it necessary.

S – Precisely for this reason the client may have left the previous auditor. You will come to know from him as to whether one would be professionally comfortable signing this audit.

A – But if he objects to my accepting the audit, the client will suffer.

S – Why are you so much worried about the client who approaches you at the eleventh hour? There must be some hitch that the client may be hiding from you. Just ask whether he has paid the fees of previous auditor?

A – How will it matter? I will secure my fees and I know how to recover it.

S – Let me tell you that if you accept the audit when the previous audit fees are unpaid, that in itself is a misconduct. Let alone the other objections.

A – But the previous auditor may have charged exorbitant fees!

S – Remember, it is only the audit fees and not fees for any other services. The Guidelines from Council refers to undisputed audit fees.

A – How can one know whether it is disputed or otherwise?

S – It defines the undisputed audit fees. It means the fees appearing in the balance sheet signed by the auditor. Once it is so, it is deemed to be undisputed.

A – But what if there is cash method of accounting? Nothing will be there in the balance sheet.

S – Then you have to be extra careful. Check the records, write to the client, and write to the previous auditor.

A – What if the previous auditor objects? Or does not issue NOC for a long time?

S – Firstly, remove the wrong notion from your mind that you have to obtain an NOC. The relevant clause nowhere requires that. It only says, you have to communicate with him in writing; before accepting the audit.

A – Can I fax or e-mail? S – Not advisable. Council prefers and recommends a registered post acknowledgment due. RPAD! A – I will hand deliver to him.

S – Then you have to have a proof of delivery. I suggest, even avoid a courier. If RPAD is such a simple thing to do, why do you avoid it? This is typical of you CAs.

A – Wait. I will speak with my audit manager. (Speaks on cell phone). Good Lord! My manager informs me that the previous auditor has already mentioned in his resignation letter that he has no objection to anyone else taking up the audit! Moreover, it is only an internal audit and not statutory audit! I am saved!

S – Blissful ignorance! Mere mention in resignation letter is ‘not sufficient’. There is no substitute to your writing to him. There is no other way.

A – But what about internal audit?

S – Again a wrong notion. The rule applies to all types of audits be it statutory audit, tax audit, VAT audit, Concurrent, Internal, Revenue or Stock audit!

A – That is irritating. That is why our code is a burden.

S – No dear! Why don’t you take it positively? Perhaps, you will get valuable tips; or some advice of caution. Your efforts may be saved if the audit is risky. Or even client will dodge your fees as well! Don’t treat the previous auditor as your enemy.

A – Sometimes, I am confused as to who is a ‘previous auditor’. What if there was no tax audit for last two-three years?

S – Previous auditor does not mean the auditor for the immediately preceding year. It means the auditor who last held the same or similar assignment immediately prior to your appointment. Thus, it could be auditor appointed two-three years ago also.

A – Now that you are telling me all this, tell me, what if the audit is allotted by the Government? By CAG; or by Co-operative Department; or By RBI?

S – Still you are supposed to write. And who told you, you have to actually obtain NOC? You have to simply communicate, wait for a reasonable time.

A – But what if he objects?

S – You have to weigh the objections. If they are valid, you may consider whether or not to accept the audit. Or you may take them into consideration while reporting. But if the objection is regarding non-payment of undisputed audit fees, you are helpless. Otherwise, you will invite trouble for yourself.

A – Why does the Council not compel the auditor to respond quickly?

S – It has! In fact, the Council has advised all the members to respond to such communications quickly.

A – But previous auditor is closely known to me. I don’t think he will take it seriously for such a small fee.

S – I will tell you a real life incident. In one case, both husband and wife were CAs. The wife did the audit of a small housing society for two years. Thereafter the husband signed it. After a couple of years, there was a divorce proceedings between the two and the wife complained to the Council that the husband accepted the audit without communicating with her!

A – Ohh! This is alarming. Good that my Draupadi is not a CA!

S – Therefore, I am telling you, don’t take it lightly; and take it positively. It is in the interest of your profession.

A – Does it apply to tax assignments or certification work as well?

S – Legally speaking, ‘No’. But the Council recommends it as healthy practice.

A – Once a client came to me for advice through another CA. Thereafter, the client approached me directly. What should one do in such a situation?

S – Council recommends that you should ask the client to come through that CA; or at least inform that CA about it. That is a dignified behaviour.

A –   I am slowly getting what you are saying. If we ourselves do not respect our profession, who else will respect it? They will take us for a ride.

S –   Right. Communication with previous auditor indicates unity among professional brothers. You are well aware of what happens when brothers and cousins are not united.

Note :
The above dialogue is with reference to Clause 8 of the First Schedule which reads as under:

Clause (8):  accepts a position as auditor previously held by another chartered accountant or a certified auditor who has been issued certificate under the Restricted Certificate Rules, 1932 without first communicating with him in writing;

Further, readers may also refer to the Chapter VII of Council General Guidelines, 2008 dated 8th August, 2008 for guidelines on undisputed fees (refer page nos. 313  – 323 of the Code of Ethics publication January 2009 edition or the official website of ICAI).

Amendment to companies (fees on applications) rules 1999:

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Fee PAYABLE FOR DELAY IN FILING APPLICATIONS under s/s (2) of Section 233B of Companies Act i.e. pertaining to Appointment of Cost Auditor u/s 224 (1B) for Audit of Cost Accounts.
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Product or activity groups classification:

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The Ministry of Corporate Affairs has, vide notification dated 7th August 2012, listed the product of Activity Groups to be used in the cost Audit Reports and the in Compliance Report to be filed with the Central Government in compliance of the Companies Cost Accounting Record Rules and Cost Accounting Report Rules and other as listed in the Notification.
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Our feudal democracy

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Five hundred years ago, in feudal England, the nobles had private armies and their own livery. The king depended on the nobles for money and for horsemen to fight wars. Henry VII changed all that when he came to power in 1485, ending the 30-year Wars of the Roses (essentially, an endless feud between rival groups of feudal lords). He abolished the private armies, reduced his dependence on the nobles by drawing support from the rising middle classes and the trading community, and established a modern nation-state. Some version of that needs to be done in contemporary India.

The parallels become obvious when we see that our “nobles” today are the state satraps — They each have their horsemen and livery (parliamentarians with party tags), and their power in the Delhi court depends on how many “horsemen” they can bring to our contemporary version of the Wars of the Roses.

So long as the king is dependent on these nobles, each of whom has quasi-autonomous power in their duchies and earldoms, no central power can assert itself. The private armies in pre-Tudor England essentially pillaged and plundered; likewise, some of our nobles today honour horsemen (knights?) who have a record of murder and rape, they indulge in mass transfers of officials to make them toe the line, arbitrarily arrest cartoonists and those who ask questions… (you know the rest of the list). The king in Delhi does nothing because he gets unseated if the nobles withdraw support. It doesn’t help that the “king’s party” has no local presence to mount a challenge to the nobles in their duchies. So how does the nation-state function if every national issue is hostage to the nobles, and dependent on their consent — including which head of state can visit the country?

(Source: The Business Standard dated 22-09-2012)
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Heed the Kelkar report – Govt should move immediately on fiscal consolidation

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The report of the Vijay Kelkar Committee on fiscal consolidation argues that the Indian economy is “poised on the edge of a fiscal precipice”. The fiscal deficit is poised to miss its budgeted target by a large margin for the second year in a row — it could be 6.1% of gross domestic product, a full percentage point higher than the Budget estimate. India is going through a demographic bulge, with millions entering the workforce yearly; fiscal space is needed to stimulate growth, or India’s demographic dividend will become a curse. The cost of doing nothing, the report argues, would approximate the crisis of 1991. The panel makes suggestions to take the fiscal deficit down to 5.2% of GDP in 2012-13. However, some of these suggestions, including on tax policy, will require legislative action — difficult for the United Progressive Alliance (UPA) to pull off currently. The emphasis should, therefore, be on speedily implementing administrative reforms, instead of merely focusing on legislative changes such as the constitutional amendment for the goods and services tax. As the chairman of the committee told, credible action, not a big-bang step, is needed to achieve fiscal consolidation.

(Source: The Business Standard dated 01-10-2012).
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Big, bad data: India’s official statistics seem to have little or no link with reality

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Making official statistics accurate and current must be a prime concern. Official figures seem to have little or no link with reality. Industrial output, as gauged by the index of industrial production (IIP), reveal great volatility and mismatch with logical correlates such as power generation and cargo movement, in the aggregate and in particular sectors such as capital goods. Also, often, IIP data is at variance with published financial results of companies.

Now the base year of the index was changed to 2004-05 last year, and there is a big increase in the number of items tracked, to 399. But there is reason to believe that the raw data piling up in the 16 source agencies and departments for the IIP are not being processed either in a timely manner or, worse, entirely.

Reports suggest large vacancies in statistics cells across government departments. It is entirely possible that skilled data specialists are moving to greener pastures in the private sector. In the digital age, making sense of data is big business, of course.

Official statistics are either dated or erroneous today. Policymakers are often unable to fathom IIP trends. The Collection of Statistics Act, 2008, was notified last year, and the earlier 1953 law repealed. Chapter IV of the Act concerns offences and penalties, for refusing to supply particulars, false statements and ‘mutilation and defacement’ of information, and so on.

But there is nothing in the law that penalises nonprocessing and skewed interpretation of raw data in the various departments and ministries. The Statistics Act’s neglect of data processing by government agencies, seems to have compromised reliability and dependability of the official numbers. Speedy correction is essential. The entire policy process would be suspect without reliable official figures.

(Source: The Economic Times dated 06-10-2012)
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Accounting for fair value hedge s and hedge s of net in vestment in foreign operations

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In our previous
article, we discussed the need for hedge accounting by companies as well
as the basic principles of hedge accounting and criteria required to
qualify for hedge accounting. We gave an example of a cash flow hedge of
a highly probable forecast purchase transaction and illustrated the
impact of hedge accounting on a companies’ profit or loss account
through the term of the hedging instrument. In this article, we shall
elucidate the accounting using fair value hedges and the hedge of a net
investment in a foreign operation and illustrate the accounting
treatment through examples.

Fair value hedges:

A fair value hedge is a
hedge of changes in the fair value of a recognised asset or liability,
an unrecognised firm commitment, or an identified portion of such an
asset, liability or firm commitment, that is attributable to a
particular risk and could affect profit or loss. The following are
examples of fair value hedges: a hedge of interest rate risk associated
with a fixed rate interest-bearing asset or liability (e.g. converting a
fixed rate instrument to a floating rate instrument using an interest
rate swap); a hedge of a firm commitment to purchase an asset or to
incur a liability; or a hedge of interest rate risk on a portfolio basis
(a portfolio fair value hedge).

Accounting for a fair value hedge:

  • l
    Hedging instruments that are derivatives – Fair value changes are
    recognised in the profit or loss account.
  •  Hedging instruments that are
    non derivatives – Foreign currency components of their carrying amounts
    measured in accordance with Ind-AS 21 are recognised in the profit or
    loss account.
  •  Hedged item otherwise measured at amortised cost (Eg.
    fixed rate borrowing) or through other comprehensive income (Eg.
    available for sale financial asset) – Adjustment to the carrying amount
    of the hedged item related to the hedged risk are recognised in the
    profit or loss account.
  • The categorisation of the fair value hedge
    adjustment as either a monetary or a non-monetary item, under Ind-AS 21,
    should be consistent with the categorisation of the hedged item under
    Ind-AS 21.
  •  In a fair value hedge, any ineffectiveness automatically is
    reported in profit or loss through the accounting process, unlike in a
    cash flow hedge, in which the ineffectiveness has to be calculated and
    recognised separately.

 If the fair value hedge is fully effective, the
gain or loss on the hedging instrument would fully offset the gain or
loss on the hedged item attributable to the risk being hedged.
Accordingly, there would be no net impact to the profit or loss account.

The qualifying criteria for hedge accounting remain the same across
types of hedges, i.e. cash flow hedges, fair value hedges or net
investment in foreign operation.

Let us look into fair value hedges in
more detail by way of the following example.

Example 1: Fair Value
Hedges

RV International Limited (RVIL) is a manufacturer with an Indian
Rupees (Rs.) functional currency with trade transactions with several
countries. The company has the maximum number of trade transactions with
companies in the United States of America. RVIL’s reporting dates are
30th September and 31st March.

On 15th July 20X1, RVIL enters into a
contract to sell its manufactured units to a company in the United
States. As per the contract, RVIL is committed to deliver 1,000 units at
a price of INRNaN per unit on 30th June 20X2. The contract contains
several specifications of the units to be delivered and also contains a
penalty clause that states that if RVIL fails to adhere to its time and
quality commitment, as per the specifications of the contracts, it shall
be liable to a penalty of INRNaN million. The invoice is payable on
31st August 20X2. RVIL expects that is shall incur costs of Rs. 67.5
million in manufacturing and packing the units. All such costs are
denominated in its functional currency, Rs.

On the date that RVIL enters
into the contract of sale, its management decides to hedge the
resulting foreign currency risk and enters into a forward contract to
sell INRNaN million against Rs. The terms of the sale transactions and
of the forward contract are as shown in Table 1 and Table 2

RVIL
accordingly adopts a risk management strategy to hedge its firm
commitment denominated in $ as a fair value hedge. The management of the
company designates the spot component of the forward contract as a
hedge of the change in the fair value of the contracted firm commitment
attributable to movements in spot rates. All critical terms of the
hedged item and hedging instruments match, on the date of inception –
15th July 20X1. The hedge is determined to be 100% effective on a
prospective basis considering that all the critical terms match. The
fair value of the forward contract (hedging instrument) is Nil as on the
date of inception. Fair value is calculated as the difference between
the discounted fair value of the forward contract at the forward rate on
inception (18,000,000 * 45.9420 * discount factor at 10.6500% = Rs.
749,959,475) with the discounted fair value of the forward contract on
testing date (18,000,000 *45.9420 * discount factor at 10.6500% = Rs.
749,959,475). On 30th September the fair value shall be Rs. 37,707,866
[(18,000,000 * discount factor at 10.8600 * (48.2040 – 45.9420)]. Hedge
accounting principles also require retrospective effectiveness testing
at each date which is determined to be 100% in this example for each
testing date.

In this example, the designated hedged risk is the spot
component i.e. hedge effectiveness is measured on the basis of changes
in spot component of the forward rates. The change in the fair value of
the derivative attributable to the forward points is excluded from the
hedge relationship. This forward points component does not therefore
give rise to any ineffectiveness. It is recognised in profit or loss as
‘other operating income and expense’. Alternatively, the forward points
can be recognised as ‘interest income and expense’.

Also important to
note is that in a fair value hedge, the full fair value of the hedging
instrument is recognised in the profit and loss account. Hence,
ineffectiveness is not measured separately. The journal entries for the
transaction are as shown in Table 3.

Hence the revenue is recognised, at
a net amount of Rs. 810,000,000, which is equivalent to the value at
the hedged rate i.e. the spot rate on the date of inception (18,000,000 *
45.000).

Net Investment in a Foreign Operation: Ind-AS 39 does
not override the principles of Ind- AS 21, but it does provide the hedge
accounting model for hedging an entity’s foreign exchange exposure
arising from net investments in foreign operations.

A net investment
hedge is a hedge of the foreign currency exposure, arising from a net
investment in a foreign operation, using a derivative and/or a
non-derivative monetary item as the hedging instrument.

The hedged risk is the foreign currency exposure arising from a net investment in a foreign operation when the net assets of that foreign operation are included in the financial statements. The application of hedge accounting for a net investment in foreign operation is relevant only for the consolidated financial statements of a group of companies.

Accounting for net investment hedges:

  •     If the hedging instrument in a net investment hedge is a derivative, then it is measured at fair value. The effective portion of the change in fair value of the hedging instrument is computed by reference to the functional currency of the parent entity against whose functional currency the hedged risk is measured.

  •     This effective portion is recognised in other comprehensive income and presented within equity in the foreign currency translation reserve. The ineffective portion of the gain or loss on the hedging instrument is immediately recognised in profit or loss.

  •     If the hedging instrument is a non-derivative, e.g. a foreign currency borrowing, then the effective portion of the foreign exchange gain or loss, arising on translation of the hedging instrument into the functional currency of the hedging entity, is recognised in Foreign Currency Translation Reserve.

  •     The effective portion is computed by reference to the functional currency of the parent entity, against whose functional currency the hedged risk is measured. Effectiveness is usually achieved if currency matches and notional amount of invest-ment is unlikely to go below notional amount of derivative, for e.g., due to losses incurred.

Hence, cumulative amounts are recognised in the other comprehensive income – changes on foreign currency translation of the foreign operation and effective portion of the gains or loss on the hedging instrument.

When a net investment in a foreign operation is disposed of, the cumulative amounts recognised previously in other comprehensive income, are re-classified to profit or loss. However, it is necessary for an entity to keep track of the amount recognised in other comprehensive income separately in respect of each foreign operation, in order to identify the amounts to be reclassified to profit or loss on disposal or partial disposal.


Let us look into net investment in foreign operations hedges in more detail by way of the following example.

Example 2: Hedges of net investment in a foreign operation


Company P is an Indian company with an Rs. functional currency. It has a subsidiary in the US, Company S, whose functional currency is $. The net investment of Company P in Company S is $ 10 million. The reporting dates of Company P for its consolidated financial statements are 30th September and 31st March. The group’s presentation currency is Rs.

On 1st April 20×1, Company P takes a two-year $ 10 million floating rate (Six month LIBOR) loan. Interest payment dates are 30th September and 31st March of the respective years. The loan matures on 31st March 20X3. It is assumed that no transaction costs are incurred relating to the loan issuance.

The management of Company P has decided to hedge its net investment in Company S by designating the $ denominated loan, in order to reduce the volatility in its consolidated balance sheet on account of foreign currency translation of its net investment in Company S. The net investment of Company P is not expected to fall below $ 10 million as company S is a profitable entity and has a profit forecast for future years as approved by the board of directors of Company P. However, on 30th September 20X2, the net investment of Company P in Company S decreases to $ 9.8 million on account of unexpected losses incurred by Company S.

As per hedge effectiveness testing, the hedge is 100% effective upto the time when losses are incurred by Company S which leads to a certain amount of ineffectiveness. Relevant details of the exchange and interest rates are as shown in Table 4 and Table 5 on page 90.

The journal entries for the transaction are as under:

At each period, following the process of consolidation of a foreign subsidiary’s net assets, Company P records a Foreign Currency Translation Reserve (FCTR) which is presented in Column C above. Journal entries relating to the loan are given in Table 6:



No need for developer’s NOC for flat sale/ transfer

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In a major relief to flat buyers and society residents, the state government has said that there is no need for a no-objection certificate from the developer for sale or transfer of flat (resale) in a fully constructed building.

The state housing department has issued an official communication in this regard after coming across cases where developers illegally collected money from flat buyers for providing such NOCs.

The Cidco, which has leased out a number of properties in Navi Mumbai, has also been asked to ensure that developers of these plots comply with MOFA norms. The department has sought Cidco’s opinion on whether its permission was needed for transfer/ sale of flats for plots leased by it. The department is of the opinion that the permission—insisted upon at present—is not required. The government has urged societies where developers haven’t conveyed plots within stipulated time to apply for deemed conveyance.

(Source: The Times of India dated 01-10-2012)
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Egalitarian president could wreak havoc on entrenched hierarchies

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The move by President Pranab Mukherjee to dispense with the traditional honorifics ‘Excellency’ and ‘Mahamahim’ is not likely to go down well in much of India even though it is a democracy. In 2008, the Bar Council of India passed a resolution recommending that judges should no longer be called by their colonial-era titles of ‘Your Lordship’ and ‘Your Ladyship’ but by the more egalitarian and gender-neutral nomenclature, ‘Your Honour’.

Old habits have died hard, however, and the anachronistic form of address continues. In that sense, the President’s move to downsize his official protocol should alarm those further down the ladder who delight in prefixes such as ‘Hon’ble’ – always written thus rather than in expanded form. As it has been appropriated by President Mukherjee as his preferred title, insidious mango men may use this as good opportunity to divest increasingly discredited politicians of this obviously unsuitable honorific, routinely affixed to VIP names on placards, invitations and communiques.

In a country where even red beacon lights are zealously guarded as symbols of privilege by those who are paradoxically supposed to be public servants, it is unlikely that grandees will take kindly to their titles being abolished with as little ceremony as the maharajas were dispossessed of theirs, 40 years ago.

President Mukherjee’s other initiative – to hold more functions in Rashtrapati Bhavan rather than at other venues – should also delight the mango men. Besides reducing bandobast and security costs, it will save thousands of litres of petrol, not only of the presidential cavalcade but also of those caught in traffic restrictions due to ‘VIP movement’. Will India’s other excellencies be willing to dispense with some of their privileges too?

(Source: The Economic Times dated 11-10-2012)
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CAG has powers to examine efficiency of policy decisions: Supreme Court

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The Supreme Court has said that the Comptroller and Auditor-General had a duty to comment critically on the efficacy of policy decisions. The court rejected a PIL, seeking to rein in CAG, saying there should be no confusion over the auditor’s mandate.

“Do not confuse the constitutional office of CAG with that of an auditor of a company or corporation… CAG is not the traditional Munimji to prepare only balance sheets. It is constitutionally mandated to examine the efficiency, effectiveness and economy of the decisions of the government in using resources. If CAG will not do this, then who will,” an apex court bench comprising Justices R. M. Lodha and A. R. Dave asked.

The court’s observation came amid criticism of CAG by the ruling side, over its report on coal block allocations. Prime Minister Manmohan Singh had described some of CAG’s findings as ‘disputable’ and some as ‘selective reading’ of a 2006 law ministry opinion.

He termed as ‘flawed’ the auditor’s premise that competitive bidding could have been introduced in 2006, by amending the existing administrative instructions.

However, the apex court said, “Article 149 of the Constitution, the 1971 Act and the Rules clearly mandate CAG to examine the efficiency, effectiveness and economy of the decisions. One should not forget that CAG report is tabled in Parliament through the President. There is a full-fledged mechanism to examine a CAG report and then debate it in Parliament. A constitutional office, as we said, should not be confused with a traditional Munimji,” SC said.

(Source: The Economic Times dated 02-10-2012)
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Loyalty above duty – Ministers should not defend a deal in advance of facts

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Prime Minister Manmohan Singh, addressing the annual conference of the Central Bureau of Investigation (CBI) and state anti-corruption bureaux, said that the Prevention of Corruption Act would be amended to focus on corporate bribery, and that investigative agencies should upgrade their “skills and techniques” to deal with “newer methods of corruption”. He added that his government “stands firm in its commitment to do everything possible to ensure probity, transparency and accountability in governance”. These are fine words, and should be welcomed. However, it is far from clear why the prime minister was addressing them to the CBI and its cohorts rather than to his own Cabinet.

The political wisdom of the Congress closing ranks behind its president’s son-in-law is extremely questionable. The fact that even Karnataka Governor H. R. Bhardwaj was unable to maintain his office’s neutrality sufficiently to keep silent on the subject, saying instead that allegations against the Gandhi family always “fall like nine-pins”, is an indication of the degree to which the party’s members feel their loyalty requires a stout defence of Mr. Vadra, whatever the political cost. But it is a political party’s right to be bad at politics, if it so wishes. However, those who hold ministerial portfolios relevant to possible investigations into the association between Mr. Vadra and DLF should be a little more restrained in their comments on this issue. Finance Minister P. Chidambaram, who supervises the income tax office among other relevant departments, declared that a probe was impossible without “specific allegations or quid pro quo”. This is certainly correct as a principle. But it is far from clear that specific allegations will not emerge. Indeed, Arvind Kejriwal believes he has already made specific allegations — that the Haryana government provided favourable treatment to DLF in return for Mr. Vadra receiving benefits from that company.

( Source: The Business Standard dated 11-10-2012)
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MEDICAL PROFESSION – YESTERDAY, TODAY AND TOMORROW

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Before birth and even after death, the medical profession remains indispensible to human beings. Pregnancy to death certificate, society needs doctors. Routine health check- up or Illness, both require medical attention. Vaccination of new born to all age group needs helping hands of doctors. Poor and rich cannot escape from the services of the medical profession. No other profession covers such a wide spectrum of services to human life and all strata of the society.

Let us see the evolution of the medical profession. How the profession and services of Yesterday, Today and Tomorrow has influenced YOU and US.

In the last 65 years, medical knowledge and advances have increased by leaps and bounds. Medical profession originally had five specialities – GRASP – Gynaecology, Radiology, Anaesthesia, Surgery and Physicians. With the research and advances, other branches were developed like Paediatrician, Orthopaedic, ENT, Ophthalmology. Advances never came to a halt. System or organ specialisation started. Heart (Cardiology), Kidney (Nephrology), Brain, Alimentary system (Gastrology), etc. Once the branch develops to an extent, surgical advances in these branches also kept up the pace, so we have a Cardiac surgeon, Genito-Urinary surgeon, Neuro surgeon, Gastro and Colon surgeon and so on. Research is mounting at 20 ft. of written volumes per day from the experience, exchange of views, mistakes, complications of the disease, experiments on animals and trial on human beings. All this knowledge has resulted into new branches raising their heads. Doctors have now started specialising in diseases like Diabetes, Thyroid, Aids, Sexually Transmitted Diseases (STD), Infectious diseases, TB, Leprosy, Allergy, Immunology, etc. After system, organ and disease, symptom speciality raised its head. Vertigo, Asthma, Deafness, Obesity, baldness, and unthinkable speciality 50-65 years before like Hair & Scalp, Nail, Veins, Cosmetology and cosmetic surgery, etc. Humans by nature are ambitious, greedy and always looking for new ways to earn. Advances have spread in all the specialities and corresponding Paediatric and infant counterparts of the speciality not only came into existence but are recognised and university degrees are created. Sub-branches in paediatrics have developed into recognised speciality. To name a few, we have paediatric cardiology and surgery, Paediatric neurology and surgery, Paediatric ENT, Ophthalmology, etc. Ooph. Today, we have Red Blood Cell and White Blood Cell specialists. From GRASP during pre and immediate post independence period, fist has opened. The profession has developed into 300 specialities. BUT…What has happened with all these advances? It is not the system or organ that was snatched, but the living human being got divided and dissected.

Knowledge of each specialist and super specialist became restricted to his own field. As a practicing ENT specialist, my knowledge of dermatology and opthalmology shrunk to an extent that I am afraid of diagnosing a simple ailment of another speciality. So is the plight of all other specialists. We have become Kupmanduk (Frog in the well – person with limited vision).

Every family needs a doctor for routine health chores viz: Routine medicine, taking the appointment of a consultant, accompanying him to the specialist, following the patient’s health, home visits, etc. During pre-independence and till about two decades ago, this routine service provider was called Family Doctor, who not only knew the patient but his entire family, even the healthier ones, knew the family’s health, financial status and even social history. He was not only a doctor but a friend, philosopher and guide. But the advances have gradually taken the toll on this relation. Now, this poor fellow has to cope up with 300 specialities. Let all these advances go at the speed of a Formula 1 Race, a General Practitioner still deals with 300 specialities. His knowledge goes on shrinking and now the time has come that he has become a referral ‘clerk’. He does not like to take risk. It has reduced the family doctor to ‘General Practitioner’ dealing with routine chorus and often labelled as unlikable word – referring practitioner. Specialist can be a Kupmanduk, but he cannot. He cannot specialise into upper half and lower half or right side or left side of the body. Recent government directive that every doctor must attend CME (Continuous Medical Education) programme to get 12 credit hours in a year to renew the practicing licence. Well! the idea is good, but the outcome is wanting.

At the end of 5 ½ years when he receives the degree, he realises that what he has learned is the hospital based medicine, which is of no use to him in general practice. He has seen the patients in the hospital that he is not going to treat, seen the gadgets which he is never going to operate and attended the operation which he is never going to perform. He has never seen patients with early symptoms, approach during home visits, tackling the emergency and psychology of patients. How will he get that? Experimenting on patients? No wonder, for all professionals, the word coined is ‘Practicing’.

Proliferation of medical speciality has spread its tentacles to the supporting industry viz, instruments, gadgets, medicines, etc. Supporting services like nursing, social workers, physiotherapy, etc. cannot lag behind. So? The specialisation has started in these services. Large metropolitan cities which cater not only to the city crowd but also from town and even from abroad has to keep pace with these advances. 75 bed hospital 60 years ago, has been reduced to small nursing home with basic facilities. I know that Rs. 100 crore was big budget for a ‘large’ hospital 50 years ago. Today, a multi-speciality big hospital would cost at least Rs. 1,000 crore. This is TODAY.

Today, any philanthropist desiring to do charitable service perhaps first thinks of starting a charitable clinic which would cater to patients at nominal charges, giving only 50 % of those charges to the attending consultants. Junior consultants also try their hand at such charitable institutions till they develop their own practice. Management of such clinics or hospitals exploit, dictate, bring undue pressure on the working of the doctors for their noble mission. Bigger the institution, greater is the exploitation of doctors and patients. Doctors are keen to mention on their business cards that they are ‘Honorary’ at such hospital with five star set-up and succumb to the dictats of the management. In such institutions,certain amount of revenue should be brought in the coffers. A blind eye is turned to the various complaints forwarded by fleeced patients. If a doctor cannot bring the desired amount in the kitty, overnight he is dismissed. There is no labour law applicable. There is no union. Higher the professional set up, lower is the chance of unity. If one is thrown out, another is already in the wings to replace him. It is the survival of the fittest.

I would like to give only one classic example – a well known heart surgeon openly tells the patients that he will charge a few lakh of rupees in cash over and above the charges fixed for the bypass surgery by the hospital. Either you get your heart repaired or go elsewhere. Hospital is well aware of this menace, but turns a blind eye and becomes deaf because he fills up their ‘Heart’. In fact, these hospitals do market survey to find out which doctors can fill their coffers. Today, specialists in large hospitals feel they do the work but hospitals are earning more out of his work. A doctor gets only 15 % of the total bill of the patients.

Amount invested in constructing and developing a hospital, purchasing new gadgets, discarding old ones due to advances need to be compensated by consultants of the institution (don’t ask how). Name of the philanthropist and the institution is perpetuated in golden letters in the history. Government audit on health care is patchy. Audit cannot afford to displease multi-millionaire philanthropist. They may need that hospital.

Specialists like to remain in the rat race. They go abroad to keep pace with advances but when they come back they have to convince the hos-pital management to implement what they have learned. A group of experts have to convince a group of businessmen. Only consideration for these businessmen for ‘importing’ advances is, it will it generate revenue; benefit to patients is irrelevant. Here the salesmanship and art of communication of the specialists will help to convince the management. One who sells becomes ‘Eminent’. One who cannot remains frustrated. For every specialist of a big hospital, there are at least ten who do not have the modern infrastructure. Year after year, this ratio is increasing.

Our Netas go abroad for surgery or call foreign experts. They go abroad for some undisclosed illness. Our Indian specialist experts then become stand by, onlooker, accompanying like luggage. They come back home, boast and cater to the common man. They write on their letter-heads jumble of alphabets indicating degrees and also do not forget to check proof which mentions honorary to the President, governor, Padma award, etc. Patients fall in trap of such cargo doctors. Some rich people go to such eminent doctors so they can boast in their high society group.

The road of frustration is unending. Milestones appear at regular intervals. Cutthroat competition and politics in hospitals make specialists regret taking up the medical profession. Well decorated consulting room, stationeries will attract five star patients and not knowledge and skill. He knows that money brings money. He knows that Reserve Bank’s coloured paper will bring status to him. Status brings more money. Those who left the glamour of big cities and left for smaller cities and towns not only prospered but also made a niche in the society and became known in the entire city.

Each specialist acquires knowledge and then tries to establish his sub-speciality. He will arrange lectures, seminars and conferences till he is recognised. From where is he going to get money? It is said that never consult a doctor when he is going abroad, buying a new car, renovating his clinic, purchasing flat or his progeny is getting married. He needs money and is searching for the source. We usually go by the services available in bigger cities but Government statistics are an eye opener. There is short fall of 76% doctors, 88% of specialists, 53 % of nurses and 80% of medical technicians on all India basis.

The menace of exploitation commences after one becomes a doctor. Capitation fees for admission to medical college, post graduate seat, hospital attachment runs into lakhs and at times exceeds a crore. A doctor is bound to recover this ‘ investment’ – sooner the better. Malpractice is a cheap word for recovering the investments – split practice, unnecessary investigations, prolonged hospitalisation, gifts from pharma companies, etc. One need not be brainy to search avenues of recovery. This investment was not there Yesterday. Examiners of medical examinations are bestowed with roll number of quite a few candidates of influential origin to show leniency and pass.

For an average doctor without ready ‘Gaddi’ life begins at 40 for a life span of 65 years. Yesterday, we had the option of selecting medicine, engineering and commerce. Today, generation is reluctant to take up medical profession. Many other professions are offering lucrative career and scope for creativity. Today’s generation does not wish to toil for half their life. They don’t crave for prefix ‘Dr.’ before their name. Non- medico girls do not prefer medico husbands. They want fixed hours of work for husband – evening free to spend time together with spouse, eat timely dinner, have family life with children, no night calls and boring doctors’ party. They don’t want a daily wage earner.

Choice of students will shift from medicine to other technical courses, MBA, computer engineering, jobs are available once they get the degree. Their earnings start during their young age. Medical profession is likely to become a hereditary profession. Paradoxically, India’s population is steadily increasing. Poverty and illnesses are also keeping pace with that. Geriatric population is rising as average life span has increased and so also has age related disorders. Stress has invaded all age groups. Need of doctors can never reduce. Every doctor will have a slice of the pie.

New large hospitals will be set up not by any philanthropists but by corporates. Money resources will be channelised into money spinning specialities like cardialogy, neurology, and orthopaedics which are capable of feeding pathology, radiology, anaesthesiology, hospital beds, and operation theatres. Other specialities are likely to get step motherly treatment. GRASP will be replaced. Button-hole surgery will replace exploratory surgery. Robotic surgery will partially replace human skill.

Consulting charges are steadily rising. At present juniors charge around Rs. 500 whereas seniors and super-specialists are satisfied with Rs. 1000 to Rs. 2500 in metropolitan cities like Mumbai.

Hospitalisation is expensive. Even Municipal Corporation and Government hospitals are beyond the means of people of lower income strata to whom these are supposed to be catering to. Angiography and then Angioplasty costs Rs. 47,000 over and above each stent costs Rs. 15,000. By-pass surgery costs Rs.1,05,000. No service is free. The future will become prohibitive even for middle class. Poor and middle class will be compelled to go to either substandard municipal or government hospitals. High cost of in-house medical services in hospitals will downgrade the preference of upper middle class in selection of hospital and type of room. Five star hospitals will be restricted to people from glamour world, corporate, netas or in dial emergency.

Cost of setting up a hospital will sky rocket. Medical insurance with maximum coverage will be a MUST for every individual. As such cashless hospitalisation is accepted by few hospitals. Experience is that insurance companies do not compensate even the legitimate treatment and hospital bill. Medico-legal cases of negligence of the doctors are on the rise in metropolitan cities. Doctors will not be considered as God.

There is silver lining for Chartered Accountants when medical specialities proliferate. Today with mountain of taxation and amendments coming before the budget, during the budget and any time between the budgets not only as per the need but also politically decided. Speciality has also creeped in CA’s profession. Income Tax, Wealth Tax, Sales Tax, VAT, Excise, Import duty, Export duty, Professional Tax, Service Tax, etc. With the volumes of laws and amendments, doctors are unable to keep track of all this. They turn their head towards CA who in tandem with doctors will take care of their financial health.

Medical profession is too personalised. Faith unlike love does not develop at first sight. Doctor is a daily wage earner. The day he does not work, his income is zero unlike a CA. CA’s staff continues to work on the assigned load. He continues to earn even in his absence and the daily wage earner doctors will continue to feed him. We prosper so you will also prosper.

Section B: I. Scheme of amalgamation accounted as per Purchase Method Nagarjuna Fertilizers and Chemicals Ltd (31-3-2012)

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From Notes to Financial Statements

1. CORPORATE OVERVIEW

a. Nagarjuna Fertilizers and Chemicals Limited (Erstwhile NFCL) has during the year undertaken restructuring of its businesses. Accordingly, a Composite Scheme of Arrangement and Amalgamation (“Scheme”) was prepared, which was duly consented by the shareholders at the Court Convened Meeting held on 15th April, 2011 and also received the approval of jurisdictional High Courts of Andhra Pradesh at Hyderabad and Bombay at Mumbai. The restructuring envisaged de-merger of the Oil business undertaking to a separate company, Nagarjuna Oil Refinery Limited (“NORL”). The scheme also provide for merger of residual business of Erstwhile NFCL into its wholly owned subsidiary viz., Kakinada Fertilizers Limited (“KFL”) along with the business operation of iKisan Limited (iKisan). The entire scheme is made effective from 30th July, 2011 but operative from 1st April, 2011, being the Appointed Date.

b. Pursuant to the Scheme:

 i. Oil Business Undertaking of erstwhile NFCL was demerged into NORL and residual NFCL and iKisan are merged in to KFL.

 ii. The Effective Date of the Scheme is 30th July, 2011 but shall be operative from the Appointed Date i.e. 1st April, 2011. The Record Date of determining shareholders eligible to receive shares of KFL and NORL was fixed as 1st September, 2011.

iii. Equity Shares were allotted to the shareholders of erstwhile NFCL and iKisan on 1st October, 2011 and the account of the respective of shares, the existing pre-arrangement issued capital of Rs. 5 lakh stood cancelled.

iv. The name of KFL stands changed to Nagarjuna Fertilizers and Chemicals Limited w.e.f. 19th August, 2011

 c. The Financial Statement for the year have been drawn-up incorporating necessary adjustments as envisaged in the Scheme and in compliance with purchase method of accounting under AS 14 (Accounting for Amalgamations). In accordance with the Scheme:

i. the assets and liabilities of residual business of erstwhile NFCL and iKisan have been recorded in the books of KFL at Fair Values as on 1st April, 2011

ii. the fair values were determined by the Board of Directors based on the report obtained from a reputed firm of valuers.

iii. the difference between the fair value of equity shares and face value of equity shares is considered as Securities Premium.

iv. the difference between the value of net assets transferred to KFL over the fair value of Equity shares, and Preference shares allotted is credited to Capital Reserve Account. shareholders were credited in electronic mode or share certificates issued, as the case may be. Consequent to the allotment

v. on and from effective date, the Authorised shares capital of NFCL stands increased to Rs.
801,00,00,000/- comprising of 621,00,00,000 equity shares of Rs. 1/- each and 2,00,00,000 preference shares of Rs. 90/- each.

vi. 59,80,65,003 equity shares of Rs. 1/- each aggregating to Rs. 59,80,65,003/- have been allotted to the shareholders of erstwhile NFCL and iKisan on 1st October, 2011 without payment being received in cash.

d. Amalgamation expenses incurred Rs. 500.16 lakh have been adjusted to capital reserve.

e. The Bombay Stock Exchange vide letter dated 14th December, 2011 approved the application of the company for listing of the equity shares and the National Stock Exchange vide letter dated 13th January, 2012 accorded in-principle approval for listing of the equity shares subject to relaxation by Securities and Exchange Board of India from the fulfilment of requirement under Rule 19(2)(b) of Securities Contracts (Regulation) Rules, 1957.

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Extension of filing date for Forms 23AC and ACA ( Form for filing of Balance Sheet and Profit and Loss Account)

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Extension of filing date for Forms 23AC and ACA ( Form for filing of Balance Sheet and Profit and Loss Account)

The
Ministry has vide General Circular No.30/2012 Dated 28.09.2012,
extended the due date of filing the e-forms 23AC(Non-XBRL) and 23ACA
(Non XBRL) as per new schedule VI as follows, to ensure smooth filing
and to avoid last minute rush, without any additional fee :-

  • Company holding AGM or whose due date for holding AGM is on or before
    20.09.2012, the time limit will be 03.11.2012 or due date of filing,
    whichever is later.

  •  Company holding AGM or whose due date for
    holding AGM is on or after 21.09.2012, the time limit will be 22.11.2012
    or due date of filing, whichever is later.

Entension of time limit for filing form 23B (Form for Intimation of Appointment of Auditors)

The
Ministry of Corporate Affairs has vide General Circular No.31/2012
dated 28.09.2012 extended the filing of e-form 23B without any
additional fee till 23.12.2012 or due date of filing whichever is later.
All are advised to file e-form 23B after 22.11.2012 to avoid system
congestion. For full circular –

MCA Front offices situated at
Delhi, Chennai, Mumbai and Kolkata are being discontinued with effect
from 8th of October, 2012 , and hence, will not be available to offer
any assistance to MCA stakeholders.

Amendment to companies (issue of indian depository receipts) rules

The
Ministry of Corporate Affairs has issued the Companies (Issue of Indian
Depository Receipts) Amendments Rules 2012. The Rule 10 (i) of
Companies (Issue of Indian Depository Receipts Rules, 2004 has been
substituted as follows: “ A Holder of IDR’s may transfer the IDR’s, may
ask the domestic depository to redeem them or, any person may seek
reissuance of IDR’s by conversion of underlying equity shares, subject
to the provisions of the Foreign Exchange Management Act, 1999,
Securities and Exchange Board of India Act, 1992, or the rules,
regulations or guidelines issued under these Acts, or other law for the
time being in force.”

They shall come into force from the date of publication in the Official Gazette.

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Amendments to XBRL filing rules

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The Ministry of Corporate Affairs has vide Notification No 17/161/2012 dated 12th October 2012 amended the Companies (Filing of Documents and Forms in Extensible Business reporting Language) Rules 2012 to come into force with effect from 14th October 2012. As per the new Rules, the following class of companies have to file their Balance Sheet Profit and Loss Account and any other document as required under section 220 of the Companies Act, 1956 with the Registrar using the Extensible Business Reporting Language (XBRL) taxonomy given in Annexure II for the financial year commencing on or after 1st April, 2011 with e-Form No. 23AC-XBRL and 23ACA-XBRL specified under the Companies (Central Government) General Rules and Forms, 1956 namely:-

(i) all companies listed with any Stock Exchange(s) in India and their Indian subsidiaries; or

(ii) all companies having paid up capital of rupees five crore and above; or

(iii) all companies having turnover of rupees one hundred crore and above; or

(iv) all companies covered under rule 3 i.e, all companies who were required to file their financial statements for FY 2010-11 using XBRL.

Provided that the companies in Banking, Insurance, Power Sectors and Non-Banking Financial companies are exempted for Extensible Business Reporting Language (XBRL) filing for the financial year commencing on or after 1st April, 2011.

Final version of the MCA XBRL Validation Tool (for Financial Statements based upon new Schedule VI of the Companies Act, 1956) has been released. XBRL filings of financial statements for accounting year commencing on or after 01.04.2011 have been enabled on MCA website with effect from 14.10.2012. Stakeholders are also advised to refer to the ‘Filing Manual’ available on the XBRL portal for filing the financial statements in XBRL format. Tool available on http://xbrltool.mca.gov.in/XBRL/XBRL_TOOL/ MCAXBRLValidationTool_Version_2.0.zip

All XBRL filing companies are allowed to file their financial statements without any additional fee/ penalty upto 15th November 2012 or within 30 days of the date of their AGM, whichever is later.

In Annexure 1 to the general Circular No 33/2012, the MCA has illustrated the common errors that were observed on a close scrutiny of the XBRL filings for 2011, which need to be taken care of by certifying Chartered Accountants, Cost and Works Accountants and Company Secretaries.

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A. P. (DIR Series) Circular No. 44 dated 12th October, 2012

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Foreign Exchange Management (Deposit) Regulations, 2000 – Loans to Non Residents/third parties against security of Non Resident (External) Rupee Accounts [NR(E)RA]/Foreign Currency Non Resident (Bank) Accounts [FCNR (B)] Deposits

Presently, banks are permitted to grant loans in Indian rupees/foreign currency against NRE/FCNR(B) deposits to the deposit holder/third party up to Rs. 100 lac.

This circular has removed the ceiling of Rs. 100 and provides for grant of loans without any ceiling, subject to appropriate margin requirements. Loans will include all types of fund bases as well as nonfund based facilities. The table reads as follows: –

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Business expenditure: Capital or revenue: Section 37: Settlement charges and legal expenses for settlement of dispute is revenue expenditure allowable as business deduction:

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[CIT Vs. Airlines Hotel (P) Ltd.; 253 CTR 78 (Bom):]

Assessee was carrying on the business of conducting and managing a restautant. Under an agreement, assessee had granted a licence and permission to J to conduct and manage the restaurant business. Dispute arose between the assessee and J, which resulted in the filing of a suit before the City Civil Court, in which consent terms were arrived at and a decree was passed by consent. As per the consent decree, the assessee made payment to J which included settlement charges of Rs. 5,50,750/-. The assessee had also incurred legal expenditure of Rs. 1,65,500/- in that respect. The assessee claimed both these amounts as deduction as revenue expenditure. The Assessing Officer disallowed the claim. The Tribunal allowed the claim.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) The payment which assessee made to the conductor J included settlement charges of Rs. 5,50,750/- as recorded in the settlement of account. This payment was a payment which the assessee effected for resolving disputes and removing the hindrance which was caused in the management and conducting of the restaurant.

ii) The conductor was a bare licensee and had no interest by way of tenancy or otherwise, in respect of the premises. Consequently, the payment which was made by the assessee was one which in the true sense of the term was for removing the obstruction or hindrance in conducting and managing the restaurant and must be regarded as a matter of commercial expediency.

iii) The legal expenses in the amount of Rs. 1,65,500/- are also clearly an allowable deduction for the same reason.

iv) In this view of the matter, the view which has been taken by the Tribunal is correct.”

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PART A : Orders of CIC

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Information: Section 2(f) of the RTI Act

Information is defined u/s 2(f) as under:

“Information” means any material in any form, including records, documents, memos, e-mails, opinions, advices, press releases, circulars, orders, logbooks, contracts, reports, papers, samples, models, data material held in any electronic form and information relating to any private body which can be accessed by a public authority under any other law for the time being in force.

Four orders on various points connected with “Information” are briefly reproduced hereunder:

The applicant in most of his queries, wanted to know about the reasons why the Central Vigilance Officers (CVOs) of a number of Public Sector Undertakings (PSUs) are not working/ functioning – he has assumed that the CVOs of PSUs are not functioning properly and wants the CPIO of the CVC to provide the reasons – the Commission held that the right to information cannot be used to seek either confirmation or rebuttal of one’s personal assumption, as in this case. Information has been defined in section 2(f) to mean any form, including records, documents, memos, e-mails, opinions, advices, press releases, circulars etc. Wherever a citizen seeks any information, it must be contained in some records or file or documents in the possession of the public authority concerned. Therefore, the response of the CPIO of the CVC and other CPIOs, as well as that of the Appellate Authority appears to be absolutely in order.

[Omprakash Kashiram vs CPIO, Central Vigilance Commission – Order dated 12.03.2012 Citation: RTI III (2012) 140 (CIC)] l

Appellant submitted RTI application dated 14th August 2010 before the CPIO, Prime Minister’s Office, New Delhi, seeking the details of functioning of Punjab and Sindh Bank through 44 points.

Decision Notice
The Commission notices that the Appellant has not asked for any specific information in his RTI Application and/or second appeal to the Commission, to be given by the Respondent Public Authority.

The Appellant was given an opportunity to explain the precise information sought, but has chosen not to attend the hearing. Also, the Appellant has not provided a copy of the Second appeal to the Respondents as per the RTI Act.

Thus, based on the submissions of the Respondents, the Commission is satisfied that information as held by the Respondents has been provided to the Appellant.

The Commission through this Order would also like to highlight the abuse of Transparency Act by the Appellant in asking voluminous questions under the Act (44 questions in this case) from the Public Authority and thereby dissipating the scarce resources of the Public Authority without meeting any larger public interest objective.

The Supreme Court in the case Central Board of Secondary Education & Anr v Aditya Bandopadhyay & Ors/ CIVIL APPEAL NO. 6454 OF 2011 [RTIR II (2011) 242 (SC)], has stated:

“Indiscriminate and impractical demands or directions under RTI Act for disclosure of all and sundry information (unrelated to transparency and accountability in the functioning of public authorities and eradication of corruption) would be counter-productive, as it will adversely affect the efficiency of the administration and result in the executive getting bogged down with the non-productive work of collection and furnishing information. The Act should not be allowed to be misused or abused, to become a tool to obstruct the national development and integration, or to destroy the peace, tranquility and harmony among its citizens. Nor should it be converted into a tool of oppression or intimidation of honest officials striving to do their duty. The nation does not want a scenario where 75% of the staff of public authorities spends 75% of their time in collecting and furnishing information to applicants, instead of discharging their regular duties. The threat of penalties under the RTI act and the pressure of the authorities under the RTI act should not lead to employees of a public authorities prioritizing ‘information furnishing’, at the cost of their normal and regular duties”.

The Commission, in the light of the above observation made by the Hon’ble Supreme Court, would like to inform the Appellant to ask a specific and limited question under the RTI Act, 2005 in the future and to use his cherished right given under the Transparency Act with greater responsibility.

[Kundan Kumar Sinha vs Department of Financial Services, New Delhi – Order dated 26.04.2012: Citation: RTIR II (2012) 185 (CIC)]

Briefly, the fact that emerged during the hearing is that the appellant was in the post of Sr. Assistant in the pay-scale of Rs. 6,300/-. The post of Jr. Engineer was advertised in the scale of Rs. 8,000/-. The appellant was selected for the post of Sr. Assistant. Before he joined, the post was down-graded to the scale of Rs. 6,300/-. The appellant after having joined the new post, has certain issues regarding promotion in that cadre.

Having heard the submissions of the parties, the Commission observes that the appellant has grievances regarding the pay scale. The RTI is not the forum for redressal of grievances. The appellant, in case he so desires, may file his grievance petition before the competent authority. As far as providing information under the RTI Act is concerned, requisite information as per record and permissible under the RTI Act has been provided to the appellant by the respondent.

[Vipin Prakash vs Airports Authority of India – Order dated 23.03.2012: Citation: RTIR II (2012) 150(CIC)]

 Background
The Applicant filed his RTI application on 24.12.2010 with the PIO Railway Board stating that his pay fixation has been done incorrectly and requesting the PIO to rectify the same. He also sought a copy of the pay fixation chart of his Junior, one Mr Ram, who is drawing a higher salary than him. The PIO provided some information, dissatisfied with which the Applicant filed his first appeal seeking the rule based on which his salary was fixed. The Appellate Authority disposed off the appeal on 6.09.2011 holding that information provided is complete and as available in the records. The Applicant thereafter filed his second appeal stating that he is not satisfied with the information.

Decision
The Appellant requested the Commission during the hearing to direct the public Authorities to fix his pay correctly. The Commission, however, holds that the Appellant is not seeking any information as available in the records and therefore the relief being sought by him cannot be granted. It is however, recommended that the PIO clarify to the Appellant about how his pay has been fixed based on the 6th Pay Commission recommendations and also to provide him with a copy of his pay fixation chart preferably by 15th May 2012.

The appeal is disposed of with the above recommendation and the case is closed.

[Rajendra Singh vs Bhavan, New Delhi-Order dated 11.04.2012:Citation: RTIR II (2012) 177 (CIC)]

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Bombay Money-Lenders Act

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Introduction
When one hears the term “money-lenders” what is the first image which comes to mind? In most cases, one would associate them with rural moneylenders giving loans at exorbitant rates of interest to poor farmers. While this is one important facet of the term, it would come as a surprise to many that even someone advancing interest-bearing loans to friends and relatives may come within the purview of this term under various State Money-lending laws, if it is the business of the lender to lend on interest. For instance, the State of Maharashtra has enacted the Bombay Money-Lenders Act, 1946 for the regulation and control of transactions of moneylending within the State. Let us consider some of the important aspects of this Act.

Applicability
Section 5 is the main operative section of the Act. It provides that no money-lender can carry out the business of money-lending without a licence for the same. Further, the business must only be carried out in the area for which he has been granted a licence and in accordance with the terms and conditions of such licence. Thus, any business of money-lending without a licence is prohibited by the Act. In order to constitute an offence under the Act, the money-lender must carry on business in an area outside of what has been permitted by his licence – Bhavarlal Pruthviraj Jain v State of Maharashtra, 191 Bom CR 878.

A money lender has been defined to mean any individual, HUF, company, AOP, etc., who carries on the business of money-lending in the State of Maharashtra. However, banks, any financial/other institution notified by the State Government are excluded from the definition of a money-lender.

One of the important restrictions under the Act is the maximum rate of interest which a lender is entitled to charge. This rate is notified from time to time by the State Government. Currently, the maximum rate of interest for loans to any person other than an agriculturist is 18% p.a. in case of secured loans, whereas it is 20% in the case of unsecured loans.

Business of Money-lending
The next question which becomes relevant is that what constitutes a business of money-lending under the Act? The Act defines it to mean the business of advancing loans whether in cash or in kind and whether or not in connection with or in addition to any other business. Thus, two important facets are relevant – (a) there must be advancing of loans; and (b) such advancing must constitute a business.

What constitutes a business has not been defined and hence, useful reference may be made to various decisions under the Income-tax on what constitutes a business. The Supreme Court in the case of Distributors Baroda P. Ltd., 83 ITR 237 (SC) has held that when the Legislature speaks of the business of holding of investments, it refers to a real, substantial and systematic or organised course of activity of investment carried on by the assessee for a set purpose, such as earning profits. If the investments are only made for a collateral purpose, then it cannot be considered as the business of the assessee. A similar reasoning may be applied to the activity of giving loans. Of course, it goes without saying that whether or not a lending constitutes a business, would be driven more by the facts and circumstances of each case. However, some of the relevant factors would be the quantum of loans, frequency and number of transactions, type of borrowers, rate of interest charged, security demanded, organisational set-up of lender, etc.

In the case of Gajanan v. Seth Brindaban AIR 1970 SC 2007, the Apex Court considered as to when could a person be considered to be a money-lender:

“The word ‘regular’ shows that the plaintiff must have been in the habit of advancing loans to persons as a matter of regular business. If only an isolated act of money-lending is shown to the court it is impossible to state that it constitutes a regular course of business. It is an act of business, but not necessarily an act done in the regular course of business……….

………….on its plain reading only prohibits the carrying on of the business of money-lending in any district without holding a valid registration certificate in respect of that district. It does not prohibit and, therefore, does not invalidate an isolated transaction of lending money. Such an isolated transaction seems to us to be outside the rigour of the prohibition.”

What is a Loan?
Advancing of a loan is the prime requirement for a money-lender. Hence, let us examine what constitutes a loan? The Act defines it to mean an advance at interest.

The term interest has been defined under the Act to include, any sum, in excess of the principal paid or payable by a money-lender in consideration of or otherwise in respect of a loan. However, interest does not include any sum lawfully charged by a money-lender for or on account of costs, charges, expenses under this Act / any other Law.

The following transactions are excluded from the definition of the term loan and hence, dealing in them would not constitute a business of moneylending for the lender:

(a) A deposit of money in any Bank or in a Company or a Co-operative Society. Thus, a Company accepting Public Deposits under s.58A of the Companies Act or under the NBFC Directions for Public Deposits would not be covered by the definition of loan.
(b) A loan to or by or a deposit with a Society registered under the Societies Registration Act
(c) Loan advanced by Government or by any local authority
(d) A loan advanced to a Government servant from a fund
(e) A loan advanced by a co-operative society
(f) Advance made to a subscriber or a depositor in a Provident Fund from the amount standing to his credit in the fund
(g) A loan to or by an Insurance Company
(h) A loan to or by or deposit with anybody incorporated by any law for the time being in force in the State
(i) An advance of a sum exceeding Rs 3,000 made on the basis of a hundi
(j) An advance made bonafide by any person carrying on any business not having the primary object of lending money. However, such an advance must be made in the regular course of his business. Whether or not an advance has been made bonafide in the regular course of business is a question of fact. (k) An advance of more than Rs 3,000 made on the basis of a negotiable instrument other than a Promissory Note. This is the most important exception.

Hence, every loan is not covered by the provisions of the Act, since an advance of more than Rs 3,000 made on the basis of a negotiable instrument other than a Promissory Note is excluded – Rajesh Varma v Aminexs Holdings, 2008 (3) Mah. L.J. 460. A negotiable instrument means one defined under the Negotiable Instruments Act, 1881. This Act defines a negotiable instrument to mean “a promissory note, bill of exchange or cheque payable either to order or to bearer.” However, a Promissory Note is expressly excluded. Hence, only if the loan is given on the basis of a cheque or a bill of exchange it would be out of the purview of the Act.

Accordingly, any advance of more than Rs 3,000 made on the basis of a post-dated cheque as a security is out of the purview of this Act – Nandram Kaniram v N.B. Raahtekar, 1994 (1) Bom CR 28; Sitaram Laxminarayan Rathi v Sitaram Kashiram Koli, 1984 (2) Bom CR 92.

Consequences of Not Holding Licence

One of the important consequences of carrying on the business of money-lending without a valid licence is laid down in section 10. According to this section, no Court would pass a decree in favour of a person not holding a valid licence for any suit under this Act. Thus, a suit for recovery of dues by such a person is liable to be dismissed. Even a suit for winding up of a borrower company u/s. 433 of the Companies Act, 1956 would be barred in case the lender is in violation of the Bombay Money-Lenders Act. This principle has been laid down by the Bombay High Court in the case of Marine Container Services (India) P Ltd v Rushabh Precision Bearings Ltd., 106 Comp. Cases 108 (Bom) which held as follows:

“I find no difficulty in so also construing section 434(1)(c) to hold that a petition for winding up u/s 433(e), r.w.s. 434(1)(a), would lie only if the debt was legally recoverable. The fact that the present is a company petition and under the Bombay Money-Lenders’ Act, no relief will be granted if the suit is filed would also make the debt unenforceable under the Act. It is no doubt true that a company petition is not a petition for recovery of dues from a company. Nevertheless, to wind up a company u/s 434(1) (a), the amount must be a debt which is legally recoverable. If the recovery itself is barred u/s 10 of the Bombay Money-Lenders’, Act, I am of the opinion, therefore, that in such a case the petition filed on the ground that the company is unable to pay such a debt, would also not be maintainable.”

If a money-lender who does not have a valid licence is in possession of the property of a loan debtor as a security, then the same can be requisitioned and delivered to the loan-debtor.

Several decisions have held that if a valid licence is not held by the money-lender, then the loan ceases to be a legally enforceable debt u/s. 138 of the Negotiable Instruments Act, 1881. Hence, if the debtor pays a cheque to such a lender which subsequently bounces, then the lender is not entitled to file a criminal suit for the cheque bouncing u/s 138 – Mulchand Ramji Saiya v Premji Ratanshi Gangar, Cr. A. No. 5397 of 2010 (Bom); Nanda Dharam Nandanwar v Nandkishor Talakram Thaokar, 2010 ALL MR (Cri) 733; Anil Baburao Kataria v Pursuhottam Prabhakar Kawane, 2010 ALL MR (Cri) 802.

Further, the Act prescribes  a penalty for carrying on the business of money-lending without a valid licence. For the first offence, the punishment is a term of up to one year and/or a fine of Rs. 1,500. For every subsequent offence, the penalty is a term of at least two years.

Does the Law apply to NBFCs?

Banks have been expressly exempted. However, there is no clarity on whether or not the Act applies to NBFCs. Since money-lending is a State subject, different States and their High Courts have taken divergent views. One of the biggest bones of contention is that the State laws establish maximum rates of interest that can be charged by a money-lender whereas, the RBI has not established a ceiling on the rate of interest that can be charged by an NBFC. Some States such as Karnataka have specifically exempted certain NBFCs from the provisions of the Money Lenders Act, while there is a blanket exemption for all NBFCs in Rajasthan.

In Sundaram Finance Ltd, Special Civil Application No. 13163 of 2008 (Order dated 13th January 2010) and in Radhey Estate Developers v Mehta Integrated Finance Co Ltd, Special Civil Application No. 66 of 2010 (Order dated 26 April 2011) the Gujarat High Court ruled that the Bombay Money Lenders Act, as applicable to the State of Gujarat, does not apply to NBFCs which are regulated by the RBI.

However, the Kerala High Court has consistently been taking a view that even NBFCs are covered by the State money lending Act – Link Hire-Purchase and Leasing Co. (Pvt.) Ltd v State of Kerala, 103 Comp. Cas 941 (Ker).

Muthoot Finance Ltd has filed a Special Leave Petition (SLP. No. 14386/2010 on September 07, 2010) before the Supreme Court challenging the order of the High Court of Kerala approving the Order of the Government of Kerala notifying that provisions of the Kerala Money Lenders Act, 1958 which regulated and controlled money lending business in the state of Kerala, was applicable to NBFCs. The matter is currently pending before the Supreme Court.

Auditor’s duty

The Auditor should enquire of the auditee, whether it has complied with the aforesaid provisions in respect of any money-lending transactions executed into by it. In case the Auditor comes across a transaction which does not comply with any provisions of the above Acts, then he will have to consider whether appropriate disclosures should be made in the Notes to Accounts or whether the non-compliance is so material so as to warrant a qualification in his report.

He may insist upon a legal opinion to support any claim which the auditee is making. He can caution the auditee of likely unpleasant consequences which might arise. It needs to be repeated and noted that an audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is to exercise of ‘due care’ and ‘diligence’.

IS IT FAIR TO INVOKE PROSECUTION PROCEEDINGS SO RAMPANTLY?

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Introduction
All of us are aware that under the tax laws, any default or contravention of the provisions attract various types of consequences such as interest, penalty, fee (new section 234E), disallowance and even prosecution. Prosecution implies a criminal offence and may invite punishment of rigorous imprisonment. It is expected that while administering any law, the authorities should use discretion and a sense of proportion. The penal consequence should not be disproportional to the nature of default or offence. This is an elementary principle of jurisprudence. However, of late, there are notices issued rampantly invoking prosecution in terms of section 276B of the Income-tax Act, 1961 (‘the Act’) even for delays in payment of tax deducted at source. This article proposes to bring out the unfair part of administering this provision.

Text of section 276 B
It is worthwhile examining the wording of the relevant provision closely. The text is as follows:

276B. Failure to pay tax to the credit of Central Government under Chapter XIID or XVIB

“If a person fails to pay to the credit of the Central Government,

(a) the tax deducted at source by him as required by or under the provisions of Chapter XVII B; or

(b) the tax payable by him, as required by or under,

(i) s/s (2) of section 115 – O; or

(ii) the second proviso to section 194B,

he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine.”

Views:
Firstly, the very heading suggests that there should be a failure to pay the tax. Secondly, the placement of clause (a) in the section, makes it clear that it pertains to the tax deducted as per the provisions of Chapter XVII B – and not the ‘payment as per provisions of Chapter XVII B. Thus, failure to pay is on a different footing. Put differently, payment need not be within the time specified in that Chapter.

In short, the section contemplates total failure and not mere delay. As against this, even if the tax is already paid with interest, the notices for prosecution are being issued. The notices also mention the fact of prior payment! This then, is clearly against the wording and spirit of the provision.

It is pertinent to note that CBDT has issued instruction no. 1335 of CBDT, dated 28-5-1980 to the effect that prosecution should not normally be proposed when the amounts involved are not substantial and the amount in default has also been deposited in the meantime to the credit of the Government.

The Hon’ble Punjab and Haryana High Court, taking cognizance of this instruction, has already struck down the prosecution in the case of Bee Gee Motors & Tractors v ITO (1996) 218 ITR 155.

It is necessary to compare the text of section 276B with provisions of section 40(a)(ia). Section 40(a) (ia) contemplates a time limit for the payment of tax as well; and not merely the deduction as per Chapter XVII B. For mere delay, there are already adequate provisions viz. section 40(a) (ia) disallowance; 201(1A) – interest, 271 C and 221 – penalty. Thus, section 276B clearly applies to total failure and not a mere delay.

Incidentally, even under Service Tax, the Central Board of Excise & Customs has issued a circular no. 14/2011 dated 12.05.2011 stating that, “provisions relating to prosecution are to be exercised with due diligence, caution and responsibility after carefully weighing all the facts on record. Prosecution should not be launched merely on matters of technicalities. Evidence regarding the specified offence should be beyond reasonable doubt, to obtain conviction. The sanctioning authority should record detailed reasons for its decision to sanction or not to sanction prosecution, on file.” In its introductory paragraphs, it also mentions the purpose of prosecution stating that, “While minor technical omissions or commissions have been made punishable with simple penal measures, prosecution is meant to contain and tackle certain specified serious violations” It is all the more unfair that in certain jurisdiction, the limit fixed for prosecution is as low as Rs. 25,000/-.

Conclusion:
The harassment by Revenue Authorities has become a rule of the day. Notices contrary to the express provisions of law, spirit behind the law and in disregard of the CBDT instructions are clearly unfair and objectionable. A suitable clarification from CBDT will help avoiding redundant paper work and botheration.

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Unregistered Partition Deed – Is not admissible in evidence for any purpose. Stamp Act, section 35; Registration Act section 17(1)(b) and 49(c):

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[Lakkoji Mohana Rao v. Lakkoji Viswanadham & Ors AIR 2012 AP 110]

The brief facts of the case are that the petitioner is the elder stepbrother of the first respondentplaintiff. The petitioner herein, his mother and his elder sister filed a suit against the first respondent herein and his elder sister for partition of the family land and the house property, the said suit was decreed. In the Appeal, the District Court allowed the Appeal in part and accordingly final decree was passed and in terms of the said final decree, the properties were partitioned and possession was delivered to each of the parties. Since then, the parties are in possession of their respective allotted shares. The first respondent herein filed a suit alleging that the petitioner herein has been attempting to trespass into the land allotted to him. The petitioner herein has admitted about passing of the decree in earlier suit and also about the execution proceedings, but his main version was that there was no actual delivery of the properties as per the proceedings in execution though it was only a paper delivery. His main case is that after conclusion of the execution proceedings, the parties were not satisfied and the disputes had not ended; hence both the parties approached the elders and as per the advice of the elders, the properties were again partitioned on 14-03-2004 and since then, the petitioner herein is in possession and enjoyment of those properties.

The further case of the petitioner is that, the settlement entered into before the elders was reduced into writing in the month of March, 2004 and signed by both the parties and attested by elders.

The first respondent-plaintiff opposed the marking of the said document. His case is that the parties have partitioned their properties long back and the first respondent-plaintiff is in possession and enjoyment of the plaint schedule properties and that the alleged partition deed, dated 14-03-2004 is a forged one and created for the purpose of this case. It is also his case that the said document requires registration and it is not stamped, so it cannot be looked into.

The Hon’ble Court observed that the document sought to be filed was nothing but a partition deed creating right and title in the lands said to have been allotted to the parties. It is settled law that registration of document which is to be required u/s 17(1)(b) of the Registration Act makes the document inadmissible in evidence. U/s 49(c) of the Registration Act, no document required by section 17 to be registered, shall be received as evidence of any transaction affecting the said property, unless it has been registered. Of course, the proviso says that an unregistered document affecting immovable property and required to be registered, may be received as evidence of a contract in a suit for specific performance or as evidence of part performance of a contract for the purpose of section 53-A of the Transfer of Property Act or as evidence of any collateral transaction not required to be affected by registration of instrument.

The A.P. Amendment Act 17 of 1986 came into force with effect from 16-08-1986 and definition of ‘instrument of partition’ u/s 2(15) of the Indian Stamp Act has been amended. Even a memo recording past partition is also brought within the definition of ‘instrument of partition’ by virtue of the said amendment. Thus, the argument that a document is merely a record of family arrangement, settlement or acknowledgment of prior partition and admissible for collateral purpose is no more available after the above amended provisions of Indian Stamp Act came into force. Section 35 of the Indian Stamp Act is very clear and creates a clear bar and therefore unstamped document is inadmissible in evidence for any purpose. Admittedly the alleged document i.e. partition deed is chargeable with duty. In view of the settled legal position i.e. the bar engrafted u/s 35 of the Indian Stamp Act is an absolute bar and therefore the document cannot be used for any purpose unlike the bar contained in section 49 of the Registration Act.

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Right of daughters of coparcener – Amended provision of section 6 came into effect from 9-9-2005 – Said provision does not have retrospective effect: Hindu Succession Act 1956:

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[Ms. Vaishali Satish Ganorkar & Anr v. Satish Keshorao Ganorkar & Ors AIR 2012 Bom 101]

The court was considering the effect of amended provision section 6 of the Hindu Succession Act (HSA), 1956. The Court observed that until a coparcener dies and his succession opens and a succession takes place, there is no devolution of interest and hence no daughter of such coparcener to whom an interest in the coparcenary property would devolve would be entitled to be a coparcener or to have the rights or the liabilities in the coparcenary property alongwith the son of such coparcener.

It may be mentioned, therefore, that ipso facto upon the passing of the Amendment Act, all the daughters of a coparcener in a coparcenary or a joint HUF do not become coparceners. The daughters who are born after such dates would certainly be coparceners by virtue of birth, but a daughter who was born prior to the coming into force of the amendment Act, she would be a coparcener only upon a devolution of interest in coparcenary property taking place.

The section is required to be interpreted to see whether a daughter of a coparcener would have an interest in the coparcenery property by virtue of her birth in her own right, prior to the amendment Act having been brought into effect. It may be mentioned that prior to the amendment Act (aside from the State Amendment Act of 1995 which amended Section 29 of the HSA) indeed the daughter was not a coparcener; she had no interest in a coparcenery property. She had, therefore, no interest by virtue of her birth in such property. This she got only “on and from” the commencement of the amendment Act i.e, on and from 9th September 2005. The basis of the right is, therefore, the commencement of the amendment Act. The daughter acquiring an interest as a coparcener under the section was given the interest which is denoted by the future participle “shall”. What the section lays down is that, the daughter of a coparcener shall by birth become a coparcener. It involves no past participle. It involves only the future tense. Consequently, by the legislative amendment contained in the amended Section 6 the daughter shall be a coparcener as much as a son in a coparcenery property. This right as a coparcener would be by birth. This is the natural ingredient of a coparcenery interest since a coparcenery interest is acquired by virtue of birth and from the moment of birth. This acquisition (not devolution) which until the amendment Act was the right and entitlement only of a son in a coparcenary property, was by the amendment conferred also on the daughter by birth. The future tense denoted by the word “shall” shows that the daughters born on and after 9th September 2005 would get that right, entitlement and benefit, together with the liabilities. It may be mentioned that if all the daughters born prior to the amendment were to become coparceners by birth, the word “shall” would be absent and the section would show the past tense denoted by the words “was” or “had been”. The future participle makes the prospectivity of the section clear.

A reading of Section as a whole would, therefore, show that either the devolution of legal rights would accrue by opening of a succession on or after 9th September 2005 in case of daughters born before 9th September 2005 or by birth itself in case of daughters born after 9th September 2005 upon them.

The general scope and purview of the Amendment Act of 2006 is to make all daughters coparceners, so as to devolve upon them the share in coparcenery property along with and as much as all the sons. The remedy that it seeks to apply is to remove gender discrimination in such devolution of interest. Further, it makes every daughter by birth a coparcener. The former law was that the daughter was not by birth a copercener and no interest in a coparcenery devolved upon her by succession, intestate or testamentary. The legislation contemplated that on and from 9th September 2005, the daughter would become a coparcener by birth for the devolution of interest in coparcenery property. The Act of 2006 received the assent of President on 5th September 2005 and was published in the Gazette of India on 6th September 2005. The amended section 6 was to come into effect expressly from 9th September 2005.

In the amended HSA, mere protection is not granted to the daughters; they are given a substantive right to be treated as coparceners upon devolution of interest to them and even otherwise by virtue of their birth. This grant would effect vested rights, as in this case, when alienations and dispositions have been made. Hence, retrospectivity such as to make the Act applicable to all the daughters born even prior to the amendment cannot be granted, when the legislation itself specifies the posterior date from which the Act would come into force unlike the anterior date in the Orissa Tenants Protection Act 1948.

The rights of a daughter such as to effect vested rights would be on a wholly different footing and, therefore, cannot be applied retrospectively

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Oral family arrangement – Registration not necessary – Transfer of property Act section 5, Registration Act section 17(1)(b):

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[Bupuram Bora & Ors v. Anil Bora & Ors AIR 2011 Gauhati 104]

The respondent Nos.1 to 5 as plaintiffs had instituted the suit for declaration of right, title and interest over the land. The case of the plaintiffs was that the property originally belonging to Gura Kalita, alias Bora and Lessa Kalita. After the death of Gura Kalita, his share in the property devolved on his three sons, namely, Teen Bora, Gunaram Bora and Deben Bora and on the death of Lessa Kalita, his share in the property devolved on his only son, namely, Dharani Kalita alias Bora and accordingly, all of them have been jointly enjoying the land. According to the plaintiffs, while they were in joint possession, the proforma defendants, namely, the successor-in-interest of Teen Bora and Deben Bora, who are the brothers of plaintiffs’ father Gunaram Bora and Dharani Kalita, the successor-in-interest of Lessa Kalita, had given up their rights in respect of their shares, which land was under possession of the plaintiffs from before, by virtue of amicable partition amongst the members of the joint family, for which a document dated 14.09.1990 was subsequently executed, which however, was not registered.

It is also the case of the plaintiff that on or about 02.03.1992 the principal defendants/appellants encroached on the land. The Trial Court decreed the suit of the plaintiffs/respondents declaring the right, title and interest.

The substantial question of law raised which was relevant for the purpose of the appeal, i.e. whether by virtue of unregistered deed, the plaintiffs could acquire the right, title and interest in respect of Schedule land. It has been submitted that since, by the said document, Dharani Kalita alias Bora, son of Lessa Bora apart from Dombaru Bora and Gorsing Bora, both are sons of Bogiram Bora, relinquished their rights in respect of the land measuring 3 kathas 5 lechas in favour of the plaintiffs, who are sons of Gunaram Bora, who is the brother of Teen Bora, Deben Bora, Dharani Kalita alias Bora and Bogiram Bora, the said document cannot confer any right, title and interest on the plaintiffs, as the said document is not registered, though compulsorily registerable u/s 17(1)(b) of the Registration Act, 1908. Though the said document is titled as “Abandonment of Sharecum- Sale Deed”, the contents of the same reveals recording in writing as a memorandum of what had been agreed upon between the parties in the family arrangement earlier arrived at amongst the heirs so that there is no hazy notions about it in future. It is apparent from the said document that in fact no consideration amount was paid and as such it is not a sale deed requiring compliance of section 54 of the Transfer of Property Act r.w.s. 17(1)(b) of the Registration Act.

The Court held that the family arrangement can be arrived at orally and its terms may be recorded in writing as a memorandum of what had been agreed upon between the parties. Such memorandum need not be prepared for the purpose being used as a document on which future title of the parties to be founded and if such memorandum is prepared as record of what had been agreed upon so that there are no hazy notions about it in future, the same is not required to be registered. On the other hand, it is only when the parties reduced the family arrangement in writing with the purpose of using that writing as proof of what they had arranged and, where the arrangement is brought about by the document as such, that the document would require registration as it is then that it would be a document of title declaring for future what rights in what properties the parties possess. In Kale (AIR 1976 SC 807) the Apex Court following its earlier decision in Tek Bahadur Bhujil (AIR 1966 SC 292) as well as other decisions, has held that a family arrangement may even be oral, in which case there is no requirement of registration of such arrangement. It has also been held that the registration would be necessary, only if the terms and recitals of a family arrangement made under the document and as such registration is not necessary, when the document is a mere memorandum prepared after the family arrangement had already been made either for the purpose of the record or for information of the court for making necessary mutation, as such memorandum itself does not create or extinguish any rights in immovable properties and as such is not required to be compulsorily registerable u/s 17(1) of the Registration Act.

The document as well as the evidence adduced by the plaintiffs, reveal that a family arrangement had already been made and the document is nothing but the memorandum prepared after such family arrangement for the purpose of record and for the purpose of mutation of the names of the plaintiffs, who are the legal heirs of Gunaram Bora. Accordingly, the mutation was initially granted in favour of the plaintiffs over the suit land described in Schedule-A. By the said document the family arrangement has not been made. What it has indicated is only the family arrangement which had already been made and as such is not required to be registered under the Registration Act. The contention of the appellants/ defendant Nos.1 to 5 that the document is compulsorily registerable cannot, therefore, be accepted and hence rejected.

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Natural justice – Audi alteram partem – Right to hearing – Constitution of India Article 14:

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[Allied Motors Ltd v. Bharat Petroleum Corporation Ltd. (2012) 2 SCC 1]

On 15-5-2000, an unauthorised police officer accompanied by the respondent BPCL’s officials conducted a raid at the appellants petrol pump and collected samples. On the very next day, without even giving a show cause notice and/or giving an opportunity of hearing, BPCL terminated the appellants dealership. The appellant had been operating the petrol pump for the respondent for the past 30 years. During that period, on a number of occasions, samples were tested by the respondent and were found to be as per the specifications. After unsuccessfully challenging the termination of its dealership before the High Court, the appellant filed the appeal by SLP.

Before the Supreme Court, the appellant contended that its dealership had been terminated in an arbitrary manner and in violation of the principles of natural justice and also in violation of the Motor Spirit and High Speed Diesel Marketing Discipline Guidelines, 1998, section 1(d)(ii) secondly, the search and seizure was by an unauthorised police official.

The Hon’ble Supreme Court observed that the haste with which a 30 years old dealership was terminated even without giving a show cause notice and/or giving an opportunity of hearing clearly indicates that the entire exercise was carried out by the respondent corporation on non-existent, irrelevant and on extraneous consideration. There has been a total violation of the provisions of law and the principles of natural justice. Samples were collected in complete violation of the procedural laws and in non-adherence of the guidelines of the respondent Corporation.

The Hon’ble Court quashed and set aside the termination order of the dealership. Consequently, the respondent Corporation was directed to hand over the possession of the petrol pump and restore the dealership of petrol pump to the appellant.

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Alienation of minors property – Suit for setting aside sale – Limitation prescribed is three years from date on which minor attained majority: Hindu Minority and Guardianship Act, sec. 8(3):

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[ K.P. Mani & Ors v. Malu Amma & Ors AIR 2012 Kerala 110]

The suit property belonged to one Perachan as per kanam assignment deed No.2636 of 1927. On the death of Perachan, the lease hold right devolved on his sons, Lakshmanan and Raghavan. The said Raghavan died a bachelor. Thus, the entire property belonged to Lakshmanan. On the death of Lakshmanan, plaintiffs and other legal heirs acquired right over the property. Plaintiffs claimed that they have 2/6th shares in the suit property. While so, their sister, Syamala assigned her 1/6th share to Prabhakaran Nair and Sathiyamma. That was followed by the mother of appellants/plaintiffs and 6th defendant executing release deed in favour of Prabhakaran Nair. Appellants/plaintiffs say that at the time release deed was executed, themselves and 6th defendant were minors and that apart, 1st appellant/1st plaintiff was insane. But, it is without getting permission of the court that the mother had executed release deed and hence, it is not valid or binding on plaintiffs and 6th defendant. Defendant contended that the suit was barred by limitation. The Trial Court accepted the plea of the Defendant and dismissed the suit.

On appeal, the court held that an alienation of immovable property by the natural guardian without obtaining permission of the Court was only voidable (and not void) and that there should be a prayer to set aside such alienation.

It is not disputed that Meenakshy, mother of appellants 2nd and 3rd was their natural guardian. Hence, assuming that she has alienated the share of appellants 2 and 3/2nd plaintiff and 6th defendant without getting permission of the court, the release deed to the extent it concerned appellants 2 and 3 is only voidable and not void and hence, appellants 2 and 3 were bound to get release deed to the extent it concerned them set aside, for which the period of limitation prescribed is three years from the date on which appellants 2 and 3 attained majority. Admittedly, the suit was filed much beyond the said period of three years in which case Defendant 1 to 5 are justified in their contention that the suit to the extent it concerned appellants 2 and 3 is barred by limitation. The view taken by the first appellate court concerning appellants 2 and 3 was held to be correct.

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Hedge accounting in a volatile environment

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Entities generally enter into certain derivative transactions to protect or hedge themselves from risk of fluctuation in certain key variables (such as currency exchange rates, interest rates or commodity prices) that may have a detrimental impact on their profit and loss accounts. In a hedging transaction, there is usually a hedged item and a hedging instrument such that the hedging instrument protects an entity from fluctuations in the value of the hedged item. In order to reflect the impact of hedging activities in the profit or loss account, an entity may elect to apply the hedge accounting principles under IFRS (or Ind AS). These principles provide guidance on designating hedge relationships by identifying qualifying hedged items, hedging instruments and hedged risks.

Qualifying hedged items can be recognised assets, liabilities, unrecognised firm commitments, highly probable forecast transactions or net investments in foreign operations. In general, only derivative instruments entered into with an external party qualify as hedging instruments. However, for hedges of foreign exchange risk only, non-derivative financial instruments (for example, loans) may qualify as hedging instruments.

Hedge accounting allows an entity to either :
• measure assets, liabilities and firm commitments selectively on a basis different from that otherwise stipulated in IFRS or Ind AS (“fair value hegde accounting model”); or

• defer the recognition in profit or loss of gains or losses on derivatives (“cash flow hedge accounting model” or “net investment hedging”).

Hedge accounting is voluntary; however, it is permitted only when strict documentation and effectiveness requirements, as stated in IAS 39 are met. The Ind AS criteria are similar to the IFRS criteria. These criteria are:

• There is formal designation and written documentation at the inception of the hedge.

• The effectiveness of the hedging relationship can be measured reliably. This requires the fair value of the hedging instrument, and the fair value (or cash flows) of the hedged item with respect to the risk being hedged, to be reliably measurable.

• The hedge is expected to be highly effective in achieving fair value or cash flow offsets in accordance with the original documented risk management strategy.

• The hedge is assessed and determined to be highly effective on an ongoing basis throughout the hedge relationship. A hedge is highly effective if changes in the fair value of the hedging instrument, and changes in the fair value or expected cash flows of the hedged item attributable to the hedged risk, offset within the range of 80-125 percent.

• For a cash flow hedge of a forecast transaction, the transaction is highly probable and creates an exposure to variability in cash flows that ultimately could affect profit or loss.

One of the more common hedging transactions entered into by entities is a hedge of highly probable forecast transactions (purchases or sales), considered a cash flow hedge. A cash flow hedge is a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability, or a highly probable forecast transaction that could affect profit or loss. In the case of hedges of highly probable forecast purchase or sale transactions in foreign currency, the hedged risk would be currency risk, the hedged items are the forecast purchases/sales and the hedging instruments typically used are currency forwards.

Given below is an example of applying hedge accounting to the cash flow hedge of a highly probable forecast purchase.

Example:
Company R is an Indian company with Indian Rupees (INR) as the functional currency. The reporting dates of Company R are 30th June and 31st December.

On 1st January 20X0, Company R expects to purchase a significant amount of raw materials in future for its production activities. A Company based in the US will supply the raw materials. Company R’s management forecasts 100,000 units of raw material will be received and invoiced on 31st July 20X1 at a price of USD 75 per unit. For convenience, it is assumed that the invoice will also be paid on 31st July 20X1.

The Company’s management decides to hedge the foreign currency risk arising from this highly probable forecast purchase. R enters into a forward contract to buy USD and sell INR. The negotiations with the US Company are in advanced stages and the board of Company R has approved the transaction.

On 1st January 20X0, the Company enters into a US Dollar forward contract, to purchase USD 7,500,000 at a forward rate of INR/USD 46.245, by selling an equivalent INR sum of INR 346,837,500 on 31st July 20X1.

Exchange Rates on various dates are as shown in Table 1 :

Annualised interest rates applicable for discounting cash flows on 31 July 20X1 at various dates of the hedge are as shown in Table 2:


The fair value of the foreign currency forward contract at each measurement date is computed as the present value of the expected settlement amount, which is the difference between the contractually set forward rate and the actual forward rate on the date of measurement, multiplied by the discount factor.

On 1st January 20X0, which is the start date of the forward contract, the fair value of the derivative will be nil, as the difference between the contractually set forward rate and the actual forward rate (7,500,000 * (46.2450 – 46.2450)) is Nil.

On 30th June 20X0, the actual forward rate is 45.9732 and discount factor of 0.9138. Accordingly, the fair value of the currency forward contract is Rs. (1,862,774) i.e. [(7,500,000 * (45.9732 – 46.2450)) * 0.9138].

The fair value of the currency forward contract at each measurement date is computed in the same manner. Accordingly, the fair values at each measurement date are shown in Table 3.

The company designates this hedge relationship on 1st January 20X0.

Hedge effectiveness testing needs to be performed on a prospective as well as on a retrospective basis. A common way to measure hedge effectiveness is the cumulative dollar offset method which is a quantitative method that consists of comparing the change in fair value or cash flows of the hedging instrument with the change in fair value or cash flows of the hedged item attributable to the hedged risk.

Prospective testing will consider the expected variability in cash flows based on possible movements in exchange rates using dollar offset/hypothetical derivative method. Retrospective testing will consider actual variability in value/cash flows based on actual changes in forward rates.

In the given case, hedge effectiveness has been assessed prospectively and retrospectively using the cumulative dollar offset method and a hypothetical derivative for the notional amount of hedged purchases to demonstrate a relationship between the change in fair value of the hedging instrument and the change in fair value of the hedged item. The hypothetical derivative method is used to measure hedge effectiveness and ineffectiveness and is based on the comparison of the change in the fair value of the actual contracts designated as the hedging instrument and the change in the fair value of a hypothetical hedging instrument for purchases in the month of payment (considering that payment is the designated hedged item). In the given case, the hypothetical derivative that models the hedged cash flows would be a forward contract to pay $ 7,500,000 in return for INR.

The effectiveness of the relationship will be demonstrated by the following ratio:
Cumulative change in the fair value of the forward contract(s) by designated expiry.

Cumulative change in the fair value of the Hypo-thetical Derivative.

If the ratio of the change is within the range of 80% to 125%, the hedge will be determined to both continue to be, and to have been highly effective.

In this example, using the cumulative dollar offset method and a hypothetical derivative, the hedge effectiveness has been assessed as 100% effective at each measurement date. This is primarily because the date of maturity of the currency forward contract and date of the forecasted purchase payment, and the notional amount being hedged is the same. Hence, the ratio of fair value of the forward contract undertaken (hedging instrument) and the hypothetical derivative is 100% in each case. In practice, ineffectiveness often arises due to any changes in the expected timing of the purchase/ collection and the maturity date of the derivative. For example, though the derivative matures at the end of the month, the payment may occur at any time during the month.

Journal Entries (ignoring the impact of taxes) for the transaction using hedge accounting:

Date

Particulars

Dr/ Cr

Amount

Amount

 

 

 

(INR)

(INR)

 

 

 

 

 

1-Jan-X0

No entry as the fair value of the currency
forward contract is nil

 

 

 

 

 

 

 

 

30-Jun-X0

Hedging reserve (OCI)W

Dr

1,862,774

 

 

 

 

 

 

 

To Derivative (liability)

Cr

 

1,862,774

 

 

 

 

 

 

(Being, change in the effective portion of
the fair value of the cur-

 

 

 

 

rency forward
contract)

 

 

 

 

 

 

 

 

31-Dec-X0

Derivative (asset)

Dr

2,141,046

 

 

 

 

 

 

 

Derivative (liability)

Dr

1,862,774

 

 

 

 

 

 

 

To Hedging reserve (OCI)

Cr

 

4,003,820

 

 

 

 

 

 

(Being, change in the effective portion of
the fair value of the cur-

 

 

 

 

rency forward
contract – difference between the fair value between

 

 

 

 

measurement dates 31
December 20X0 and 30 June 20X0 (-1,862,774

 

 

 

 

– 2,141,046))

 

 

 

 

 

 

 

 

30-Jun-X1

Derivative (asset)

Dr

2,519,448

 

 

 

 

 

 

 

To Hedging reserve (OCI)

Cr

 

2,519,448

 

 

 

 

 

 

(Being, change in the effective portion of
the fair value of the currency

 

 

 

 

forward contract –
(4,446,495 – 2,141,046))

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31-Jul-X1

 

 

 

Derivative (asset)

Dr

4,002,005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To Hedging reserve (OCI)

Cr

 

4,002,005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Being, change in the effective portion of
the fair value of the cur-

 

 

 

 

 

 

 

 

rency forward
contract)

 

 

 

 

 

 

 

 

 

 

 

 

 

31-Jul-X1

 

 

 

Inventory

Dr

355,500,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To Trade Payable

Cr

 

355,500,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Being, 
recognition  of  purchase 
of  inventory  at 
spot  rates

 

 

 

 

 

 

 

 

i.e.7,500,000*47.4)

 

 

 

 

 

 

 

 

 

 

 

 

 

31-Jul-X1

 

 

 

Hedging reserve (OCI)

Dr

8,662,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To Inventory

Cr

 

8,662,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Being, recognition of gains recognised in
equity into the carrying

 

 

 

 

 

 

 

 

amount of the
inventory acquired by Company R.  The
net impact

 

 

 

 

 

 

 

 

of this adjustment is
that the inventory is ultimately recognised at

 

 

 

 

 

 

 

 

the forward rate of
46.245; alternatively this could have been carried

 

 

 

 

 

 

 

 

in OCI and released
to the P&L account directly when the inventory

 

 

 

 

 

 

 

 

would have been
booked in the P&L account)

 

 

 

 

 

 

 

 

 

 

 

 

 

31-Jul-X1

 

 

 

Cash

Dr

8,662,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To Derivative (asset)

Cr

 

8,662,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Being, settlement of derivative in cash)

 

 

 

 

 

 

 

 

 

 

 

 

 

31-Jul-X1

 

 

 

Trade Payable

Dr

355,500,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To Cash

Cr

 

355,500,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Being, settlement of trade payable)

 

 

 

 

 

 

 

 

 

 

 

 

In this example, since the hedge is 100% effective. the fair value of the currency forward contract has been taken to Hedging Reserve at each period end.

Conclusion:

By adopting hedge accounting, a company is able to align its risk management policy with its accounting treatment and better represent the transaction in its financial statements. It also reduces the volatility in the profit and loss account by deferring the unrealised gains or losses on the hedging instruments to other comprehensive income. In the future articles, we shall discuss examples on the other two type of hedges i.e. fair value hedge and hedge of a net investment in a foreign operations.

Press Note No.9 (2012 Series) dated 3rd October , 2012

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Setting up of step down (operating) subsidiaries by NBFCs having foreign investment above 75% and below 100% and with a minimum capitalisation of US$ 50 million – amendment of paragraph 6.2.24.2 (1) (iv) of ‘Circular 1 of 2012 – Consolidated FDI Policy.

Presently, 100% foreign owned NBFC with a minimum capitalisation of US $ 50 million can set up step down subsidiaries for specific NBFC activities, without any restriction on the number of operating subsidiaries and without bringing in additional capital.

This circular has relaxed the limit 100% holding and provides that NBFC having foreign investment of more than 75% and a minimum capitalisation of US $ 50 million, can set up step down subsidiaries for specific NBFC activities, without any restriction on the number of operating subsidiaries and without bringing in additional capital.

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Use of PC in Bed & Sleep Disruption

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In today’s gadget-obsessed world, sleep experts often say that for a better night’s rest, people should click the “off” buttons on their gadgets before tucking in for the night. Gizmos stimulate brain activity, they say, disrupting your ability to drift off to sleep. Increasingly, researchers are finding that artificial light from some devices at night may tinker with brain chemicals that promote sleep.

Researchers at Rensselaer Polytechnic Institute showed that exposure to light from computer tablets significantly lowered levels of the hormone melatonin, which regulates our internal clocks and plays a role in the sleep cycle. In the study, published in the journal Applied Ergonomics, the researchers had volunteers read, play games and watch movies on an iPad, iPad 2 or PC tablet for various amounts of time while measuring the amount of light their eyes received.

They found that two hours of exposure to a bright tablet screen at night reduced melatonin levels by about 22%.

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CENVAT Credit – Refund of service tax paid on input services – Export of software – Non taxable at the relevant point in time – Exporter entitled to refund of such unutilised CENVAT Credit on furnishing requisite documents – Registration is not a pre-requisite to claim CENVAT Credit in absence of any such statutory provisions.

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3. 2012 (27) STR 134 (Kar) mPortal India Wireless Solutions Pvt. Ltd. v. CST, Bangalore
    
CENVAT Credit – Refund of service tax paid on input services – Export of software – Non taxable at the relevant point in time – Exporter entitled to refund of such unutilised CENVAT Credit on furnishing requisite documents – Registration is not a pre-requisite to claim CENVAT Credit in absence of any such statutory provisions.

Facts:

The petitioner was an STPI unit engaged in development and export of software and a 100% export oriented unit. The Assistant Commissioner rejected the refund claim in absence of registration certificate and requisite documents as well as the reason of time bar and the order was upheld by the Commissioner. The Tribunal observed that the petitioner was entitled to the refund of CENVAT credit with respect to input services even when export of softwares was not liable to service tax and that limitation u/s. 11B of the Central Excise Act did not apply in this case. However, it upheld that the CENVAT Credit could be claimed only when the assessee was registered.

Held:

Bar of limitation was not the ground for rejection of refund claim of accumulated unutilised CENVAT Credit by an export of services. Further, there is no express provision providing restriction on availment of CENVAT Credit in case of unregistered assessees and therefore, it was held that registration is not a pre-requisite for claiming CENVAT Credit. The matter was remanded for verification of invoice/s/bill/s/challan/s, service tax payment etc.

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Revised Schedule VI — An Analysis

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Introduction
Section 211(1) of the Companies Act, 1956 requires all companies to draw up the Balance Sheet and Statement of Profit and Loss account as per the form set out in Schedule VI. The pre-revised Schedule VI was introduced in 1976.

As mentioned in the Foreword of the ICAI Guidance Note on Revised Schedule VI to the Companies Act, 1956 (ICAI GN), “to make Indian business and companies competitive and globally recognisable, a need was felt that format of Financial Statements of Indian corporates should be comparable with international format. Since most of the Indian Accounting Standards are being made at par with the international Accounting Standards, the changes to format of Financial Statements to align with the Accounting Standards will make Indian companies competitive on the global financial world. Taking cognisance of imperative situation and need, the Ministry of Corporate Affairs revised the existing Schedule VI to the Companies Act, 1956”.

The Ministry of Company Affairs (MCA) vide Notification dated 28th February 2011 notified the format of Revised Schedule VI. Further vide Notification dated 30th March 2011, it was clarified that the “The new format shall come into force for the Balance Sheet and Profit and Loss Account to be prepared for the financial year commencing on or after 1st April 2011”.

The ICAI GN issued in December 2011 gives detailed guidance on the Revised Schedule VI and the manner in which the various instructions contained in Revised Schedule VI are to be interpreted.

The structure of Revised Schedule VI is as under:

(a) General Instructions
(b) Part I — Form of Balance Sheet
(c) General Instructions for preparation of Balance Sheet
(d) Part II — Form of Statement of Profit and Loss
(e) General Instructions for preparation of Statement of Profit and Loss

It should be noted that besides the format for preparation of Balance Sheet and Profit and Loss statement as notified by the Revised Schedule VI, there are other disclosure requirements also. These disclosures are:

(a) Disclosures as per the notified Accounting Standards i.e., as per the Companies (Accounting Standards) Rules, 2006;

(b) Disclosures under the Companies Act, 1956 (e.g., on buyback of shares — section 77, political contributions — section 293, etc.);

(c) Disclosures under Statutes (e.g., as per the Micro, Small and Medium Enterprises Development Act, 2006);

(d) Disclosures as per other ICAI pronouncements (e.g., disclosure on MTM exposure for derivatives);

(e) In case of listed companies, disclosures under Clause 32 of the Listing Agreement (e.g., Loans to associate companies, etc.)

Applicability of the Revised Schedule

VI As mentioned in the Notification dated 30th March 2011, financial statements for all companies have to be prepared using the format given by Revised Schedule VI for financial years commencing on or after 1st April 2011.

A company having its financial year ending on, say, 30th June 2011, 30th September 2011 or 31st December 2011 cannot adopt the new format since their financial years have not commenced on or after 1st April 2011. Since the format of Revised Schedule VI is a statutory format, a company cannot decide to follow the same even on a voluntary basis. However, if a company decides to prepare its financial statements from 1st April 2011 to 31st December 2011 (i.e., for a period of 9 months), it will have to prepare the same using the format of Revised Schedule VI.

All companies registered under the Companies Act, 1956 have to prepare their financial statements using Revised Schedule VI. However, proviso to section 211 exempts banking companies, insurance companies and companies engaged in generation or supply of electricity from following the said format since these are governed by their respective statutes. However, since the Electricity Act 2003 and the Rules thereunder do not prescribe any format for preparing financial statements, such companies will have to follow the format laid down by the Revised Schedule VI till a separate format is prescribed.

Listed companies require to publish information on quarterly and annual basis in the prescribed format in terms of clauses 41(l)(ea) and 41(l)(eaa) of the Listing Agreement. These formats are inconsistent with formats under the Revised Schedule VI. However, since the formats are statutory formats as per the Listing Agreement, the same will have to be followed till the time a new format is prescribed under Clause 41 of the Listing Agreement.

Companies which are in the process of making an issue of shares (IPO/FPO) have to file ‘offer documents’ containing among other details, financial information of the last 5 years. The formats of Balance Sheet and Statement of Profit and Loss prescribed under the SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2009 (‘ICDR Regulations’) are inconsistent with the format of the Balance Sheet/Statement of Profit and Loss in the Revised Schedule VI. However, since the formats of Balance Sheet and Statement of Profit and Loss under ICDR Regulations are only illustrative, to make the data comparable and meaningful for users, companies will be required to use the Revised Schedule VI format to present the restated financial information for inclusion in the offer document. It may also be noted that the MCA had vide General Circular No. 62/2011, dated 5th September 2011 has clarified that ‘the presentation of Financial Statements for the limited purpose of IPO/FPO during the financial year 2011-12 may be made in the format of the pre-revised Schedule VI under the Companies Act, 1956. However, for period beyond 31st March 2012, they would prepare only in the new format as prescribed by the present Schedule VI of the Companies Act, 1956’.

Revised Schedule VI requires that except in the case of the first financial statements (i.e., for the first year after incorporation), the corresponding amounts for the immediately preceding period are to be disclosed in the Financial Statements including the Notes to Accounts. Accordingly, corresponding information will have to be presented starting from the first year of application of the Revised Schedule VI. Thus, for the Financial Statements for the financial year 2011-12 corresponding amounts need to be given for the financial year 2010-11. This will require all companies to take an extra effort to compile the corresponding amounts for 2010-11 for disclosing in Revised Schedule VI prepared for the financial year 2011-12.

All companies whether private or public, whether listed or unlisted, and irrespective of their size in terms of turnover, assets, etc. (other than those mentioned in para 9 above) will have to adhere to the new format of financial statements from 2011-12 onwards. Many small or family-owned companies which are run as an extension of partnerships will have difficulties in adopting the new formats since they may not have the necessary trained manpower or infrastructure for such changeover.

Major principles as per Revised Schedule VI

Revised Schedule VI has eliminated the concept of ‘Schedules’. Such information will now have to be provided in the ‘Notes to accounts’. Accordingly, the manner of cross-referencing to various other information contained in financial statements will also be changed to ‘Note number’ as against ‘Schedule number’ in pre-revised Schedule VI.

As per general instructions contained in the Revised Schedule VI, the terms used shall carry the meanings as per the applicable Accounting Standards (AS). As per the ICAI GN, the applicable AS for this purpose shall mean the AS notified by the Companies (Accounting Standards) Rules, 2006.

Revised Schedule VI requires that if compliance with the requirements of the Companies Act, 1956 (Act) and/or AS requires a change in the treat-ment or disclosure in the financial statements, the requirements of the Act and/or AS will prevail over Revised Schedule VI.

As per preface to the AS issued by ICAI, if a par-ticular AS is not in conformity with law, the provi-sions of the said law or statute will prevail. Using this principle, disclosure requirements of existing Schedule VI were considered to prevail over AS. However, since the Revised Schedule VI gives specific overriding status to the requirements of AS notified by the Companies (Accounting Stan-dards) Rules, 2006, the same would prevail over the Revised Schedule VI.

There are several instances of conflict between provisions of the Revised Schedule VI and the notified AS e.g., definition of Current Investments as per the Revised Schedule VI and AS -11, definition of Cash and Cash Equivalents as per the Revised Schedule VI and AS-3, treatment of proposed dividend as per the Revised Schedule VI and AS- 4, etc. In all such cases, provisions of the AS will prevail over the Revised Schedule VI.

The nomenclature for the Profit and Loss account is now changed to ‘Statement of Profit and Loss’. Also, only the vertical format is prescribed for both Balance Sheet and the Statement of Profit and Loss.

The format of the Statement of Profit and Loss as per the Revised Schedule VI does not contain disclosure of appropriations like transfer to reserves, proposed dividend, etc. These are now to be disclosed in the Balance Sheet as part of adjustments in ‘Surplus in Statement of Profit and Loss’ contained in ‘Reserves and Surplus’. Further, debit balance of ‘profit and loss account’, if any, is to be disclosed as a reduction from ‘Reserves and Surplus’ (even if the final figure of Reserves and Surplus becomes negative).

It is clarified by the Revised Schedule VI that the requirements mentioned therein are minimum requirements. Thus, additional line items, sub-line items and sub-totals can be presented as an addition or substitution on

the face of the financial statements if the company finds them necessary or relevant for understanding of the company’s financial position. Also, in preparing the financial statements, a balance will have to be maintained between providing excessive detail that may not assist users of the financial statements and not providing important information as a result of too much aggregation.

Revised Schedule VI requires use of the same unit of measurement uniformly throughout the financial statements and ‘Notes to Accounts’. Rounding off requirements, if opted, are to be followed uniformly throughout the financial statements and ‘Notes to Accounts’. The rounding off requirements as per pre-revised Schedule VI and as per the Revised Schedule VI are summarised in the following table:


Some disclosures no longer required in the Revised Schedule VI

The disclosure requirements as per the Revised Schedule VI do not contain several disclosures which were required by pre-revised Schedule VI. Some of these are:

(a)    Disclosures relating to managerial remuneration and computation of net profits for calculation of commission;
(b)    Information relating to licensed capacity, installed capacity and production;
(c)    Information on investments purchased and sold during the year;
(d)    Investments, sundry debtors and loans & advances pertaining to companies under the same management;
(e)    Maximum amounts due on account of loans and advances from directors or officers of the company;
(f)    Commission, brokerage and non-trade discounts; and
(g)    Information as required under Part IV of pre-revised Schedule VI.

Major changes in the format of Balance Sheet
Equity and Liabilities

A new disclosure requirement regarding details of number of shares held by each shareholder holding more than 5% shares in the company is inserted by the Revised Schedule VI. The ICAI GN has clarified that in the absence of any specific indication of the date of holding, such information should be based on shares held as on the Balance Sheet date. For this disclosure, the names of the shareholders would be normally available from the Register of Members required to be maintained by every company.

Details pertaining to number of shares issued as bonus shares, shares bought back and those allot-ted for consideration other than cash needs to be disclosed only for a period of five years immediately preceding the Balance Sheet date including the current year. Under the pre-revised Schedule VI requirement is to disclose such items at all times.

In case of listed companies, share warrants are issued to promoters and others in terms of SEBI guidelines. Since such warrants are effectively and ultimately intended to become part of capital, Revised Schedule VI requires that the same be disclosed as part of the Shareholders’ funds as a separate line-item — ‘Money received against share warrants.’ In case the said warrants are forfeited, the amount already paid up would be transferred to ‘Capital Reserve’ and disclosed as part of ‘Reserves and Surplus’.

There are specific disclosures required by the Re-vised Schedule VI for ‘Share Application money pending allotment’. It has been also stated that share application money not exceeding the issued capital and only to the extent not refundable is to be included under ‘Equity’ and share application money to the extent refundable is to be separately shown under ‘Other current liabilities’. Disclosures required regarding share application, whether included under ‘Equity’ or under ‘Other current li-abilities’ are as under:

(a)    terms and conditions;
(b)    number of shares proposed to be issued;
(c)    the amount of premium, if any;
(d)    the period before which shares are to be allotted;
(e)    whether the company has sufficient authorised share capital to cover the share capital amount on allotment of shares out of share application money;
(f)    Interest accrued on amount due for refund;
(g)    The period for which the share application money has been pending beyond the period for allotment as mentioned in the share application form along with the reasons for such share application money being pending.

A major change in the format of balance sheet as per the Revised Schedule VI is the classification of all items of liabilities and assets into Current and Non-Current. The terms ‘Current’ and ‘Non-Current’ are defined by Revised Schedule VI as under:

(a)    A liability is classified as Current if it satisfies any of the following criteria:
(i)    it is expected to be settled in the company’s normal operating cycle;
(ii)    it is held primarily for the purpose of being traded;
(iii)    it is due to be settled within 12 months after the reporting date; or
(iv)    The company does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting date.

All other liabilities shall be classified as non-current.

  (b)  An asset shall be classified as current when it satisfies any of the following criteria:
  (i)  It is expected to be realised in, or is intended for sale or consumption in the company’s normal operating cycle;
  (ii)  It is held primarily for the purpose of being traded;
  (iii)  It is expected to be realised within 12 months after the reporting date; or
  (iv)  It is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least 12 months after reporting period date.

All other assets shall be classified as non-current.

  (c)  ‘Operating Cycle’ is defined by Revised Schedule VI as “An operating cycle is the time between the acquisition of assets for processing and their realisation in cash or cash equivalents. Where the normal operating cycle cannot be identified, it is assumed to have duration of twelve months”.

  (d)  Thus, all companies will need to bifurcate balances in respect of all liabilities and assets into ‘current’ and ‘non-current’. The definitions contain four conditions out of which even if one is satisfied, the said liability or asset would be classified as ‘current’. If none of the conditions are satisfied the said liability or asset will be classified as ‘non-current’. The four conditions are quite subjective since they use phrases like ‘expected’, ‘held primarily’, ‘due to be settled’, etc.

  (e)  As per the definition, current liabilities would include items such as trade payables, employee salaries and other operating costs that are expected to be settled in the company’s normal operating cycle or due to be settled within twelve months from the reporting date. Thus, liabilities that are normally payable within the normal operating cycle of a company, are classified as current even if they are due to be settled more than twelve months after the end of the balance sheet date.

  (f)  Similarly, as per the definition, current assets would include assets like raw materials, stores, consumable tools, etc. which are intended for consumption or sale in the course of the company’s normal operating cycle. Such items of inventory are to be classified as current even if the same are not actually consumed or realised within twelve months after the balance sheet date. Current assets would also include inventory of finished goods since they are held primarily for the purpose of being traded. They would also include trade receivables which are expected to be realised within twelve months from the balance sheet date.

  (g)  A company can have multiple operating cycles in case they are manufacturing/dealing in different products. In such cases, the bifurcation into ‘current’ and ‘non-current’ can become difficult.

  (h)  Companies will also need to bifurcate all their borrowings into ‘current’ and ‘non-current’. It is possible that the same borrowing will be classified into two components depending on the portion repayable within/after twelve months from the balance sheet date. Other detai ls in respect of borrowings such as  whether secured (with terms of security) or unsecured, whether guaranteed or not, details of repayment of loans, details of redemption in case of debentures, etc. are also required to be disclosed.

  (i)  Since the format of the balance sheet mentions Deferred Tax Liability (DTL)/Deferred Tax Asset (DTA) as a non-current liability/asset, the same is to be always classified as non-current and cannot be classified as ‘current’ even if the deferred tax liability/asset would become payable or receivable within twelve months of the balance sheet date. It should be also noted that such DTL/DTA is always disclosed on a net basis as required by AS-22.

(j)    For several items of liabilities/assets, the aforesaid classification exercise can become quite cumbersome and time-consuming for companies especially since the same is also required to be done for 2010-11.

In case of loans taken by a company, Revised Schedule VI requires specific disclosure of period and amount of continuing default as on the balance sheet date in repayment of loans and interest to be specified separately in each case.

Revised Schedule VI requires disclosure of loans and advances taken from related parties. ‘Related Parties’ for this purpose would mean those parties as defined by AS-18.

Revised Schedule VI requires disclosure of ‘Trade Payables’ as part of ‘other non-current liabilities’ or ‘current liabilities’. A payable can be classified as ‘trade payable’ if it is in respect of amount due on account of goods purchased or services received in the normal course of business. As per the pre-revised Schedule VI, the term used was ‘Sundry Creditors’ which included amounts due in respect of goods purchased or services received as well as in respect of other contractual obligations. Since amounts due under contractual obligations can no longer be included within ‘trade payables’, items like dues payables in respect of statutory obligations like contribution to provident fund, purchase of fixed assets, contractu-ally reimbursable expenses, interest accrued on trade payables, etc. will need to be classified as ‘others’.

Assets

As per Revised Schedule VI, the disclosure for fixed assets is to be segregated into:

(a)    Tangible assets;
(b)    Intangible assets;
(c)    Capital work-in-progress; and
(d)    Intangible assets under development

The classification of tangible assets is similar to the one under pre-revised Schedule VI, but has a separate item for ‘Office Equipment’. Besides, ‘Plant and Machinery’ is now renamed as ‘Plant and Equipment’.

Classification of intangible assets as a separate item of Fixed Assets is introduced by Revised Schedule VI. It is also required to classify ‘Computer Software’ separately within ‘Intangible Assets’.

It is also necessary to separately disclose, a reconciliation of the gross and net carrying amounts of each class of assets at the beginning and end of the reporting period showing additions, disposals, acquisitions through business combinations (i.e., on account of amalgamations/demergers, etc.) and other adjustments (like capitalisation of borrowing costs as per AS-16) and the related depreciation/ amortisation and impairment losses/reversals.

Since Revised Schedule VI specifically requires capital advances to be included under long-term loans and advances, the same cannot be included under capital work-in-progress. The same also cannot be therefore included within current assets.

There is also a specific requirement to include ‘assets given/taken on lease’, both tangible and intangible under each of the items of fixed assets.

As per Revised Schedule VI, all Investments are to be bifurcated into ‘current’ and ‘non-current’. They also further need to be classified (as in the pre-revised Schedule VI) into trade/non-trade and
quoted/unquoted.

The classification of investments is to be done as under:

(a)    Investment property;
(b)    Investments in Equity Instruments;
(c)    Investments in preference shares;
(d)    Investments in Government or trust securities;
(e)    Investments in debentures or bonds;
(f)    Investments in Mutual Funds;
(g)    Investments in partnership firms; and
(h)    Other investments (specifying nature thereof).

Revised Schedule VI also requires that under each classification, details need to be given of names of bodies corporate indicating separately whether they are:
(a)    subsidiaries,
(b)    associates,
(c)    joint ventures, or
(d)    controlled special purpose entities.

In regard to investments in the capital of partnership firms, the names of the firms (with the names of all their partners, total capital and the shares of each partner) need to be given. It is possible that the partnership firm maintains both ‘capital’ and ‘current’ accounts of its partners. In that case, the bal-ance in ‘capital’ account will be clas-sified as a ‘non-current’ investment in the balance sheet of the company, whereas the balance in ‘current’ account is classified as ‘current’ investment.

In case the company has an investment in a ‘Limited Liability Partnership’ (LLP), the disclosure norms of ‘partnership firm’ (as discussed in para 41 above) will not apply since an LLP is considered as a ‘body corporate’.

As per Revised Schedule VI, all loans and deposits, deposits, etc. given by a company
are to be classified into ‘current’ and ‘non-current’.

Revised Schedule VI requires disclosure of loans and advances given to related parties. ‘Related Parties’ for this purpose would mean those parties as defined by AS-18.

Revised Schedule VI requires disclosure of ‘Trade Receivables’ as part of ‘other non-current assets’ or ‘current assets’. A receivable shall be classified as ‘trade receivable’ if it is in respect of the amount due on account of goods sold or services rendered in the normal course of business. As per the pre-revised Schedule VI, the term ‘sundry debtors’ included amounts due in respect of goods sold or services rendered or in respect of other contractual obligations as well. Since, amounts due under contractual obligations cannot be included within ‘Trade Receivables’, items like dues in respect of insurance claims, sale of fixed assets, contractually reimbursable expenses, interest accrued on trade receivables, etc. will need to be classified within ‘others’.

The pre-revised Schedule VI required separate presentation of debtors for those outstanding for a period exceeding six months (based on billing date) and ‘other debtors’. However, for the ‘current’ portion of ‘Trade Receivables’, the Revised Schedule VI requires separate disclosure of ‘Trade Receivables outstanding for a period exceeding six months from the date they became due for payment’. This requirement can result in a lot of work for companies since it would mean modifying their accounting systems to compile the amounts exceeding six months based on the due date. Giving corresponding data for 2010-11 would also result in added work for most companies.

The requirement for classifying ‘loans and advances’ and ‘trade receivables’ into secured/unsecured and good/doubtful also continues in Revised Schedule VI.

The Revised Schedule VI does not contain any specific disclosure requirement for the unamortised portion of expense items such as share issue expenses, ancillary borrowing costs and discount or premium relating to borrowings. These items were included under the head ‘Miscellaneous Expenditure’ as per the pre-revised Schedule VI. Though, Revised Schedule VI does not mention disclosure of any such item, since additional line items can be added on the face or in the notes, unamortised portion of such items can be disclosed (both ‘current’ as well as ‘non-current’ portion), under the head ‘other current/non-current assets’ depending on whether the amount will be amortised in the next 12 months or thereafter.

The term ‘cash and bank balances’ existing in the pre-revised Schedule VI is replaced under Revised Schedule VI by ‘Cash and Cash Equivalents’. These are to be classified into:

(a)    Balances with banks;
(b)    Cheques, drafts on hand;
(c)    Cash on hand; and
(d)    Others (specify nature).

For ‘Cash and Cash Equivalents’, disclosure is also separately required as per Revised Schedule VI for:

(a)    Earmarked balances with banks (for example, for unpaid dividend);
(b)    Balances with banks to the extent held as margin money or security against the borrowings, guarantees, other commitments;
(c)    Repatriation restrictions, if any, in respect of cash and bank balances shall be separately stated;
(d)    Bank deposits with more than twelve months maturity shall be disclosed separately.

Major changes in the format of Statement of Profit and Loss

Revised Schedule VI requires disclosure of ‘Revenue from Operations’ on the face of the statement of profit and loss. In the case of a company other than a finance company, such ‘Revenue from Operations’ is to be disclosed as:

(a)    Sale of products
(b)    Sale of services
(c)    Other operating revenues
(d)    Less: Excise duty

Though Revised Schedule VI specifically requires disclosure of Sale of Products on ‘gross of excise’ basis, there is no mention of whether Sales Tax/VAT and Service Tax is also to be included or not in sale of products or sale of services, respectively. Though not entirely free of doubt, the ICAI GN has stated that “Whether revenue should be presented gross or net of taxes should depend on whether the company is acting as a principal and hence responsible for paying tax on its own account or, whether it is acting as an agent i.e., simply collecting and paying tax on behalf of government authorities. In the former case, revenue should also be grossed up for the tax billed to the customer and the tax payable should be shown as an expense. However, in cases, where a company collects tax only as an intermediary, revenue should be presented net of taxes.” (Also refer BCAJ February 2012 ‘Gaps in GAAP’ for a discussion on whether taxes should be disclosed gross or net).

In addition to Revenue from Op-erations, Revised Schedule VI also requires disclosure of ‘Other Operating Revenue’ as well as ‘Other Income’. The term ‘Other Operating Revenue’ is not defined by Revised Schedule VI. The ICAI GN has how-ever clarified that “this would include revenue arising from a company’s operating activities, i.e., either its principal or ancillary revenue-generating activities, but which is not revenue arising from the sale of products or rendering of services. Whether a particular income constitutes ‘other operating revenue’ or ‘other income’ is to be decided based on the facts of each case and detailed understanding of the company’s activities. The classification of income would also depend on the purpose for which the particular asset is acquired or held”.

In respect of a finance company, Revised Schedule VI requires ‘Revenue from Operations’ to include revenue from:
(a)    Interest and
(b)    Other financial services.

Though the term ‘finance company’ is not defined by Revised Schedule VI, the ICAI GN states that “the same should be taken to include all companies carrying on activities which are in the nature of ‘business of non-banking financial institution’ as defined in section 45I(f) of the Reserve Bank of India Act, 1935”.

In    case    of    all    companies, Revised Schedule VI requires ‘Other income’ to be disclosed on the face of the statement of profit and loss. For this purpose ‘Other Income’ is to be classified as:

(a)    Interest Income (in case of a company other than a finance company);
(b)    Dividend Income;
(c)    Net gain/loss on sale of Investments;
(d)    Other non-operating income (net of expenses directly attributable to such income).

As can be seen from the above, in the case of all company (including a finance company) Dividend income and Net gain/loss on sale on investments will be always classified as ‘Other Income’.

‘Other Income’ will also include share of profits/ losses in a partnership firm. Though there is no specific requirement mentioned for the same in the Revised Schedule VI, the ICAI GN mentions that the same should be separately disclosed. The ICAI GN also requires that in case the financial statements of the partnership firm are not drawn up to the same date as that of the company, adjustments should be made for effects of significant transactions and events that occur between the two dates and in any case, the difference between the two reporting dates should not be more than six months.

Revised Schedule VI requires the aggregate of the following expenses to be disclosed on the face of the Statement of Profit and Loss:

(a)    Cost of materials consumed
(b)    Purchases of stock-in-trade
(c)    Changes in inventories of finished goods, work in progress and stock in trade
(d)    Employee benefits expense
(e)    Finance costs
(f)    Depreciation and amortisation expense
(g)    Other expenses.

The ICAI GN mentions that for the purpose of disclosure, ‘Cost of materials consumed’, should be based on ‘actual consumption’ rather than ‘derived consumption’. In such a case, excesses/shortages should be separately disclosed rather than included in the amount of ‘cost of materials consumed’. This requirement was also contained in the ICAI pronouncements on the pre-revised Schedule VI.

As per Revised Schedule VI separate disclosure is also required for the following items which are classified under ‘Other Expenses’:

(a)    Consumption of stores and spare parts;
(b)    Power and fuel;
(c)    Rent;
(d)    Repairs to buildings;
(e)    Repairs to machinery;
(f)    Insurance;
(g)    Rates and taxes, excluding taxes on income;
(h)    Miscellaneous expenses.

The threshold for disclosure of ‘Miscellaneous Expenses’ is changed to those that exceed ‘1% of revenue from operations or Rs.100,000 whichever is higher’ as against the requirement of pre-revised Schedule VI of ‘1% of total revenue or Rs.5,000 whichever is higher’.

The format of Statement of Profit and Loss in Revised Schedule VI also requires specific disclosures of ‘Exceptional’, ‘Extraordinary’, items and ‘Discontinuing Operations’. These terms are defined by AS -4, AS-5 and AS-24, respectively and disclosures should be done in accordance with these definitions.

Disclosures by way of Notes

Besides the above disclosures, Revised Schedule VI also requires disclosures by way of Notes attached to the financial statements. Some of the major requirements are as under:

(a)    For manufacturing companies: raw materials consumed and goods purchased under broad heads;
(b)    For trading companies: purchases of goods traded under broad heads;
(c)    For companies rendering services: gross income derived from services rendered under broad heads.

Revised Schedule VI does not require disclosure of quantitative details for any of the above categories of companies. The same is also clearly mentioned in para 10.7 of the ICAI GN.

The ICAI GN also mentions that ‘broad heads’ for the purpose of the disclosure in para 62 above are to be decided taking into account the concept of materiality and presentation of ‘True and Fair’ view of financial statements. The said GN also mentions that normally 10% of the total value of sales/services, purchases of trading goods and consumption of raw materials is considered as an acceptable threshold for determination of broad heads.

Revised Schedule VI requires disclosures of ‘Contingent liabilities and commitments’. For this purpose, besides others, ‘other commitments’ are also to be disclosed. Such disclosure of ‘other commitments’ was not required as per pre-revised Schedule VI.

There is no explanation of what would be covered as part of ‘other commitments’ in Revised Schedule VI. The ICAI GN has however clarified that disclosures required to be made for ‘other commitments’ should include ‘only those non-cancellable contractual commitments (cancellation of which will result in a penalty disproportionate to the benefits involved) based on the professional judgment of the management which are material and relevant in understanding the financial statements of the company and impact the decision making of the users of financial statements. Examples may include commitments in the nature of buyback arrangements, commitments to fund subsidiaries and associates, non-disposal of investments in subsidiaries and undertakings, derivative related commitments, etc.’ Most of the other disclosure requirements as per Revised Schedule VI in Notes are similar to the requirements of pre-revised Schedule VI.


Implementation of Revised Schedule VI
As can be seen from the above, disclosure requirements of Revised Schedule VI are quite different from those existing in the pre-revised Schedule VI. Many of these disclosures and concepts (like ‘current’, non-current’) are similar to terms and concepts used in IFRS. Unless, companies gear up well in time to adhere to these new requirements for 2011-12 (and corresponding figures for 2010-11), it will be difficult for them to meet the reporting deadlines of the Companies Act, 1956.

What Makes a Leader?

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The most effective leaders are alike in one crucial way: They all have a high degree of what is known as emotional intelligence. Self-awareness, which is a deep understanding of one’s emotions, strengths, weaknesses, needs and drives, is the first component of emotional intelligence.

People with strong self awareness are neither overly critical nor unrealistically hopeful. Rather, they are honest with themselves and with others. People who have a high degree of self-awareness recognize how their feelings affect them, other people, and their job performance.

Someone highly self-aware knows where he is headed and why; so, for example, he will be able to be firm in turning down a job offer that is tempting financially but does not fit with his principles or long-term goals. A person who lacks self-awareness is apt to make decisions that bring on inner turmoil.

“The money looked good so I signed on,” someone might say two years into a job, “but the work means so little to me.” Decisions of self-aware people mesh with their values; so they find work energizing. How can one recognize self-awareness? First, it shows itself as candor and an ability to assess oneself realistically. Such people are able to speak accurately and openly, though not necessarily effusively or confessionally, about their emotions and the impact they have on their work.

(Source: The Economic Times dated 09-11-2012.)
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Where is the Regulator’s Response to Allegations about HSBC?

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The documents that Arvind Kejriwal released last week, which he claimed were leaked witness statements recorded by income tax officials in the course of a raid, raise serious questions about the Indian entity of the Hongkong and Shanghai Banking Corporation (HSBC). While the bank has refused to comment on any specific details, the government has refused to acknowledge Mr. Kejriwal’s charges and only said it was taking action against all individuals named in the list pertaining to black money given to it by France in June of 2011. Anything less would lead to a major loss of faith in India’s regulatory capacity. Unfortunately, while the banking regulator – the Reserve Bank of India – has long sat on HSBC’s request to extend its branch network, it is yet to address these concerns directly.

How does the procedure that the three high-networth individuals who feature in Mr. Kejriwal’s documents describe differ from hawala? All three, apparently, independently told the tax authorities as to how they managed from Delhi to open, operate and get back cash deposited in accounts in HSBC’s branch in Geneva. If the documents released by India Against Corruption are to be believed, all that is required is a phone call to HSBC, which will then depute its officers to open the account, collect cash in rupees, have it deposited abroad in a currency of your choice, operate it under your instructions — and then pay you cash in rupees, as and when required in India. None of the beneficiaries needed to go out of India to open or operate an account. If the charges are found to be true, this is a blatant case of flouting money laundering laws.

HSBC has been accused in other jurisdictions of similar acts. In the United States, the bank has admitted that a fine for a violation of federal anti-money laundering laws could cost it around $1.5 billion, and might lead to criminal charges — damaging the bank’s reputation and forcing it to set aside a further $800 million to cover a potential fine for breaches in anti-money laundering controls in Mexico as well as other violations. The provisioning was on top of $700 million it put aside in July. A US Senate report in July criticised HSBC for letting clients shift potentially illicit funds from several countries, including India. The size of the fine expected by HSBC dwarfs every other similar case, including the previous record set by ING Bank, which agreed in June to forfeit $619 million to resolve allegations that it illegally moved money on behalf of sanctioned entities in Cuba and Iran.

(Source: The Business Standard dated 13-11-2012)
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2G Spectrum Auction Generates Plenty of Lessons

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The 2G spectrum auction hasn’t quite hit the jackpot. It’s raised Rs 9,407 crore – far less than the government’s target of Rs 40,000 crore and niggardly compared to Rs 67,719 crore raised via 3G spectrum bidding. Look deeper and it’s clear expectations of market demand were pitched at outlandish levels. What the dud event did generate, however, is plenty of lessons.

First, CAG’s astronomical figure – Rs 1.76 lakh crore – flies out the window on being tested on the ground. Booty amassed in 2010 from sale of a restricted amount of 3G spectrum was hardly a realistic revenue-garnering benchmark. This isn’t to say the latest auction couldn’t have scored better, had the reserve price been less eye-popping and India’s investment climate more propitious. But that’s exactly why the government shouldn’t have been bamboozled to rush into an auction, using TRAI’s play-safe floor price. Nor is this to argue that the FCFS policy wasn’t messed with by former telecom minister A Raja. This is merely to reiterate that mobile telephony wouldn’t have soared had we been fixated on maximising revenue.

Second, outrage over corruption scandals shouldn’t blind us to issues of jurisdictional propriety and economic sense. It’s not for CAG or courts to dictate policy. In its response to the presidential reference on allocation of natural resources, the Supreme Court made this clear. Identifying ‘common good’ as the key criterion for resource disbursal, it said policymaking is the government’s turf. Yes, government must work with institutional checks and balances. But institutional overreach can lead to unhappy denouements, as with the lacklustre spectrum auction.

Third, resources are best mobilised through the expansion of telecom which fosters overall economic growth. But the sector can’t grow to potential with exorbitant costs of entry that would mar competition by barring smaller players, financially burden companies and raise prices for consumers. It’s important here that spectrum distribution isn’t opaque, whatever the modality. For instance, single-step e-auctions can work well with safeguards. So can a technology-enabled system where all licensees can access pooled spectrum. What we need now is to focus on practical ways to boost telecom infrastructure and transparency in policy implementation. What we don’t need is sound and fury over controversies blown out of all proportion. As we’ve seen, that only makes policymakers bungle on the side of caution, which chokes off investor feel-good and raises prices all round.

(Source: The Times of India dated 16-11-2012).
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Appeal: Question of law can be raised at any stage in income tax proceedings: Educational Institution: Exemption u/s. 10(23C) (iiiad): Seminary imparting religious education: Entitled to exemption:

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[CIT Vs. St. Mary’s Malankara Seminary; 348 ITR 69 (Ker):]

Assessee was a seminary imparting religious education. For want of registration u/s. 12A of the Incometax Act, 1961, it forfeited the claim for exemption u/s. 11 of the Act. In appeal, it raised an alternate claim before the CIT(A) who allowed the claim first, but recalled it later. The Tribunal allowed the claim on merits.

On appeal by the Revenue, the Kerala High Court upheld the decision of the Tribunal and held as under:

“i) A pure question of law can be raised at any stage of the proceedings under the Income-tax Act.

ii) There is nothing to indicate that section 10(23C) (iiiad) of the Act, requires the educational institutions referred to therein to impart education in any particular subject or in any manner whatsoever. The term “education” enjoys a wide connotation covering all kinds of coaching and training carried on in a systematic manner leading to personality development of an individual.

iii) In the case of a seminary, students on completion of their studies are made priests, who head churches as religious leaders practicing and propagating religion as a profession. Accordingly, religious teaching in seminary is also education and seminary is, therefore, an “educational institution” entitled for exemption u/s. 10(23C)(iiiad).

iv) The ground raised in appeal by the assessee based on section 10(23C)(iiiad) was certainly a pure question of law and on the same facts the issue was found in favour of the assessee. The assessee was rightly found to be eligible to raise the additional and alternative ground of exemption which was correctly found in its favour.”

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Appeal to the High Court: Power to condone delay in filing: Retrospective amendment does not affect completed matters: J. B. Roy Vs. Dy. CIT (All):

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[Review Petition No. 10 of 2011 in ITA No. 127 of 2006 dated 07/09/2012:]

By an order dated 11/12/2009, the appeal filed by the assessee u/s. 260A was dismissed by the Allahabad High Court, on the ground that the appeal was filed beyond the statutory period of limitation and there is no power to condone the delay. Section 260A(2A) was inserted by the Finance Act, 2010 w.e.f. 01/10/1998 (retrospectively) granting power to the High Court to condone the delay in filing the appeal. In view of the said retrospective amendment, the assessee filed review petition requesting to restore the appeal and condone the delay.

The Allahabad High Court dismissed the review petition and held as under:

“i) Though section 260A(2A) has been inserted retrospectively w.e.f. 01/10/1998 by the Finance Act, 2010, the fact remains that the cases already settled before the said amendment cannot be re-opened as per the ratio laid down in Babu Ram Vs. C. C. Jacob AIR (1999) SC 1845, where it was observed that the prospective declaration of law is a devise innovated by the Apex Court, to avoid reopening of the settled issues and to prevent multiplicity of proceedings. It is also a devise adopted to avoid uncertainty and avoidable litigation.

ii) By the very object of the prospective declaration of law, it is deemed that all actions taken contrary to the declaration prior to its date of declaration are validated. This is done in the larger public interest. In matters where decisions opposed to the said principle have been taken prior to such declaration of law, cannot be interfered with on the basis of such declaration of law.

iii) The amendment is applicable to future cases to avoid uncertainty as per the ratio laid down in M. A. Murthy Vs. State of Karnataka 264 ITR 1 (SC), where it was observed that prospective over-ruling is a part of the principles of constitutional cannon of interpretation and can be resorted to by the court, while superseding the law declared by it earlier. It is not possible to anticipate the decision of the Highest Court or an amendment and pass a correct order in anticipation as per the ratio laid down in CIT vs. Schlumberger Sea Company 264 ITR 331 (Cal). Therefore, the amendment introduced in section 260A(2A) has the effect only on pending and future cases.

iv) On the date when the appeal was dismissed on the ground of limitation, there was no discretion with the Court to condone the delay. A discretion has come to the Court by virtue of the amendment by inserting section 260A(2A). The appeal was rightly dismissed as per the then law and the subsequent amendment is not applicable as the matter has already attained finality.”

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Delegation of Legislative Power – Two broad principles are (i) that delegation of non-essential legislative function of fixation of rate of imposts is a necessity to meet the multifarious demands of a welfare state, but while delegating such a function laying down of a clear legislative policy is pre-requisite, and (ii) while delegating the power of fixation of rate of tax, there must be in existence, inter alia, some guidance, control, safeguards and checks in the concerned Act. The question o<

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[Delhi Race Club Ltd. v. UOI (2012) 347 ITR 593 (SC)]

Licence Fee – A licence fee imposed for regulatory purposes is not conditioned by the fact that there must be a quid pro quo for the services rendered, but that, such licence fee must be reasonable and not excessive. It would again not be possible to work out with arithmetical equivalence the amount of fee which could be said to be reasonable or otherwise. If there is a broad correlation between the expenditure which the State incurs and the fees charged, the fees could be sustained as reasonable.

On 19-10-1994, the Central Government in exercise of its powers u/s. 2 of the Union Territories (Laws) Act, 1950, extended the Mysore Race Courses Licensing Act, 1952 (the Act) to the Union Territory of Delhi, as it existed then, with certain amendments. Section 4 of the said Act provided for the payment of a Licence fee. Section 11 empowered the Government to make rules. In furtherance of the power conferred u/s. 11 of the Act, by a notification dated 1-3-1985, the Administration of the Union Territory of Delhi notified the Delhi Race Course Licensing Rules, 1985. Rules 4 and 5 of the 1985 Rules laid down the procedure for submission of application for grant of licence for horse racing and the validity period of such licence, respectively. Rule 6 prescribed the rate of “licence fee”, which was Rs.2000/- per day for horse racing on which the race is held on the race course and Rs.500/- per day for arranging for wagering or betting on a horse race run on any other race course within or outside the Union Territory of Delhi. On 7-3-2001, in exercise of the powers conferred u/s. 11 of the Act, the Lt. Governor of the National Capital Territory of Delhi enacted the Delhi Race Course Licensing (Amendment) Rules, 2001 and enhanced the aforesaid licence fee rates to Rs.20,000 and Rs.5,000 respectively.

On January 31, 2002, the Commissioner of Excise, Entertainment and Luxury Tax issued a demand letter to Delhi Race Club, a body corporate, the appellant, informing them that the licence fee deposited by them was short by Rs.17,80,000 for the year 2001-02 and by Rs. 18 lakh for the year 2002-03. Validity of the demand notice was questioned by the appellant by way of a writ petition in the High Court of Delhi, on the grounds that both the notifications, dated 19th October, 1984 and 7th March, 2001, were illegal in as much as : (i) delegation of powers u/s. 11 of the Act to the Lt. Governor, to fix the licence fee without any guidelines is excessive delegation of legislative power and is therefore, ultra vires, (ii) in the absence of an element of quid pro quo, the licence fee charged was not in the nature of a fee but a tax and (iii) the ten-fold increase in licence fee was highly excessive. However, based on the arguments advanced by the learned counsel, the High Court framed two key questions, viz., (i) Is the licence fee under rule 6 of the 1985 Rules a “fee” or not? And (ii) If it is a fee, is it excessive or not?

Answering both the questions against the appellant, the High Court concluded that the licence fee in question was not a compensatory fee and consequently there was no requirement of quid pro quo; the licence fee was in the nature of a regulatory fee and therefore, would not require any quid pro quo in the form of any social service and when the impost of Rs. 2,000 and Rs. 500 in the year 1984 was not regarded by the appellant as being excessive, keeping in mind the high rate of inflation between 1984 and 2001, the enhanced rates of Rs. 20,000 and Rs. 5,000 in the year 2001 could not be said to be excessive.

The appellant’s writ petition having been dismissed, they approached the Supreme Court.

The Supreme Court, after considering authorities wherein the question as to the limits of permissible delegation of legislative power by a Legislature to an executive/another body was examined, held that from the conspectus of the views on the question of nature and extent of delegation of legislative functions by the Legislature, two board principles emerge, viz. (i) that delegation of nonessential legislative function of fixation of rate of imposts is a necessity to meet the multifarious demands of a welfare state, but while delegating such a function, laying down of a clear legislative policy is pre-requisite and (ii) while delegating the power of fixation of rate of tax, there must be in existence, inter alia, some guidance, control, safeguards and checks in the concerned Act. It is manifest that the question of application of the second principle will not arise unless the impost is a tax. Therefore, as along as the legislative policy is defined in clear terms, which provides guidance to the delegate, such delegation of a non-essential legislative function is permissible.

According to the Supreme Court therefore, the pivotal question to be determined was the nature of the impost in the present case.

The Supreme Court, after noting the precedents on the issue, held that the true test to determine the character of a levy, delineating “tax” from “fee” is the primary object of the levy and the essential purpose intended to be achieved. According to the Supreme Court, in the case before it, it was clear from the scheme of the Act that its sole aim was regulation, control and management of horse-racing. The Supreme Court observed that such a regulation is necessary in public interest to control the act of betting and wagering as well as to promote the sport in the Indian context. To achieve this purpose, licences are issued subject to compliance with the conditions laid down therein, which inter alia include maintenance of accounts and furnishing of periodical returns; amount of stakes which may be allotted for different kinds of horses; the measures to be taken for the training of the persons to become jockeys, to encourage Indian bred horses and Indian jockeys; the inclusion and association of such persons as the government may nominate as stewards or members in the conduct and management of the horse-racing. The violation of the condition of the licence or the Act is penalised under the Act, besides a provision for cognisance by a court not inferior to a Metropolitan Magistrate. To ensure compliance with these conditions, the 1985 Rules empower the District Officer or an Entertainment Tax Officer to conduct inspection of the race club at reasonable times. According to the Supreme Court, the nature of the impost was therefore not compulsory exaction of money to augment the revenue of the State but its true object was to regulate, control, manage and encourage the sport of horse racing as was distinctly spelled out in the Act and the 1985 Rules. For the purpose of enforcement, wide powers were conferred on various authorities to enable them to supervise, regulate and monitor the activities relating to the race course, with a view to secure proper enforcement of the provisions. Therefore, by applying the principles laid down in the aforesaid decisions, it was clear that the said levy was a “fee” and not “tax”.

The Supreme Court further held that a licence fee imposed for regulatory purposes is not conditioned by the fact that there must be a quid pro quo for the services rendered, but that, such licence fee must be reasonable and not excessive. It would again not be possible to work out with arithmetical equivalence the amount of fee which could be said to be reasonable or otherwise. If there is a broad correlation between the expenditure which the State incurs and the fees charged, the fees could be sustained as reasonable.

According to the Supreme Court, the licence fee levied in the present case, being regulatory in nature, the Government need not render some defined or specific services in return as long as the fee satisfies the limitation of being reasonable. The Supreme Court noted that the amount of licence fee charged from the appellant had not been challenged as being excessive. Thus, in the light of the above observations relating to inspection and other provisions of the Act, Supreme Court held that the licence fee charged had a broad co-relation with the object and purpose for which the Act and the 2001 Rules had been enacted.

The Supreme Court observed that the challenge to the constitutionality of section 11(2) of the Act was based on the premise that no guidance, check, control or safe-guard is specified in the Act. This principle, as distinguished above, applied only to the cases of delegation of the function of fixation of rate of tax and not a fee.

The Supreme Court in the conclusion observed that the challenge to the validity of section 11(2) of the Act was raised after almost 15 years of its coming into force. This appellant, since the commencement of the Act, had been regularly paying the licence fee and the present challenge was made only when quantum of the licence was increased by the Government on account of non-revision of the same since the commencement of the Act. Evidently, the inflation during this period was taken as the criterion for increasing the quantum of the fee. It was a reasonable increase keeping in view the fact that expenditure incurred by the Government in carrying out the regulatory activities for attaining the object of the Act would have proportionately increased. Accordingly, to the Supreme Court, an institution of the size of the race course should not have cloaked their objection to an increase in the rate of licence fee and present them as a challenge to the constitutionality of the charging section.

High Court – If the High Court finds that the Tribunal has not answered some issues which arose before it in an appeal, instead of itself answering those issues, it should remit the case back to the Tribunal.

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[Teknika Components v. CIT (2012) 346 ITR 570 (SC)]

The assessee-respondent filed a return for the assessment year 2000-01, declaring taxable income of Rs.1,72,980/- inter alia after claiming deduction u/s. 80IA of Rs.89,74,875/-. The assessment was completed accepting the return submitted by the assessee, except denying the deduction u/s. 80IA to the extent of Rs.1,72,985/- in respect of interest credited to the Profit & Loss Account. Since the assessee-firm was held eligible for deduction u/s. 80IA, the rate of gross profit at 75.8% was examined by the Assessing Officer.

The Commissioner of Income Tax, exercising his jurisdiction u/s. 263 passed an order setting aside the assessment order and directing the Assessing Officer to frame fresh assessment, after giving reasonable opportunity of being heard to the assessee, the effect of which was to disallow deduction granted u/s. 80IA.

The Tribunal cancelled this order of the Commissioner in an appeal filed by the assessee.

The High Court in the appeal preferred by the Department, came to the conclusion that the Tribunal had not answered some of the issues, which stood decided by the Commissioner of Income Tax u/s. 263. In the circumstances, the High Court set aside the order of the Tribunal.

Against the Order of the High Court, the assessee approached the Supreme Court by way of Special Leave Petition. On 5-1-2011, the Supreme Court permitted the Department to proceed with reassessment without prejudice to the rights and contentions of the parties. In September 2014, when the matter came up for hearing, it was pointed out to the Supreme Court that the Assessing Officer had passed a fresh order on 5-5-2011, in which he had disallowed the claim for deduction u/s. 80IA and that the assessee had preferred an appeal to the Commissioner of Income Tax (Appeals) against the said order.

The Supreme Court was of the view that, instead of the High Court itself answering the issues which were held to be not answered by the Tribunal, it ought to have remitted the case to the Tribunal which it had not done in the present case.

The Supreme Court, in the peculiar facts and circumstances of the case, directed the Commissioner of Income Tax (Appeals) to decide the matter uninfluenced by the earlier order of the Commissioner of Income Tax u/s. 263. The Supreme Court set aside the order of the High Court and disposed of the appeal accordingly.

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Central Board of Direct Taxes – Representation should not be rejected without hearing and that the case should be disposed of by a reasoned order.

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[Satyam Computer Services Ltd. v. CBDT (2012) 346 ITR 566 (SC)]

The Petitioner company was a victim of unprecedented fraud perpetrated by the former chairman and previous management of the company. Serious Fraud Investigation Office (SIFO) which investigated the fraud, found that the previous management paid taxes on fictitious income to convey a false impression that the income was genuine. As per initial quantification, sales was overstated by Rs.4,915 crore (2001-02 to 2007-08), interest income of Rs.920.14 crore was shown on non-existing fixed deposits (2001-02 to September, 2008) and non-existent interest of Rs.186.91 crore was paid on fictitious fixed deposits (2001-02 to 2007-08).

In the circumstances, Petitioner Company represented to the Central Board of Direct Taxes (CBDT) stating that income declared by the earlier management in return of income had been overstated and tax credit thereon was excessively claimed, as evident from the subsequent restatement of accounts at the instance of the Company Law Board and consequent upon investigation by the SIFO. It was the case of the company before the CBDT that the Department had acted on the basis of false claims of payment of taxes made by the previous management by rectifying the assessment and raising tax demands. The case of the petitioner was that, in the circumstances, the overstated income in the specified assessment years should be reduced.

CBDT vide order dated 10-3-2011 passed u/s. 119 rejected the representation of the company for re-quantification/reassessment of income for various years for the reasons given in the order. However, no hearing was given to the petitionercompany. Aggrieved, the petitioner–company filed a writ petition in the Andhra Pradesh High Court. The High Court directed the petitioner-company to pay Rs. 350 crore and to give bank guarantee for Rs. 267 crore, pending hearing and disposal of the writ petition. The petitioner-company filed a Special Leave Petition before the Supreme Court.

The Supreme Court was of the view that the CBDT in the peculiar facts and circumstances of the case, ought to have heard the petitioner-company which they had not done. The Supreme Court also found that the representations made by the petitionercompany required further details to be furnished and in the circumstances, it directed the petitionercompany to file within two weeks, a comprehensive petition/representation before the CBDT giving all requisite/details/particulars in support of the case for re-quantification/reassessment of income for the assessment years 2003-04 to 2008-09 and directed the CBDT to hear the petitioner-company and dispose of the case within a period of two weeks from the date of hearing by a reasoned order. The Supreme Court further required the chairman of the company to file an undertaking with the Registry of Supreme Court to furnish bank guarantee of the nationalised bank in a sum of Rs. 617 crore and on filing such undertaking, attachment levied by the Department would stand lifted. The Supreme Court disposed of the petition without expressing any opinion on the merits of the case and keeping all the contentions open.

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Appeal u/s. 260A – High Court ought to give its findings in detail – High Court should not set aside the order of the Tribunal in an appeal filed by the Department without hearing the assessee.

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[Rajesh Mahajan v. CIT (2012) 346 ITR 513 (SC)]

The appellant, an individual was a partner in M/s. Mahajan Exports, Panipat and M/s. Maspar, Panipat deriving business income, income from salary and income from house property. A search was conducted under section 132 (1) at his residential and business premises. Pursuant to a notice under section 158BC, the appellant filed his return for the block period declaring total undisclosed income at ‘nil’. The assessment was completed after scrutiny, determining total undisclosed income at ‘nil’. The said assessment order was set aside by the Commissioner u/s. 263 with a direction to make the assessment de novo on the following matters:

(a) cash found at the premises of the assessee at Panipat house,
(b) cash found at the Delhi house;
(c) unsecured loans, and
(d) fresh investment

The order of Commissioner u/s. 263 was set aside by the Tribunal, observing that the appellant had filed detailed explanation and supporting evidence on the basis of which the Assessing Officer had made due enquires while passing the assessment order, after obtaining necessary approval from his superior officer u/s. 158BC of the Act. The High Court set aside the order of the Tribunal in an appeal filed by the Department. On an appeal to the Supreme Court by the appellant, the Supreme Court noted that the appellant was not heard by the High Court and that the review application was also dismissed by the High Court.

The Supreme Court set aside the judgment of the High Court and remitted the case for de novo consideration observing that the High Court ought to have given its findings in detail, particularly on the question whether there was any error of law in the decision of the Tribunal and whether that error caused prejudice to the Revenue.

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Interest expenditure – Advances to sister concerns – Commercial expediency – S. A. Builders v. CIT needs reconsideration.

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[Addl. CIT v. Tulip Star Hotels Ltd. (SLP (CC) No.7140 of 2012 dated 30-4-2012)]

The respondent-assessee had borrowed certain funds which were utilised by the assessee to subscribe to the equity capital of the subsidiary company, namely, M/s. Tulip Star Hospitality Services Ltd. This subsidiary company used the said funds for the purpose of acquiring the Centaur Hotel, Juhu Beach, Mumbai, which is now functioning as “The Tulip Star, Mumbai”. The assessee paid interest on the borrowed money. This interest liability incurred by the assessee was claimed by it as deduction on the ground that it was business expenditure. The Assessing Officer refused to allow the expenditure.

However, the Commissioner of Income Tax (Appeals) reversed the decision of the Assessing Officer and the opinion of the Commissioner of Income Tax (Appeals) was confirmed by the Income Tax Appellate Tribunal.

The Tribunal noted that the assessee was in the business of owning, running and managing hotels. For the effective control of new hotels acquired by the assessee under its management, it had invested in a wholly owned subsidiary, namely, M/s. Tulip Star Hospitality Services Ltd. On this ground, relying upon the judgment of the Supreme Court in the case of S.A. Builders Pvt. Ltd. v. CIT [2007] 288 ITR 1, the Tribunal held that the assessee was entitled to the deduction of interest on the borrowed funds.

On an appeal, the Delhi High Court inter alia held that the expenditure incurred under the aforesaid circumstances would be treated as expenditure incurred for business purposes and was thus allowable under section 36 of the Act.

On a further appeal, the Supreme Court was of the opinion that S.A. Builders Ltd. v. Commissioner of Income Tax, reported in 288 ITR 1, needed reconsideration. The Supreme Court therefore issued notice on the SLP.

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DEDUCTIBILITY OF ADVANCE PAYMENTS – Section 43B

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Issue for consideration
Section 43B of the Income Tax Act provides that certain deductions shall be allowed only in that previous year in which the specified sum is actually paid , irrespective of the previous year in which the liability to pay such sum was incurred according to the method of accounting regularly employed by the assessee. It basically applies to taxes, duties, cess, or fees, contributions to provident funds, superannuation funds, gratuity funds, interest on loans or borrowings from financial institutions or banks and leave encashment.

This section, which was inserted with effect from assessment year 1984-85, to the extent relevant for our discussion, reads as under:

43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or

(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or

(c) any sum referred to in clause (ii) of sub-section (1) of section 36, or

(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or

(e) any sum payable by the assessee as interest on any loan or advances from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advances, or

(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee,

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him :

Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.

Explanation 2 to section 43B provides that for the purposes of clause (a), “any sum payable” means a sum for which the assessee incurred liability in the previous year, even though such sum may not have been payable within that year under the relevant law.

Therefore, in respect of the specified sums , even if the liability has been incurred, but payment has not been made, the deduction would not be allowable in the year in which the liability is incurred, but would be allowable in the year of payment.

The section begins with a non-obstante clause that has the effect of overriding the provisions of the Act . It further states that a deduction otherwise allowable in respect of the specified sums will be allowed in the year of actual payment.

A controversy has arisen in respect of a converse type of situation where the payment has been made, but liability to pay has not yet been incurred, particularly in respect of taxes which are covered by clause (a). While the Kerala High Court has taken the view that the deduction would not be allowable in the year of payment if the liability has not been incurred as per the method of accounting, the Calcutta, Punjab & Haryana and Delhi High Courts have taken a contrary view to the effect that the deduction would be allowable u/s 43B in the year of payment, even if the liability to pay tax or duty was incurred in the next year under the mercantile system of accounting followed by the assessee. A related controversy has also arisen for allowance of deduction, in the year of payment, though the liability to pay the same may not have arisen under the relevant statute governing the expenditure in the year of payment. The special bench of the ITAT favours the grant of allowance in the year of actual payment.

Kerala solvent extractions’ case
The issue arose before the Kerala High Court in the case of CIT v. Kerala Solvent Extractions, 306 ITR 54.

In this case, pertaining to assessment year 1994-95, the assessee which was following the mercantile method of accounting, made an additional payment of Rs. 23 lakhs towards sales tax payable for April 1994. This amount was claimed as a deduction for the year ended 31st March 1994. The Assessing Officer disallowed the claim u/s 143(1)(a), since it was specifically stated in the accounts accompanying the return that the amount paid was towards sales tax for April 1994.

The assessee’s appeal against the disallowance was allowed by the Commissioner(Appeals), who held that the disallowance of the amount paid towards advance sales tax was a debatable point. The Tribunal confirmed the order of the Commissioner(Appeals).

Before the Kerala High Court, it was argued on behalf of the Revenue that sales tax liability payable in April 1994 was not an allowable deduction u/s 37(1) r.w.s 145. It was argued that the claim was not allowable as the assessee had not incurred expenditure, and that unless the amount paid was the liability of the assessee for the previous year, it could not be allowed, no matter whether the assessee had paid it or not. On behalf of the assessee, it was contended that the tax having been paid in the previous year, though not a liability of the year, was an allowable deduction under clause (a) of section 43B read with explanation 2.

The Kerala High Court observed that it was not in dispute that the sales tax liability of the assessee was an allowable deduction in the computation of income from business by virtue of section 29 r.w.s 37(1), that income chargeable under the head “Profits and Gains of Business or Profession” was to be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee, that the assessee was following the mercantile system of accounting and that like any other liability, sales tax liability should be claimed and allowed on mercantile basis. It was also undisputed that the sales tax liability of Rs. 23 lakh pertained to April 1994, which fell in the next financial year, and that u/s 145, the assessee was not entitled to deduction of this amount in the earlier year of payment.

According to the Kerala High Court, the issue was whether section 43B entitled the assessee to deduction of liability of the next financial year merely because the amount was paid by the assessee during the previous year relevant to the assessment year. The Kerala High Court observed that words of section 43B showed that the section dealt with deductions otherwise allowable under the provisions of the Act, and that the section only laid down the conditions for eligibility for deduction of certain al-lowances which were otherwise admissible under the Act. According to the Kerala High Court, the scheme of section 43B was to allow the deductions referred to in clauses (a) to (f) only on payment basis, even though the assessee was following the mercantile method of accounting. In other words, section 43B was an exception to section 145, inas-much as even if the claim was allowable deduction based on the system of accounting, it would still be inadmissible u/s 43B if it was not paid on or before the end of the relevant previous year, or at least before the date of filing of the return. The Kerala High Court therefore held that section 43B was only supplementary to section 145 and was only an additional condition for allowance of deductions otherwise allowable under the other provisions of the Act.

The Kerala High Court, on examination of the scheme of the sales tax, noted that under the scheme, the liability for payment of sales tax arose on the due date of filing of the monthly returns and the final return and the liability therefore arose only on due date of filing of the return. Under this scheme, if the assessee remitted any amount in the financial year towards tax payable for any month of the next financial year, this amount did not constitute tax liability of the assessee for that previous year, but would be carried as an amount of tax paid in advance for the next year, and would be adjusted towards tax liability for that year. If the assessee discontinued business, it was entitled to get refund of the tax paid in the earlier year.

According to the Kerala High Court, explanation 2 to section 43B did not justify the claim of the assessee for deduction because even under that provision, only liability incurred by the assessee during the previous year was allowable on payment basis. What the explanation contemplated was incurring of liability by the assessee in the previous year, though the amount was not payable during the previous year under the relevant law. The Kerala High Court noted that so far as sales tax was concerned, it was a tax on sale or purchase of a commodity. Since the liability arose under the statute and the payment was not towards tax due for the previous year or payable in that year, the assessee was not entitled to claim deduction u/s 29 r.w.s 37(1) and 145.

The Kerala High Court therefore held that the asses-see was not entitled to the deduction in the year of payment, and further confirmed that the payment of sales tax was prima facie disallowable, and hence upheld the disallowance u/s 143(1).

Paharpur cooling towers’ case

The issue again came up recently before the Calcutta High Court in the case of Paharpur Cooling Towers Ltd v. CIT, 244 CTR 502.

In this case, for assessment year 1996 -97, the assessee paid a sum of Rs. 3.22 crore on account of excise duty, the liability for payment of which was incurred in the previous year relevant to assessment year 1997- 98. The assessee claimed deduction in respect of the amount actually paid by it during the previous year ended 31st March 1996 in the assessment for assessment year 1996-97, u/s 43B.

The assessing officer disallowed the assessee’s claim for deduction of the excise duty paid on the ground that the liability for such excise duty was not incurred during the previous year relevant to assessment year 1996-97. The Commissioner(Appeals) allowed the appellant’s claim for deduction of excise duty. The tribunal allowed the appeal of the revenue against the order of the Commissioner(Appeals), upholding the disallowance of such advanced payment of excise duty.

The Calcutta High Court observed that the requirement of section 43B(a) was that the assessee must have actually paid the amount, as well as incurred liability in the previous year for the payment, even though such sum may not have been payable within that year under the relevant law. The court noted that the assessee had undoubtedly paid the duty in the previous year and such payment was made consequent upon the liability incurred in the very year, but in view of the fact that it followed the mercantile system of accounting, the amount was legally payable in the next year. According to the High Court, the amount therefore was clearly covered by section 43B read with explanation 2.

The High Court further noted that the position would have been different if the amount was not paid in the previous year, in which case the assessee would not have been eligible to get the benefit. The object of the legislature was to give the benefit of deduction of tax, duty, etc. only on payment of such amount, liability of which the assessee had incurred and not otherwise. Even if the tax or duty was payable in the next year in view of the system of accounting followed by the assessee, according to the Calcutta High Court, if the liability was ascertained in the previous year and the tax was also paid in that same year, there was no scope of depriving the assessee of the benefit of deduction of such amount.

The Calcutta High Court, after analysing the reasons for introduction of section 43B, stated that it was never the intention of the legislature to deprive the assessee of the benefit of deduction of tax, duty, etc, actually paid by him during the previous year, although in advance, according to the method of accounting followed by him. The Calcutta High Court observed that, if the reasoning given by the tribunal were accepted, an advance payer of tax, duty, etc payable in accordance with the method of accounting followed by him would not be entitled to get the benefit even in the next year when liability to pay would accrue in accordance with the method of accounting followed by him, because the benefit of section 43B was given on the basis of actual payment made in the previous year.

The Calcutta High Court therefore held that the advance excise duty paid was allowable as a deduction in the year of payment, though the liability to pay such duty arose in the subsequent year as per the method of accounting employed by the assessee.

A similar view was taken by the Delhi High Court in the case of CIT v. Modipon Ltd (No 2) 334 ITR 106, as well as by the Punjab and Haryana High Court in the case of CIT v Raj and San Deeps Ltd 293 ITR 12, again in the context of excise duty paid in advance.

Observations

The dispute is two fold. In claiming deduction based on actual payment while computing the total income of the year payment, whether it is necessary that the liability to pay the specified sum has arisen (a) under the respective statute governing the expenditure and(b) under the method of accounting employed by the assessee. The Revenue’s case is that for an allowance of deduction, it is essential that three conditions are satisfied; liability under the governing statute, liability under the method of accounting and the actual payment. It is only on compliance of all the three conditions that an assessee shall be entitled to a valid claim of deduction. In contrast, the assesses are of the view that the only condition necessary for a valid deduction is the actual payment and once that is proved the claim cannot be frustrated.

The purpose behind the introduction of section 43B, and the reasons for introduction of Explanation 2 are narrated by the Explanatory Memorandum reported in 176 ITR (St) 123. It states that the objective of section 43B is to provide for a tax disincentive by denying deduction in respect of a statutory liability which is not paid in time. The first proviso to section 43B was introduced to rule out the hardship caused to certain taxpayers who had represented that since the sales tax for the last quarter cannot be paid within the previous year, the original provisions of section 43B would unnecessarily involve disallowance of the payment for the last quarter. The Memorandum further states that certain courts had interpreted the words “any sum payable” to the effect that the amount payable in a particular year should also be statutorily payable under the relevant statute in the same year. This was against the legislative intent and it was therefore being proposed, by way of a clarificatory amendment and for removal of doubts, that the words “any sum payable” be defined to mean any sum, liability for which had been incurred by the taxpayer during the previous year, irrespective of the date by which such sum was statutorily payable.

The language of the provision specifically provides for overriding or ignoring the method of accounting. Once that is done, there is no enabling provision found in the section that requires looking back to the method of accounting for ascertaining the eligibility of the deduction, otherwise. The only requirement is to ascertain the fact of the actual payment. If the payment is made , the deduction is allowed and should be allowed instead of denying the same.

The actual payment of the specified sum, under the provision, is the key consideration for allowance of the deduction. It emerges nowhere that a person should satisfy the twin conditions of the liability and of the actual payment as well, before a lawful deduction is claimed and allowed. To read the condition of the incurring of the liability in the section amounts to doing a serious violence to the provision and should be avoided. The use of the words ‘irrespective of the previous year in which the liability to pay such sum was incurred’ clearly puts to rest any doubts about the intention of the legislature, which is to allow the deduction in the year of payment, irrespective of the year in which liability was incurred.

Further, nothing is gained by denying a lawful deduction based on actual payment, as the payment is the conclusive proof of the intention of the payer. It may be that in some stray cases, the person making the payment in advance is refunded the sum paid. In such cases, the law has enough provisions to tax the refund in his hands including under the provisions of s.41(1) of the Act.

It is nobody’s case that a deduction should be allowed on payment in respect of an expenditure that is otherwise not allowable under the Act. The deduction should surely be for an expenditure that is allowable in computing the income under the provisions of the Act. In view of this position, any attempt to frustrate a deduction by relying on the opening part of the section which uses the term ‘a deduction otherwise allowable’ should be nipped in the bud. The said term simply means that the claim should be of an expenditure that is otherwise allowable under the Act and not necessarily w.r.t. the method of accounting. If the intention were to first determine the allowability on the basis of the method of accounting , it would have been provided there and then, by stating that ‘ a deduc-tion otherwise allowable on accrual’ or ‘as per the method of accounting’. On the contrary, the latter part simply advises one to ignore the method of accounting.

The next difficulty is about the need for accrual of liability under the relevant statute that provides for the expenditure and its relation to the Explanation 2. The scope of the said Explanation 2 is restricted to only those payments which are covered by clause(a) of s. 43B of the Act. This again emphasizes the fact that the scheme of the deduction is based on one and only condition and that is that of the actual payment, at least as far as the deduction under clauses(b) to(f) are concerned and if that is so, there is nothing that permits assigning of a different treat-ment for clause(a) payments. With great respect to the Calcutta High Court, it seems that the court’s observation that in order for a valid deduction, it was necessary that the liability for such payment should have been incurred under the relevant law in the same year in which the amount was paid, though it might not have become payable under the method of accounting employed by the assessee, does not seem justified. Kindly note that the said Explanation 2 itself supports the claim for the deduction in the year of payment, irrespective of the liability to pay, when it states ‘even though such sum might not have been payable within that year under that law’. If that is so, undue importance is not required to be given, for the purposes of deduction under the Income tax Act, to accrual of liability and the time thereof, under the relevant laws governing the payment of the expenditure. The Delhi High Court seems to support this position when it stated that the purpose of s. 43B is ‘subserved by the payment of the duty to the Department concerned’.

The Special Bench of the Income Tax Appellate Tribunal also had occasion to consider this issue, though again in the context of excise duty, in the case of DCIT v. Glaxo Smith Kline Consumer Health-care Limited, 299 ITR (AT) 1 (Chd)(SB). Some of the observations of the members of the special bench are interesting and throw considerable light on how section 43B is to be viewed in the case of advance payments, and are reproduced below:

(i)    There is no reference to any condition to establish “accrual of liability” for the claim of deduction. Only actual payment is insisted upon. The whole idea of enactment of section 43B is to change the system and replace the condition of allowability of deduction from incurring of the liability to actual payment. Having in mind the provision of section 43(2) and the purpose of section 43B, there is no question of asking the assessee to prove actual payment as well as incurring of a liability.

(ii)    It is not necessary that the assessee must prove incurring of a specific liability under any statute referred to in the different clauses of section

43B. It must be an expenditure connected and related to the assessee’s business deductible u/s 28 of the Act. It should not be a prohibited item totally unrelated to the business of the assessee. The expression “a deduction otherwise allowable” only means statutory liabilities mentioned in section 43B. The expression “a deduction otherwise allowable” reflects deduction on account of general liability fastened to the assessee’s business on account of duties, taxes, cess or fees by whatever name called, arising in the course of the carrying on of the business. The expression does not mean any specific liability which is required to be incurred.

(iii)    There is no justification to examine the previous year in which liability to pay the sum was incurred, when the mandate is “irrespective of the previous year in which liability was incurred” and the claim is to be allowed on the basis of actual payment. To do otherwise would be in violation of the words “irrespective of the previous year” in which the liability was incurred and disregard the mandate of the section.

(iv)    Section 43B brought in a change in the normal rule of deduction of expense based on the accounting method followed by an assessee. The rule of deduction u/s 43B is actual payment of the liability. When the payments are understood as actual payments, those payments even if mentioned as advance payments, need to be allowed as deduction u/s 43B.

(v)    Section 43B provides for the deduction of sums payable mentioned in clauses (a) to (f), only if actually paid ; but they shall be allowed irrespective of the previous year in which the liability to pay such sum was incurred by the assessee. The expression “irrespective of the previous year” means the deduction has to be allowed regardless of the previous year. Any reference to the time of incurring or accruing of the liability is dispensed with by the statute while concentration is made on the point of actual payment of the sum to the Treasury of the Government.

(vi)    It is highly improbable to presume that an assessee would indulge in tax avoidance by actually paying money towards duties and taxes. Any such benefit arising to an assessee is only incidental.

(vii)    The section does not lay down any rule that the liability to pay the duty must be incurred first and only thereafter the payment of such duty made, so as to claim the deduction under section 43B. The expression “otherwise allowable” refers to a declaration that payments which are available as deductions u/s 43B, are those expenses which are usually allowed by the Income-tax Act for the purpose of computing income. The expression “any sum payable” does not mean “payment outstanding”.

On a combined reading of the provisions together with the Explanatory Memorandum and of the intention and the history behind the provisions, amended form time to time, it is clear that section 43B completely overrides the method of accounting and therefore section 145, and that even advance payments of tax are allowable as deduction, in the year of actual payment, even if the liability to pay the tax did not arise during the previous year, but in a subsequent year.

The view taken by the high courts in favour of the allowance of deduction on payment is , in our respectful opinion, a better view of the matter.

Further, the view that the deduction is allowed under the Income tax Act in the year of payment , as held by the special bench of the ITAT, irrespective of its year of accrual under the relevant statute providing for liability to the expenditure, once the actual payment is made, is a far better view.

Coal on Fire

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Few days back, the report of the Comptroller and Auditor General (CAG) of Performance Audit of Allocation of Coal Blocks was tabled in the Parliament. The CAG has reported that the Government ought to have allocated the coal blocks by competitive bidding. The Government followed a method that lacked transparency. CAG estimated the loss to the exchequer to the tune of Rs. 1.86 lakh crore due to the method followed by the Government.

One is not sure whether the action of the Government was the result of any corrupt practice and `mota maal’ received by the ruling party as alleged by the opposition or a mere impropriety or a decision taken with national interests in mind.

Since the Report was tabled in the Parliament, the opposition has not permitted the Parliament to function and has been demanding the resignation of the Prime Minister. Not permitting the Parliament to function is becoming a regular affair and does not augur well for the democracy. Both, the opposition and the ruling party members, are airing their views on the electronic media. The debate ought to happen on the floor of the Parliament; that is the right forum. The opposition is being irresponsible. They would be performing their duty better, if they take the Government to task on the floor of the Parliament.

The Government has been defending the allocation of the coal blocks by putting up several arguments, most of them rather illogical and difficult to digest.

The Prime Minister, while accepting the responsibility for the decision, has stated that the conclusions of the CAG are disputable. The Minister of Corporate Affairs (holding additional charge of Ministry of Power) commented that the CAG Report has been made without proper study and that the things that the CAG has come out with are all speculative and presumptive. He mentioned that the Report will precipitate the policy paralysis in the Government.

The Finance Minister reportedly said that there was zero loss due to allocation of the coal blocks (a defence taken even when 2G scam surfaced). The Minister denied having ever said this. Now his view is that, since mining had not started at any of the coal blocks except one and the coal was still buried in the Mother Earth, no loss had occurred. Does the Minister agree that there is loss, but it will start accruing only when the mining of coal starts? Is it his case that there is no issue at this point of time since loss will accrue in future? Will the Minister accept if an assessing officer were to assess a higher loss and argue that question of loss to the revenue will arise, only if and when the assessee makes profit and claims a set off?

The Minister of Coal slammed the CAG Report on various grounds including the methodology of calculating the loss. The spokesperson for the ruling party at one stage even challenged the jurisdiction of the CAG in making the Report. The Minister of Human Resources Development and the Minister of Law have also joined the bandwagon trying to discredit the Report.

While accepting the proposition that every decision, report and the functioning of any constitutional authority should be open for reasonable criticism, the kind of frontal attack from the ruling party on the CAG and his Report is rather unfortunate and uncalled for. The CAG is a constitutional authority (the Supreme Audit Institution of India) with a right and duty to interrogate the Government on its performance as well as compliance. Each report must be given serious consideration and deliberated upon and discussed at appropriate forums. Neither is the main opposition party justified in not letting the Parliament function nor is the ruling party right in rubbishing the Reports of a constitutional authority on flimsy grounds.

The Nation has witnessed in the recent times two instances, where allocation of natural resources made by the Government has come under attack. The Supreme Court, in the proceedings relating to 2G scam, has directed that national natural resources should be allocated based on competitive bidding. While this may be the most transparent method of allocation of the resources, it has many repercussions. In a competitive bidding, the prices of the resources will bring in more revenue to the national exchequer, but it will impact the pricing of the products and services offered to the public using those high-priced resources. Price of coal will directly impact the prices of power, steel and cement. While the rates for the power are fixed by the Regulatory Commissions, prices of steel and cement are not regulated. Are we ready for prices that are fully market-driven in all sectors? These are complex questions, these can be handled if the Government and bureaucrats work with honesty and diligence and develop transparent yet an efficient way in consultation with all stakeholders.

We talk about high growth rate, that the coming decades will be that of India, India will be a superpower. Are we only fooling ourselves? Can India really progress unless the system is cleansed of corruption and inefficiency. Most of us want to be optimistic. But when we look at the situation around us in the present times, pessimism sets in. Unless we change our act quickly as a nation, we will lose the opportunity when there is a turnaround in the world economy.

Sanjeev Pandit
Editor

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Happiness Unlimited

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What is happiness where does it lie?
How does it look like and why is it so shy?
Chase of mankind always kept aloof,
Appearances in roses, hearts filled with gloom.

Life in bigger cities, despite better amenities, has become very hectic and stressful that a news item even reported that sale of anti-depressants in India is growing by 17% annually. If we look around, it is an appalling scenario. People seem or rather pretend to be happy, but in actuality are far from being happy. Why is it so that in this era of technological advancements where almost everything has become possible upon a touch of a button, the mind is far away from serenity?

Life is referred as “anubhav dhara”, stream of experiences. There is life as long as there are experiences. As the experiences cease, life also comes to an end. There are two components of any experience, subject and object. The subjects are we as individuals and the object is the world. As the subject, we individuals deal with the world, we have experiences. As are the experiences, so is the life. If experiences are good, life is good and when there are sorrowful experiences, so is the life. To improve the experience, the options are either to improve the subject or the object. One set of school works for the betterment of the objects to provide greater happiness. The scientific developments play an important role and indeed have made massive contributions. With each passing day, new and new captivating gadgets and equipments are becoming part of our life. The objects are truly facilitating. Nevertheless people continue to be in a state of anguish and pain. No object till date has ever been able to overcome the sufferings and woes of any human being. This is an irony. Another set of thinkers concentrate on the subject. Vedanta provides that if we do not work on the improvement of the subject, we live a life of strain and disarray even in the world of prosperity and plenty.

We as human beings succumb to our desires. Desires of sense objects. The fulfillment of each desire; achievement of sense object, symbolises happiness to us. Each time we get our desire fulfilled we appear to be happy. If we put happiness into an equation, mathematically, it would be:

                     Number of desires fulfilled
Happiness = ————————————–
                      Total number of desires entertained.

Obvious from the above formula, the two ways in which happiness can be increased are:
I) Either increase the numerator or
II) Decrease the denominator.

Getting along with the first option is very easy. We try to increase the numerator by fulfilling our desires and we do have a sense of happiness. For example: If there is a desire to go out for a dinner at a restaurant, then accomplishing the object makes us feel happy. But in the process of increasing the numerator, we find ourselves in a situation where many more desires have crept in. Every time we fulfill our desire, the number of desires in the wait list keeps on rising. Thus, increase in the numerator automatically increases the denominator and in fact manifolds, severely affecting the equation of happiness downwards.

Concentrating on the subject, we achieve strength to raise ourselves. If we are able to control and confine our desires, there is decrease in the denominator. The removal of each desire would give us the power. Happy at all times. Swami Ramatirtha has said “If you are not happy as you are, where you are, you will never be happy.” The day when we bring down the denominator to zero value, imagine the level of happiness, it shall be infinite. “Happiness Unlimited”. It might seem to be a difficult proposition, but we human beings do follow this practice. The question ahead is; are we willing to improve upon? How? Let’s see.

It is a known fact that our composition is of matter and spirit. The body, mind and intellect referred to as the matter and Atman, the spirit. At the gross level it is body, mind being subtle. Intellect is subtler and Atman the subtlest. Eating an imported brand of chocolate and its taste is the cause of happiness to the body. When it comes to the emotional level where mind plays, we rise and we give the chocolate to our child giving us much more joy and in fact for a longer duration. Our intellectual pursuits for study many times make us give up various desires and we happily let go desires for a cause something more important. That brings everlasting happiness. We need to lift ourselves because intellectual persists.

Giving away desires may not be that easy. The higher we move, from body to mind to intellect and there above, it becomes more difficult. The higher is the pain; greater the happiness. The Lord Himself has said in the eighteenth chapter of The Bhagwad Gita: The true happiness is like poison in the beginning but nectar in the end – verse 37. False happiness is like nectar in the beginning but poison in the end – verse 38.

In these times, full of hassle and haste, let us pause for a while; think where true happiness lies and how it can be achieved lies in not letting go the objective of our life and existence.

The way to happiness is on path of attitude,
Where hearts filled with sense of gratitude.
With all one has ever so content,
As divine gifts above from heavens.

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OUR MOTTO FOR LIVING OTHERS

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OUR MOTTO FOR LIVING
OTHERS

Lord, help me live from day to day
In such a self-forgetful way,
That even when I kneel to pray,
My prayer shall be for “Others”,

Help me in all the work I do
To ever be sincere and true,
And know, that all I do for you
Must needs be done for “Others”
And when my work on earth is done
And my new work in Heavens begun
May I forget the crown I’ve won,
While thinking still of “Others”
“Others, “ Lord, yes, “Others!”
Let this my motto be,
Help me to live for others
That I may live for Thee

P.C.
Your Guru desires that the above message may reach
all tax practitioners of Maharashtra. Please therefore pass on
the above message to your known Tax Practitioners.

From your Guru

On Teacher’s day 5th September 2012
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Editor

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Editor,

Re: Make Section 206AA inapplicable to Non Residents

After 8 years of inaction/ drift, a number of mega scams and countless reported incidents of corruption at high echelons of Indian polity, the Government has now woken up and has initiated steps to stimulate economic growth, encourage FDI and remove misapprehensions from minds of foreign investors caused by the policy paralysis and various retrospective amendments by the Finance Act, 2012.

At the ground level, one provision which greatly inconveniences and irks Non-Residents is Section 206AA inserted with effect from 01-04-2010, requiring every person to obtain and furnish his PAN Number to the payers or otherwise, be ready to suffer TDS @ 20% irrespective of the actual rate of TDS applicable to the transaction either under the Tax Treaty or under various provisions of Incometax Act applicable to Non Residents. One fails to understand the rationale of making this provision applicable to Non-Residents.

 The Non-Residents, particularly those who do not have frequent transactions with India, are very hesitant to obtain PAN. Further, the procedure for obtaining PAN is very cumbersome and time consuming. In most transactions, the Non-Resident wants payment net of tax and, therefore, the burden of paying the tax @ 20% falls on the Indian Resident and it works out to 25% due to the application of Grossing up provision u/s 195A.

The Government has all the Information online about the Non-Resident payees, as the payer has to upload full details about all remittances in Form 15CA before making any remittance overseas. If the resident payer makes any mistake in deducting TDS from any remittance to a Non-Resident, the payment is liable to be disallowed u/s 40(a)(i) besides other consequences by way of recovery of tax short deducted, interest and penalty.

How many advanced countries have such harsh provisions? The FM should consider consequences for Indian MNCs and others, if India’s trading partners were to introduce provisions similar to Section 206AA in their Tax Laws.

If the Finance Minister really wants to create a business / investor / tax payer friendly environment in India, he should make Section 206AA inapplicable to Non-Residents. Such an action would remove a massive irritant and also reduce the cost of doing business with Non Residents.

Yours sincerely,

Tarun Singhal.

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India Inc braces for stricter bribery laws

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India Inc is gearing up to face more stringent and specific anti-bribery laws with the government planning to amend the Indian Penal Code (IPC) to cover bribes given domestically by the private sector.

Once this comes into force, the employee concerned and also the company’s management could face imprisonment of upto seven years. It is likely that the proposed IPC amendment would be broad based and, in addition to bribes given to public officials, will also cover bribes within the private sector (such as company A, a supplier, bribing an official in company B to bag huge orders).

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Nine of ten, unemployable – No movement yet on quality control in higher education

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The state of professional higher education in India is abysmal. Consider engineering. All told, there are 1.5 million engineering seats in the country. Almost a third of these are unfilled, so about a million engineers are produced every year. Yet, barely 10 per cent of them are readily employable. About a quarter don’t know enough English to make sense of the curriculum. The tab for this monumental inefficiency is picked up by the companies that draw from this pool. Every year, they end up spending thousands of crores of rupees to retrain the fresh graduates and make them job-worthy. The situation is no better in business schools. Unlike engineering colleges, the rot has not been measured here. But it can’t be vastly different. People are, naturally, disillusioned: the number of students who appear in the entrance examinations for business schools has fallen steadily for three years. There are as many as 300,000 seats on offer; about one-third of this capacity is vacant. As a result, close to a hundred business schools have shut down in the last couple of years. More are bound to follow.

 All engineering colleges and stand-alone business schools are regulated by the All India Council for Technical Education (AICTE). Business schools under universities are regulated by the University Grants Commission (UGC). The AICTE has thus far focused exclusively on fattening the supply pipe of engineers and MBAs. The logic is that India’s higher-education enrolment ratio is very low compared to other emerging countries; to improve that, the AICTE has been liberal with approvals. This strategy is turning counterproductive. The AICTE should now focus on the quality of education imparted.

Employers complain that the output of engineers and MBAs is poor because the teaching faculty is weak. Engineering colleges and business schools, in turn, say that’s because the salaries are regulated by the AICTE, which keeps them from hiring good teachers. While the norms for engineering colleges are fairly stringent (not less than 2.5 acres of land, at least one acre of land for every 300 students, working capital of at least Rs 1 crore and a studentteacher ratio of not more than 15), those for business schools are lax: 20,000 square feet of built-up area, seven faculty members, 20 computers, 2,000 books in the library and subscription to 30 journals. The lack of entry barriers has caused the glut and the consequent fall in quality. These are issues that the AICTE needs to address urgently.

The crucial reform this sector needs is more effective legislation. Legislative initiatives like the Higher Education and Research Bill, 2011, which seeks to replace the AICTE and the UGC with a commission responsible for ensuring quality, and the National Accreditation Regulatory Authority for Higher Educational Institutions Bill, 2010, which will make it mandatory for all institutes of higher education to be accredited by an independent agency, have not made much headway. Unfortunately, in another craven surrender to its allies, the government reportedly withdrew the latter Bill – two years after its introduction – on Tuesday, because the Trinamool Congress had objections. Surely these objections were not new? If so, why has the human resource development ministry waited for so long to review the Bill? Such lack of seriousness in reform will only worsen the sector’s crisis.

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Readying quacks

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Sometimes, the Indian state demonstrates a naive belief in numbers that obscures the real issues. Take healthcare; by the government’s own reckoning, the country’s doctor-patient ratio should be around 1:1,000. Currently, it is 1:2,000. That’s the kind of problem the government thinks it understands.

Health minister Ghulam Nabi Azad informed the Rajya Sabha about the steps taken to counter this situation. Among other things, the government has relaxed norms for establishing new medical colleges in terms of faculty, land and other infrastructure. It has also relaxed the student/teacher ratio in postgraduate classes and raised the intake capacity at the undergraduate level from 150 to 250. The result will be more doctors, but given the dilution on various counts, it could very well mean poor-quality ones. This is inadequate medicine for an already sick healthcare system.

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Supreme Court on Sahara Matter – A Milestone Decision

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It is a historic decision on several grounds – of the companies being asked to refund huge sums of money, of a pursuit by SEBI till the logical end despite numerous hurdles including inter-regulator conflicts, of certain important rulings on the point of law by the Supreme Court which involved, perhaps on facts, removal of several creases in various laws. It is worth knowing the entire sequence of facts, the issues involved and the orders passed. This article cannot obviously do justice to the 263 page Supreme Court order, but an attempt to highlight important issues has been made.

The matter, of course, is far more complex than being a linear sequence of orders and appeals. It had several detours to Allahabad and other courts but, in essence, it is sufficient to consider this series of orders only. The decision covers many important areas – powers of SEBI, what constitutes an issue to the public, the sanctity in law of Guidelines of SEBI and so on. Concerns have been expressed about the dubious role that the Registrar of Companies performed. The Supreme Court also appears to have endorsed the possibility of criminal action against the Saharas (the two Sahara group companies against whom the orders were passed). These and other issues may need separate analysis as to its scope and implications. Further, the progress of implementation of the order of the Supreme Court in terms of payment of refund monies into the designated bank, identification of the OFCDs holders, etc. will have to be seen. There are reports that the Saharas may pursue further litigation and hence, this matter may develop even further.

The essential facts – as stated in the decisions – are summarised in a simplified manner below. However, one preliminary thought comes to mind. The facts are quite glaring and extreme. The Saharas offered their Optionally Fully Convertible Debentures (“OFCDs”) to crores of people, hiring lakhs of agents through thousands of branches and raised tens of thousands of crores of rupees. And then they claimed, clearly on technical grounds, that there was no issue of securities to the public that would result in need for compliance of SEBI Regulations and other laws for disclosure, investor protection, etc. Further, they refused to provide information to SEBI and adopted delaying tactics. In the face of such facts, one even wonders whether the decision – which rejects every contention of the Saharas and even removes several creases and gaps in law in the process – could be interpreted to some extent as restricted to the facts of the case.

The Saharas, as the Supreme Court records, sought to raise funds through OFCDs. They filed/circulated an information memorandum/ Red Herring Prospectus with the Registrar of Companies, but no documents with SEBI. It took a view that issue of shares to a group of people – described in an extremely broad manner – did not amount to an issue to the public requiring compliance with the provisions of the Companies Act, 1956, the SEBI Act and Regulations, etc. that dealt with public issues. The Saharas, however, appointed about 10,00,000 agents, opened 2900 branches and offered the OFCDs to crores of people, and issued the OFCDs to some 66 lakh people (it appears that the actual figures may be even higher).

Contrast this with the maximum limit of 49 offerees permitted u/s 67(3) of the Companies Act, 1956, beyond which the offer would become a public offer. When the Sahara Group filed an offer document through a merchant banker for a public issue of shares of another group company, SEBI, having come to know through this offer document of the earlier issues of OFCDs, made preliminary inquiries with the merchant banker. The merchant banker essentially replied, relying on legal opinions, that the earlier issues of OFCDs were in compliance of law but did not provide more details. When SEBI pursued the matter further with the Saharas, they insisted that SEBI had no jurisdiction and that they had complied with the law and would respond only to the Registrar of Companies. In what was seen to be further delaying tactic, they claimed that the issue as to whether they are liable to provide information to SEBI was pending determination before the Law Ministry and SEBI should wait till the matter was resolved. This resulted in gathering of information by SEBI from ROC documents and passing of certain orders by SEBI, petitions before the High Court, etc. and finally, the Order by SEBI which, alongwith the Order on appeal by SAT was upheld by the Supreme Court. Several issues were raised before the Supreme Court. The ruling of the Supreme Court and its implications would need a far more detailed analysis and at this stage, some of the important issues and rulings are highlighted below. Was the offer of OFCDs by the Saharas a “private placement” or an issue to the public? It was noted that the offer was made to “friends, associates, group companies, workers/ employees and other individuals associated/affiliated or connected in any manner with Sahara India Group of Companies”. These persons in reality turned out to be nearly 3 crore in number. When finally the details of the allottees were provided, the Supreme Court was dissatisfied with the details and noted that just the first page of the data was enough to cast doubts on the genuineness of the persons. An allottee was named merely “Kalavati” and the person introducing her was named “Haridwar”. No details were provided on how the allottees formed part of the group described above. The Court held that in view of the first proviso to section 67(3), offer to more than 49 persons would be deemed to be an offer to the public. The fact that the offer was clearly made to more than 49 persons attracted this provision. Apart from the offer to more than 49, another preceding condition, that the offer should have been made as a matter of domestic concern between the persons making and receiving the offer, was also not satisfied in view of the extremely broad description of the offerees. Further, since the OFCDs were transferable, yet another preceding condition – that the offer should not be calculated to be received by persons other than the offerees – was also not satisfied. Thus, the offer was clearly an offer to the public u/s. 67(3) of the Companies Act, 1956.

Whether the OFCDs which admittedly were “hybrids”, were securities and hence amenable to jurisdiction of SEBI? The Saharas contrasted the definition of securities under the SEBI Act/SCRA and the Companies Act, 1956 to submit that the term securities under the SEBI Act/SCRA did not cover hybrids while that under the Companies Act, 1956, covered it. Reliance was placed on the definition under the Companies Act, 1956, which reads:- “2(45AA) “securities” means securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and includes hybrids;” (emphasis supplied). Thus, it was argued by Saharas that since hybrids were specifically included as an addition, it showed that the basic definition of securities under SCRA could not have included hybrids. Thus, in short, the OFCDs, being hybrids, were governed only by the Companies Act, 1956, and SEBI – which derives jurisdiction under the SEBI Act/SCRA, could not govern issue of securities.

The Supreme Court first held that since u/s 55A, SEBI had powers to administer various specified provisions of the Companies Act, 1956, in matters of issue of securities and since securities specifically included hybrids, SEBI did have jurisdiction to that extent.

Then, the Supreme Court examined the definition of hybrid under the Companies Act, 1956, and noted that it covered any security that had the character of more than one type of security including their derivatives. The definition under SCRA defines securities inclusively and not exhaustively. Since, by definition, a hybrid is a “security”, it is covered by definition of “securities” under SCRA. Further, securities under SCRA included “other marketable securities of a like nature” and thus hybrids would once again be covered. It was particularly noted that the OFCDs were transferable, i.e., “marketable” as understood in this context.

Thus, hybrids were held to be securities under SCRA too and hence, SEBI was held to have jurisdiction over them.

It is submitted that this does not fully explain why the definition under the Companies Act, 1956, specifically included hybrids.

Whether the listing of OFCDs on stock exchanges was optional or mandatory?

The Saharas argued that u/s. 60B, there was a clear demarcation of listed and unlisted companies and unlisted companies were required to file the RHP only with the Registrar of Companies. The Saharas were neither listed nor intended to be listed. SEBI countered that section 73 clearly requires that a company seeking to offer securities to the public has to apply for listing to the stock exchanges.

The Supreme Court read section 60B and section 73 harmoniously and held that it was concluded by it earlier that the offer was indeed an offer to the public. In view of this, there was no option left in the manner of applying for listing. Listing was an inevitable consequence of such an offer and thus not optional but mandatory. Requirement of listing automatically brings in the jurisdiction of the SEBI, as it transforms a “public company” into a “listed public company” and thus covered by section 60B too.

Whether Section 55A gave powers to SEBI to administer specific provisions on unlisted companies that did not intend to get their securities listed?

Section 55A gives powers to SEBI to administer certain provisions in case of listed companies and unlisted companies that intended to get their securities listed on the recognised stock exchanges. The Saharas were neither listed nor, they claimed, they intended to get listed. This was even clearly specified in various documents.

The Supreme Court held that the intention could not be grasped and determined out of context of the actions of the Saharas. The Saharas did make an issue to the public. Such a public issue necessarily resulted in their being mandatorily required to get such securities listed. Thus, there is a deemed intention, since they could not carry out acts which require listing and then claim that they do not intend to list their securities.

Even otherwise, the Supreme Court held, section 11 of the SEBI Act was wide enough to give powers to SEBI to protect the interest of investors in securities and to regulate the securities markets by such measures as it thinks fit. This is wide enough to give powers to SEBI under the present facts. Later provisions of the Act do state that SEBI has certain powers over “other persons associated with the securities markets” and public companies, which intend to get their securities listed on the recognised stock exchanges. Even if these are taken to be restrictions for those sections and purposes, they do not apply to the former provisions. Thus, SEBI has adequate powers to govern the unlisted Saharas.

Furthermore, section 11A is even more specific in matters of issue of prospectus, etc. Sections 11B/11C reinforce this conclusion that SEBI has powers to govern listed and unlisted companies. Being a stand alone statute, the SEBI Act cannot be limited even by the provisions of the Companies Act, 1956.

Thus, SEBI had the jurisdiction to regulate and administer the unlisted Saharas.

Whether the SEBI DIP Guidelines had statutory force or were mere “departmental instructions”?

The Supreme Court held that the DIP Guidelines did have “statutory force” and that the OFCDs were issued in contravention of the DIP Guidelines as also of the SEBI ICDR Regulations that succeeded them.

Whether there was a pre-planned attempt by the Saharas to bypass the regulatory and administrative authority of SEBI in respect of issue of OFCDs?

It was pointed out by SEBI that the Saharas had modified the explicit format of declaration required to be given in the prescribed format. The prescribed format required the companies issuing a prospectus to state, inter alia, that the guidelines of SEBI have been complied with and no statement is made contrary to the provisions of the SEBI Act or rules made thereunder or guidelines issued thereunder. The Saharas omitted these declarations. There was further attempt to misguide by stating that the offer was by way of private placement when the invitation was extended to approximately three crore persons. The Supreme Court said that it cer-tainly seemed so that there was a pre-planned intention to bypass the regulatory and administrative authority of SEBI.

The manner of issuing the information memorandum/RHP showed that the procedure adopted was “obviously topsy-turvy and contrary to the recognised norms in company affairs”. All this made, the Supreme Court said, the entire approach of the Saharas “calculated and crafty”.

Their repeated refusals to share information and their non-cooperation, the unrealistic and possibly fictitious information provided and other similar factors made the Supreme Court to also state that the whole affair was “doubtful, dubious and questionable”.

Accordingly, the Supreme Court upheld the proceedings initiated by SEBI and the Orders of SEBI and SAT. It upheld the Order of SAT for refund of the amounts collected by issue of OFCDs alongwith interest @ 15% per annum. A mechanism was laid down to ensure this including deposit of the amounts with a nationalised bank, appointment of a retired Judge of the Supreme Court to oversee the process and several other directions for safeguarding various interests.

PART A : JUDGMENT OF THE SUPREME COURT

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RTI operation being annihilated: On 13th September, 2012, the Supreme Court of India (SC) delivered a judgment which, though a landmark on the subject of RTI, has nearly stopped the operation of RTI at various Commissions. It is a judgment running into 107 para. First, nearly 50 pages analyse the RTI Act. Some of the paragraphs/ sentences therein are:

  •  The value of any freedom is determined by the extent to which the citizens are able to enjoy such freedom. Ours is a constitutional democracy and it is axiomatic that citizens have the right to know about the affairs of the Government which, having been elected by them, seeks to formulate some policies of governance aimed at their welfare. However, like any other freedom, this freedom also has limitations. It is a settled proposition that the Right to Freedom of Speech and Expression enshrined under Article 19(1)(a) of the Constitution of India (for short ‘the Constitution’) encompasses the right to impart and receive information. The Right to Information has been stated to be one of the important facets of proper governance. With the passage of time, this concept has not only developed in the field of law, but also has attained new dimensions in its application. The legal principle of ‘A man’s house is his castle. The midnight knock by the police bully breaking into the peace of citizen’s home is outrageous in law’, stated by Edward Coke has been explained by Justice Douglas as follows: “The free State offers what a police state denies- the privacy of the home, the dignity and peace of mind of the individual. That precious right to be left alone is violated once the police enter our conversations.”
  •  The foundation of the power of judicial review, as explained by a nine-judge’s Bench in the case of Supreme Court Advocates on Record Association & Ors vs Union of India [(1993) 4 SCC 441], is the theory that the Constitution which is the fundamental law of the land, is the ‘will’ of the ‘people’, while a statute is only the creation of the elected representatives of the people; when, therefore, the ‘will’ of the legislature as declared in the statute, stands in opposition to that of the people as declared in the Constitution – the ‘will’ of the people must prevail. It is the Constitution which is Supreme in India and not the Parliament.
  •  Certain principles have often been reiterated by this Court, while dealing with the constitutionality of a provision or a statute. Even in the case of Atam Prakash v. State of Haryana & Ors. [(1986) 2 SCC 249] the Court stated that whether it is the Constitution that is expounded or the constitutional validity of the constitution as a statute that is considered, a cardinal rule is to look to the preamble of the guiding light and to the Directive Principles of State Policy as the Book of Interpretation. The Constitution being sui generis, these are the factors of distant vision that help in the determination of the constitutional issues.
  •  The freedom of speech is the lifeblood of democracy. It is a safely valve. ? Justice V R Krishna Iyer in his book “Freedom of Information” expressed the view: “The right to information is a right incidental to the constitutionally guaranteed right to freedom of speech and expression. The international movement to include it in the legal system gained prominence in 1946 with General Assembly of the United Nations declaring freedom of information to be a fundamental human right and a touchstone for all other liberties. Article 19 of the Universal Declaration of Human Rights says:

“Everyone has the right to freedom of information and expression; this right includes freedom to hold opinions without interference and to seek, receive and impart information and ideas through any media and regardless of frontiers.” It may be a coincidence that Article 19 of the Indian Constitution also provides every citizen the right to freedom of speech and expression. However, the word ‘information’ is conspicuously absent. But, as the highest Court has explicated, the right of information is integral to freedom of expression. The Court then dealt with scheme of the Act of 2005 (comparative Analysis of Act of 2002 and Act of 2005) To restrict the length of the Article, though very interesting, the same is not being reported here.

 The Court then dealt with the writ matter of validity of the provisions under the RTI Act pertaining to appointment of the Central Information Commissioners (section 12) and of the State Information Commissioners (section 15).

“In order to examine the constitutionality of these provisions, let us state the parameters which would finally help the Court in determining such questions”.

The Court stated:

“The Courts would preferably put into service the principle of ‘reading down’ or ensure the attainment of the object of the Act. These are the principles which clearly emerge from the consistent view taken by this Court in its various pronouncements.”

Four issues framed by the supreme court in para 44 were as under:

  •  To examine the constitutionality of sections 12 and 15 of the RTI Act, the Supreme Court framed the following issues, viz.,

 a. Whether the law under challenge lacks legislative competence?

 b. Whether it violates any Article of Part III of the Constitution, particularly Article 14?

 c. Whether the prescribed criteria and classification resulting therefrom is discriminatory, arbitrary and has no nexus to the object of the Act? and

d. Whether a legislative exercise of power which is not in consonance with the constitutional guarantees and does not provide adequate guidance makes the law just, fair and reasonable?

  • The Supreme Court then dwelt upon determination of the nature of Tribunals, Commissions and their functions in India and referred to the scenario prevalent in some other jurisdictions of the world.
  •  The Supreme Court after analysing the scheme of the RTI Act discussed at length, the kind of duties and responsibilities that the Central Information Commissioner and the State Information Commissioners and other Information Commissioners are expected to perform, and the multifarious functions that the Information Commission is expected to discharge in its functioning, and observed as under:-

“Besides separation of powers, the independence of judiciary is of fundamental constitutional value in the structure of our Constitution. Impartiality, independence, fairness and reasonableness in judicial decision making are the hallmarks of the Judiciary. If ‘Impartiality’ is the soul of Judiciary, `Independence’ is the life blood of Judiciary. Without independence, impartiality cannot thrive, as this Court stated in the case of Union of India v. R. Gandhi, President, Madras Bar Association {(2010) 11 SCC 17}”

“The above detailed analysis leads to an ad libitum conclusion that under the provisions and scheme of the Act of 2005, the persons eligible for appointment should be of public eminence, with knowledge and experience in the specified fields and should preferably have a judicial background. They should possess judicial acumen and experience to fairly and effectively deal with the intricate questions of law that would come up for determination before the Commission, in its day-to-day working. The Commission satisfies abecedarians of a judicial tribunal which has the trappings of a court. It will serve the ends of justice better, if the Information Commission was manned by persons of legal expertise and with adequate experience in the field of adjudication. We may further clarify that such judicial members could work individually or in Benches of two, one being a judicial member while the other being a qualified person from the specified fields to be called an expert member. Thus, in order to satisfy the test of constitutionality, we will have to read into section 12(5) of the Act that the expression ‘knowledge and experience’ includes basic degree in that field and experience gained thereafter and secondly that legally qualified, trained and experienced persons would better administer justice to the people, particularly when they are expected to undertake an adjudicatory process which involves critical legal questions and niceties of law. Such appreciation and application of legal principles is a sine qua non to the determinative functioning of the Commission as it can tilt the balance of justice either way. Malcolm Gladwell said, “the key to good decision making is not knowledge. It is understanding. We are swimming in the former. We are lacking in the latter”. The requirement of a judicial mind for manning the judicial tribunal is a well accepted discipline in all the major international jurisdictions with hardly any exceptions. Even if the intention is to not only appoint people with judicial background and expertise, then the most suitable and practical resolution would be that a ‘judicial member’ and an ‘expert member’ from other specified fields should constitute a Bench and perform the functions in accordance with the provisions of the Act of 2005. Such an approach would further the mandate of the statute by resolving the legal issues as well as other serious issues like an inbuilt conflict between the Right to Privacy and Right to Information while applying the balancing principle and other incidental controversies. We would clarify that participation by qualified persons from other specified fields would be a positive contribution in attainment of the proper administration of justice as well as the object of the Act of 2005. Such an approach would help to withstand the challenge to the constitutionality of section 12(5)”

“As a natural sequel to the above, the question that comes up for consideration is as to what procedure should be adopted to make appointments to this august body. Section 12(3) states about the High-powered Committee, which has to recommend the names for appointment to the post of Chief Information Commissioner and Information Commissioners to the President. However, this section, and any other provision for that matter, is entirely silent as to what procedure for appointment should be followed by this High Powered Committee. Once we have held that it is a judicial tribunal having the essential trappings of a court, then it must, as an irresistible corollary, follow that the appointments to this august body are made in consultation with the judiciary. In the event, the Government is of the opinion and desires to appoint not only judicial members but also experts from other fields to the Commission in terms of section 12(5) of the Act of 2005, then it may do so, however, subject to the riders stated in this judgment. To ensure judicial independence, effective adjudicatory process and public confidence in the administration of justice by the Commission, it would be necessary that the Commission is required to work in Benches. The Bench should consist of one judicial member and the other member from the specified fields in terms of section 12(5) of the Act of 2005. It will be incumbent and in conformity with the scheme of the Act that the appointments to the post of judicial member are made ‘in consultation’ with the Chief Justice of India in case of Chief Information Commissioner and members of the Central Information Commission and the Chief Justices of the High Courts of the respective States, in case of the State Chief Information Commissioner and State Information Commissioners of that State Commission. In the case of appointment of members to the respective Commissions from other specified fields, the DoPT in the Centre and the concerned Ministry in the States should prepare a panel, after due publicity, empanelling the names proposed at least three times the number of vacancies existing in the Commission. Such panel should be prepared on a rational basis, and should inevitably form part of the records. The names so empanelled, with the relevant record, should be placed before the said High Powered Committee. In furtherance to the recommendations of the High Powered Committee, appointments to the Central and State Information Commissions should be made by the competent authority. Empanelment by the DoPT and other competent authority has to be carried on the basis of a rational criteria, which should be duly reflected by recording of appropriate reasons. The advertisement issued by such agency should not be restricted to any particular class of persons stated u/s. 12(5), but must cover persons from all fields. Complete information, material and comparative data of the empanelled persons should be made available to the High Powered Committee. Needless to mention that the High Powered Committee itself has to adopt a fair and transparent process for consideration of the empanelled persons for its final recommendation.

This approach is in no way innovative but is merely derivative of the mandate and procedure stated by this Court in the case of L. Chandra Kumar (supra) wherein the Court dealt with similar issues with regard to constitution of the Central Administrative Tribunal. All concerned are expected to keep in mind that the Institution is more important than an individual. Thus, all must do what is expected to be done in the interest of the institution and enhancing the public confidence. A three Judge Bench of this Court in the case of Centre for PIL and Anr. v. Union of India & Anr. [(2011) 4 SCC 1] had also adopted a similar approach and with respect we reiterate the same.

Giving effect to the above scheme would not only further the cause of the Act but would attain greater efficiency, and accuracy in the decision-making process, which in turn would serve the larger public purpose. It shall also ensure greater and more effective access to information, which would result in making the invocation of right to information more objective and meaningful.

For the elaborate discussion and reasons afore-recorded, we pass the following order and directions:

1.    The writ petition is partly allowed.

2.    The provisions of sections 12(5) and 15(5) of the Act of 2005 are held to be constitutionally valid, but with the rider that, to give it a meaningful and purposive interpretation, it is necessary for the Court to ‘read into’ these provisions some aspects without which these provisions are bound to offend the doctrine of equality. Thus, we hold and declare that the expression ‘knowledge and experience’ appearing in these provisions would mean and include a basic degree in the respective field and the experience gained thereafter. Further, without any peradventure and veritably, we state that appointments of legally qualified, judicially trained and experienced persons would certainly manifest in more effective serving of the ends of justice as well as ensuring better administration of justice by the Commission. It would render the adjudicatory process which involves critical legal questions and nuances of law, more adherent to justice and shall enhance the public confidence in the working of the Commission. This is the obvious interpretation of the language of these provisions and, in fact, is the essence thereof.

3.    As opposed to declaring the provisions of section 12(6) and 15(6) unconstitutional, we would prefer to read these provisions as having effect ‘post-appointment’. In other words, cessation/termination of holding of office of profit, pursuing any profession or carrying any business is a condition precedent to the appointment of a person as Chief Information Commissioner or Information Commissioner at the Centre or State levels.

4.    There is an absolute necessity for the legislature to reword or amend the provisions of section 12(5), 12(6) and 15(5), 15(6) of the Act. We observe and hope that these provisions would be amended at the earliest by the legislature to avoid any ambiguity or impracticability and to make it in consonance with the constitutional mandates.

5.    We also direct that the Central Government and/ or the competent authority shall frame all practice and procedure related rules to make working of the Information Commissions effective and in consonance with the basic rule of law. Such rules should be framed with particular reference to section 27 and 28 of the Act within a period of six months from today.

6.    We are of the considered view that it is an unquestionable proposition of law that the Commission is a ‘judicial tribunal’ performing functions of ‘judicial’ as well as ‘quasijudicial’ nature and having the trappings of a Court. It is an important cog and is part of the court attached system of administration of justice, unlike a ministerial tribunal, which is more influenced and controlled and performs functions akin to the machinery of administration.

7.    It will be just, fair and proper that the first appellate authority (i.e. the senior officers to be nominated in terms of section 5 of the Act of 2005) preferably should be the persons possessing a degree in law or having adequate knowledge and experience in the field of law.

8.    The Information Commissions at the respective levels shall henceforth work in Benches of two members each. One of them being a ‘judicial member’, while the other an ‘expert member’. The judicial member should be a person possessing a degree in law, having a judicially trained mind and experience in performing judicial functions. A law officer or a lawyer may also be eligible, provided he is a person who has practiced law at least for a period of twenty years as on the date of the advertisement. Such lawyer should also have experience in social work. We are of the considered view that the competent authority should prefer a person who is or has been a Judge of the High Court for appointment as Information Commissioners. Chief Information Commissioner at the Centre or State level shall only be a person who is or has been a Chief Justice of the High Court or a Judge of the Supreme Court of India.

9.    The appointment of the judicial members to any of these posts shall be made ‘in consultation’ with the Chief Justice of India and Chief Justices of the High Courts of the respective States, as the case may be.

10.    The appointment of the Information Commissioners at both levels should be made from amongst the persons empanelled by the DoPT in the case of Centre and the concerned Ministry in the case of a State. The panel has to be prepared upon due advertisement and on a rational basis as afore-recorded.

11.    The panel so prepared by the DoPT or the concerned Ministry ought to be placed before the High-powered Committee in terms of section 12(3), for final recommendation to the President of India. Needless to repeat that the High Powered Committee at the Centre and the State levels is expected to adopt a fair and transparent method of recommending the names for appointment to the competent authority.

12.    The selection process should be commenced at least three months prior to the occurrence of vacancy.

13.    This judgment shall have effect only prospectively.

14.    Under the scheme of the Act of 2005, it is clear that the orders of the Commissions are subject to judicial review before the High Court and then before the Supreme Court of India. In terms of Article 141 of the Constitution, the judgments of the Supreme Court are law of the land and are binding on all courts and tribunals. Thus, it is abundantly clear that the Information Commission is bound by the law of precedence, i.e., judgments of the High Court and the Supreme Court of India. In order to maintain judicial discipline and consistency in the functioning of the Commission, we direct that the Commission shall give appropriate attention to the doctrine of precedence and shall not overlook the judgments of the courts dealing with the subject and principles applicable, in a given case. It is not only the higher court’s judgments that are binding precedents for the Information Commission, but even those of the larger Benches of the Commission should be given due acceptance and enforcement by the smaller Benches of the Commission. The rule of precedence is equally applicable to intra appeals or references in the hierarchy of the Commission.

The writ petition is partly allowed with the above directions, however, without any order as to costs. [writ & petition (CIVIL) No. 210 of 2012 in the matter of Namit Sharma vs Union of India decided on 13.09.2012. The judgment was dictated by Swatanter Kumar and the other judge was A. K. Patnaik.]

Repayment of Deposits

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Introduction

One of the most important and easy sources of raising funds for companies and non-banking financial companies has been public deposits. As per statistics from the RBI, as on March 2010, the aggregate public deposits of the NBFC sector were Rs. 17,247 crore. Add to this the amount raised by companies as public deposits u/s. 58A of the Companies Act, 1956, deposits being accepted by unincorporated entities, and you would have an amount which would be mind boggling. However, since it is very easy to raise these deposits, a very large number of cases of defaults and frauds are also associated with public deposits. Various Central and State Legislations have been enacted to curb the default in repayment of deposits. Some of these Legislations appear to be entrenching each other’s territories and hence, have invited close scrutiny from the Supreme Court and various High Courts. The Supreme Court’s decision in the case of Sahara India Real Estate Corp. v SEBI, C.A. No. 9813 of 2011, Order Dated 31st August, 2012, is an example of Courts taking the matter of investor repayment very seriously. Although that case was not in relation to public deposits, it does show us the importance the Courts place on these matters. Let us look at some of the important and controversial issues connected with repayment of deposits which the Courts have had an occasion to consider.

Laws Governing Raising of Deposits by Companies

 Deposits generally mean any deposit of money with a company, subject to exclusions mentioned expressly. What does and does not constitute a deposit can be a subject matter of discussion by itself. However, it would suffice to say that the scope of the term is very large. Deposits can be raised by two types of companies:

(a) Non-banking Financial Companies; and

(b) Companies other than NBFCs

Anup P. Shah Chartered Accountant laws and Business The raising of deposits by NBFCs is governed by Chapter III B of the Reserve Bank of India Act, 1934 (“the RBI Act”). Pursuant to this Act, the RBI has notified the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998; Residuary Non-Banking Companies (Reserve Bank) Directions, 1987 and the Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977.

 In the case of Companies which are not NBFCs (also known as NBNFCs), the raising of public deposits is governed by s/s. 58A to 58AAA of the Companies Act,1956 read with the Companies (Acceptance of Deposits) Rules, 1975. These Laws lay down the meaning of the term deposit as well as various conditions subject to which public deposits can be raised by companies or NBFCs.

Repayment of Deposits by NBFCs S/s.

 45Q and 45QQA of the RBI Act provide that every deposit accepted by a NBFC shall be repaid in accordance with the terms and conditions of the deposit. In case the NBFC fails to so repay the deposit, then the Company Law Board is empowered, either suo moto or an application, to order repayment or reschedule the terms and conditions of repayment. The provisions of these sections override all other laws. In case the NBFC fails to comply with the CLB’s Order, then the RBI can launch prosecution in respect of the same. Any person in default is liable to be punished with imprisonment for a term of up to three years and a fine of at least Rs. 50 for every day of noncompliance.

In the case of Piyush Rastogi v Moulik Finance and Resorts Ltd., 88 SCL 104 (All), it was held that RBI had power, jurisdiction and authority to file a criminal complaint against default/contravention made in respect of deposits’ repayment by the company and its directors and, therefore, submission of petitioner that initiation of criminal proceedings was illegal and without any jurisdiction was wholly erroneous. In the case of RBI v Integrated Finance Co. Ltd., 145 Comp. Cases 87 (Mad), the Court held that the repayment of a deposit contemplated under the RBI Act was repayment in cash and not in kind. It further held that the jurisdiction of the CLB to order repayment could not be usurped by any other Court. The CLB has held that there are no fetters on the powers of CLB under the RBI Act and in a particular case, the CLB may order repayment of deposits in modification of the parameters fixed by the RBI – B. Bharathi v Rockland Leasing Ltd., 95 Comp. Cases 471 (CLB).

Repayment by Other Companies

If a company, other than an NBFC, accepts deposits in violation of the Companies (Acceptance of Deposits) Rules, 1975 made u/s. 58A of the Companies Act, 1956, then the same shall be repaid within 30 days. The CLB may, u/s. 58A(9) order the repayment or rescheduling of the repayment of the deposits by companies other than NBFCs. Failure to comply with the CLB’s order may result in an imprisonment of three years and a fine of at least Rs. 500 for every day of non-compliance. Further, in case of defaults in repayment of deposits of small depositors (deposit of Rs. 20,000 or less in a financial year), the company is required to intimate the CLB. The validity of section 58A has been upheld by the Supreme Court in the case of Delhi Cloth & General Mills Co Ltd v UOI, (1983) 4 SCC 166.

Deposits by Individuals, Firms, AOPs

The RBI Act prohibits any individual, firm, AOP, etc., from accepting deposits if that person’s business is that of financing/non-banking financial activities/ receiving deposits/any lending, etc. However, loans raised from certain relatives, partner’s capital, etc., are allowed. The penalty for violation of this provision is punishable with imprisonment for a term of upto two years and/or with a fine higher than Rs. 2,000 or upto twice the deposit received by that person.

The validity of these provisions has been upheld in Kanta Mehta v UOI, 62 Comp. Cases 769 (Delhi) which was affirmed by the Supreme Court in T. Velayudhan Achari v UOI, (1993) 2 SCC 582. The Supreme Court has also held that the provisions of this section are applicable to money-lenders, being individuals/firms, registered under State Moneylending Acts, e.g., the Bombay Money-lending Act, 1946 and the State Laws cannot override the RBI Act – Kerala Small Financiers’ Association v UOI, 116 Comp. Cases 641 (SC). Very recently, the RBI has clamped down on certain sole proprietary firms of the promoters of some large NBFCs, which were raising deposits in violation of this provision.

Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999 (MPID Act)

 In addition to the above two Central Acts, various States, such as, Maharashtra, Gujarat, Bihar, Tamil Nadu, Andhra Pradesh, etc., have enacted Depositor Protection Acts. One such Act is the MPID Act of 1999 applicable in the State of Maharashtra. MPID is an Act to protect the interest of depositors of Financial Establishments and applies to “deposits” raised by a Financial Establishment. Section 014 of this Act provides that this Act overrides all other laws. Section 2(c) of the MPID Act defines the expression “deposit” to include any receipt of money or acceptance of any valuable commodity by any Financial Establishment to be returned after a specified period or otherwise, either in cash or in kind or in the form of a specified service with or without any benefit in the form of interest, bonus, profit or in any other form. Thus, the definition of the term is much wider than the definition found under the Companies Act or the RBI Act. The definition expressly excludes the following:

(i) Amounts raised by way of share capital, debenture, bond, other instruments in accordance with SEBI Regulations. Thus, the public issue of securities is excluded.

(ii) Partners’ capital in a firm.

(iii) Amounts received from a bank.

(iv)    Any amount received from specified Public Financial Institutions.

(v)    Amounts received in the ordinary course of business by way of, –
(a)    security deposit,
(b)    dealership deposit,
(c)    earnest money,
(d)    advance against order for goods or services;

(vi)    Any amount received from an individual or a firm or an association of individuals not being a body corporate, registered under any enactment relating to money lending which is for the time being in force in the State. Thus, money received from a money-lender registered under the Bombay Money-lending Act, 1946 is not a deposit.

(vii)    Any amount received by way of subscriptions in respect of a Chit.

A    “Financial Establishment” is defined to mean any person accepting deposit under any scheme or arrangement or in any other manner. It does not include a Government company or a bank. The term is very wide and covers within its purview, individuals, firms, NBFCs, companies, etc., which receive deposits.

Section 3 of the MPID Act provides that if any Financial Establishment fraudulently defaults in repayment of a deposit on maturity, then every person, including the promoter, partner, director, any other person, employee, etc., responsible for the management or conducting the business/affairs of the Financial Establishment shall be punished. The penalty is a term of upto six years and fine of upto Rs. 1 lakh. In addition, the Financial Establishment shall be liable for a fine of up to Rs. 1 lakh. The provisions of the MPID Act do not overrule the Criminal Procedure Code and all provisions of arrest, bail, etc., provided in the Code would have to be followed – Uday Mohanlal Acharya v State, (2001) 5 SCC 453.

Section 4 provides an additional recourse to the aggrieved depositor. If the State Government is satisfied that there is a default, it may order attachment of the Financial Establishment’s properties. Only property belonging to the defaulter can be attached. Property taken onleave and licence by the defaulter is not his property and cannot be attached – Chimanlal Modi v State, 2004 (2) Bom. CR. (Cri) 866.

Validity of State Depositor Protection Acts

The validity of the MPID and other similar State Depositor Protection Acts have been the subject matter of great debate. The moot point has been that, when there are Central Statutes in the form of the Companies Act and the RBI Act, how can a State Statute legislate on the very same issue? A Full Bench of the Bombay High Court in the case of Vijay C Puljal v State, 128 Comp. Cases 196 (Bom) (FB), had an occasion to consider this issue in detail. Striking down the validity of the MPID Act as being ultra vires, the Bombay High Court held as follows:

(i)    The constitutional validity of s. 58A of the Companies Act, 1956 has been upheld by the Supreme Court. It has also held that the Parliament has legislative competence to enact Sections 58A, 58AA and 58AAA of the Companies Act, 1956.

(ii)    The validity of the provisions of the RBI Act and the legislative competence of Parliament to enact Chapter III-C of this Act were upheld by the Supreme Court.

(iv)    The legislation enacted by the MPID Act directly conflicted with the provisions contained in the Central Legislation. The MPID Act has created an offence in respect of the same subject matter by providing different punishments;

(v)    The law enacted by the MPID Act is, in pith and substance, referable to legislative heads contained in the Central Acts. Hence, the State Legislature has enacted a law which it was not competent to enact.

However, the Supreme Court in the case of K.K. Baskaran v State, (2011) 3 SCC 793 has overruled the aforesaid Bombay High Court decision. Although this was a case in relation to the Tamil Nadu Depositors Act, the Supreme Court expressly overruled the decision in the case of Vijay Puljal. The Madras High Court had upheld the validity of the TN Act, and the case before the Supreme Court was in challenge to this Order. The Apex Court took a socialistic view of the situation and upheld all Depositor Protection Acts. Some excerpts from its judgment are as follows:

“18. Learned counsel for the appellant relied on the Full Bench decision of the Bombay High Court in Vijay C. Punjal’s case (supra) in support of his contention that the Tamil Nadu Act, like the Maharasthra Act, was unconstitutional being beyond the legislative competence of the State Legislature. We do not agree.

19.    We have carefully perused the judgment of the Full Bench of the Bombay High Court in Vijay’s case (supra) and we respectfully disagree with the view taken by the Bombay High Court.

……………..

22.    We are of the opinion that the impugned Tamil Nadu Act enacted by the State Legislature is not in pith and substance referable to the legislative heads contained in List I of the Seventh Schedule to the Constitution though there may be some overlapping. In our opinion, in pith and substance the said Act comes under the entries in List II (the State List) of the Seventh Schedule.

23.    It often happens that a legislation overlaps both Lists I as well as List II of the Seventh Schedule. In such circumstances, the doctrine of pith and substance is applied. We are of the opinion that in pith and substance the impugned State Act is referable to Entries 1, 30 and 31 of List II of the Seventh Schedule and not Entries 43, 44 and 45 of List I of the Seventh Schedule.

24.    It is well-settled that incidental trenching in exercise of ancillary powers into a forbidden legislative territory is permissible.

…………

38.    The Court should interpret the constitutional provisions against the social setting of the country and not in the abstract. The Court must take into consideration the economic realities and aspirations of the people and must further the social interest which is the purpose of legislation.
…………….

39.    We fail to see how there is any violation of Article 14, 19(1)(g) or 21 of the Constitution. The Act is a salutary measure to remedy a great social evil. A systematic conspiracy was effected by certain fraudulent financial establishments which not only committed fraud on the depositor, but also siphoned off or diverted the depositor’s funds mala fide.

……………..

44.    We are of the opinion that there is no merit in this petition. The impugned Tamil Nadu Act is constitutionally valid. In fact, it is a salutary mea-sure which was long overdue to deal with these scamsters who have been thriving like locusts in the country.”

Directors’ Duty

Directors of a company/entity accepting public deposits should be extra cautious, because the consequences are quite stringent in nature. In case of any doubt over whether the company is in violation of any Central/State Deposit Law, they should immediately obtain expert advice. Courts, generally, have a sympathetic attitude towards depositors and hence, deposit acceptors should be wary of any non-compliance on their part. The old adage of “better safe than sorry” would work best and hence, they should consider setting a system of checks and balances in place beforehand.

Courts and arbitrators may take their time, but grumbling is prohibited

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Litigants and society in general have become inured to long delays in courts. Decades-old cases no longer shock anyone. Like climate change, the deceleration of the wheels of justice is hardly discernible to the naked eye.

The Supreme Court stated that 37 years of prosecution is not sufficient in itself to conclude that the accused people have been deprived of their fundamental right to speedy trial.

If this is so in criminal cases, the record of civil courts is worse. Property and partition suits take a lifetime of visiting the courts. In a judgment delivered by the Delhi High Court last week, delays in arbitration was the main argument for quashing the award (Oil India Ltd vs Essar Oil Ltd).

The Supreme Court has dealt with this problem in one of the leading cases, ONGC vs Saw Pipes Ltd (2003). It stated that “it is for the parties to take appropriate action of selecting proper arbitrator(s) who could dispose of the matter within reasonable time fixed by them. It is for them to indicate the time-limit for disposal of the arbitral proceedings. It is for them to decide whether they should continue with the arbitrator (s) who cannot dispose of the matter within reasonable time.”

Long delays keep important issues out of sight and out of mind. For instance, some urgent questions in arbitration law have been referred to a Constitution Bench of the Supreme Court in the 2002 Bhatia International case, but the court has shown no haste to resolve them. Instead, it gave precedence to the problem of incorrect legal reporting mooted by an offended foreign telecom major, and spent two months over it.

There are several economic issues crying for early court decision for decades. These gross cases render the rubric of speedy trial mere rhetoric. Who remembers the appeal lying in the Delhi High Court about the attempted murder of a former Chief Justice of India? It was there for nearly four decades. The trial in the 1993 Bombay blast cases is trundling along in the special court, with no end in sight. All these will climb up the judicial ladder in due time. But remember, no grumbling, and inordinate delay will not be heard as a ground to close the dog-eared files.

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A.P. (DIR Series) Circular No. 94, dated 19-3- 2012 — Clarification — Prior intimation to the Reserve Bank of India for raising the aggregate Foreign Institutional Investors/Non- Resident Indian limits for investments under the Portfolio Investment Scheme.

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Presently, Foreign Institutional Investors (FII) and Non-Resident Indians (NRI) are allowed to purchase/ sell shares and convertible debentures of an Indian company (through registered brokers) on recognised stock exchanges in India within the aggregate investment limit of 24 and 10%, respectively, of the paid-up equity capital or value of each series of convertible debentures of the Indian company.

This Circular requires all Indian companies raising the aggregate FII & NRI investment limit to the sectoral cap/statutory limit, to immediately intimate the said increase in limits to RBI along with a Certificate from the Company Secretary stating that all the relevant provisions of FEMA and the Foreign Direct Investment Policy have been complied with.

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Income from house property: Section 23(2) of Income-tax Act, 1961: Allowance for self-occupation u/s.23(2) is available for HUF also.

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[CIT v. Hariprasad Bhojnagarwala, 342 ITR 69 (Guj.) (FB)]

The following question was considered by the Full Bench of the Gujarat High Court: “Whether the Appellate Tribunal is right in law and on facts in holding that the benefit of section 23(2) is available to a Hindu Undivided Family?”

The High Court held as under: “

(i) The benefit of relief in respect of self-occupied property u/s.23(2) of the Income-tax Act, 1961 is available only to the owner who can reside in his own residence. That means, the benefit of relief is available only to an individual assessee and not to an imaginary assessable entity.

(ii) A Hindu Undivided Family is nothing but a group of individuals related to each other by blood or in a certain manner. A Hindu Undivided Family is a family of a group of natural persons. The family can reside in the house, which belongs to the Hindu Undivided Family. A family cannot consist of artificial persons.

 (iii) There is nothing in the words used in section 23(2), which excludes its application to a Hindu Undivided Family.

(iv) The question is answered in favour of the assessee and against the Revenue.”

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Capital gains: Exemption u/s.54F of Incometax Act, 1961: A.Y. 2007-08: Purchase of residential house in joint names of assessee and his wife: Wife had not contributed: Assessee entitled to exemption u/s.54F to the full extent.

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[CIT v. Ravindra Kumar Arora, 342 ITR 38 (Del.)]

The assessee sold a land being a long-term capital asset and invested the sale proceeds in a residential house which was purchased in the joint name of the assessee and his wife. His wife had not made any contribution. The assessee’s claim for deduction u/s.54F of the Income-tax Act, 1961 was rejected by the Assessing Officer on the ground that the house had been purchased in the joint names of the assessee and his wife. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under: “

(i) Section 54F of the Income-tax Act, 1961, is a beneficial provision which should be interpreted liberally in favour of the exemption/deduction to the taxpayer and deduction should not be denied on a hyper-technical ground.

(ii) The condition stipulated in section 54F stood fulfilled. It would be treated as the property purchased by the assessee in his name and merely because he had included the name of his wife and the property purchased in the joint names would not make any difference. The assessee was entitled to exemption u/s.54F.”

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Recovery of tax: Stay of recovery during pendency of appeal: Section 220(6) of Income-tax Act, 1961: If prima facie the case is in favour of the assessee, stay should be granted for the full demand.

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The assessee filed appeal against the order u/s.201 of the Income-tax Act, 1961 before the CIT(A). The assessee also filed an application for stay of the demand before the CIT(A). The CIT(A) observed that there is ‘enough strength in the plea of the assessee for stay of demand’. However, he directed to pay 30% of the demand.

The Allahabad High Court allowed the writ petition filed by the assessee and held as under: “

(i) If on a cursory glance it appears that the demand raised has no leg to stand, it would be undesirable to require the assessee to pay full or substantive part of the demand. From the perusal of the materials brought on record, we are of the view that the Commissioner having himself expressed opinion on the order that there is enough strength in the plea of the assessee for stay of the demand, there was no occasion to direct for deposit of 30%.

(ii) In view of the above, we provide that during the pendency of the appeal the demand against the petitioner shall be kept in abeyance. However, the petitioner shall furnish adequate security in respect of the said 30% of the demand.”

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Recovery of tax: Attachment: Stay of recovery: Sections 220(1), 220(6) and 281B of Income-tax Act, 1961: Provisional attachment u/s.281B on 7-10-2011: Assessment order passed on 9-3-2012: Demand directed to be paid within 7 days instead of 30 days: Not proper: Application for stay of demand till disposal of appeal by CIT(A) rejected: Not just: High Court directed stay of recovery till disposal of appeal by CIT(A).

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[Firoz Tin Factory v. ACIT (Bom.), W.P. (L) No. 765 of 2012 dated 26-3-2012]

By an attachment order dated 7-10-2011, passed u/s.281B of the Income-tax Act, 1961 mutual funds of value Rs.36.54 crore were attached. The assessment order for the A.Y. 2010-11 was passed on 13-3-2012 raising a demand of Rs.36,56,61,776. Demand was directed to be paid within 7 days instead of 30 days as provided u/s.220(1) of the Act. The petitioner assessee filed an appeal before the CIT(A) and made an application u/s.220(6) of the Act dated 12-3-2012 for stay of demand till disposal of appeal by the CIT(A), which was rejected.

The Bombay High Court allowed the writ petition filed by the assessee and held as under:

 “(i) The provisions of section 220(1) stipulate that the amount of demand shall be paid within 30 days of the service of the notice. The proviso stipulates that where the Assessing Officer has any reason to believe that it would be detrimental to the interest of Revenue if the full period of 30 days is allowed, he may direct, with the previous approval of the Joint Commissioner, that the demand shall be paid within a period less than 30 days. The power to reduce the period under the proviso cannot be exercised casually and without due application of mind. The question as to whether it would be detrimental to the interest of the Revenue to allow the full period of 30 days has to be addressed. The reasons as well as the approval which has been granted by the Joint Commissioner must be made available to the assessee where a copy of the reasons is sought from the Assessing Officer.

(ii) In the present case, a provisional attachment has already been made on 7-10-2011 u/s.281B. The attachment was to the extent of Rs.36.54 crore. That being the position, evidently there would have been no basis for forming a reason to believe that if the period of 30 days was to be observed u/s.220(1), that would be detrimental to the Revenue. Merely because the end of the financial year is approaching that cannot constitute a detriment to the Revenue. The detriment to the Revenue must be akin to a situation where the demand of the Revenue is liable to be defeated by an abuse of process by the assessee. This is of course illustrative, for what is detrimental to the Revenue has to be determined on the facts of each case and an exhaustive catalogue of circumstances cannot be laid down. Consequently, we find that there is absolutely no justification for the Assessing Officer for making an order of demand directing the assessee to deposit the entire demand by 16-3-2012. The action is highhanded and contrary to law.

(iii) The Revenue is adequately protected by the attachment u/s.281B. No coercive steps shall be taken for recovery of the demand, pending the appeal.”

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Recovery of tax: Stay of recovery during pendency of appeal: Section 220(6) of Incometax Act, 1961: AO and Appellate Authorities are not mere tax gatherers: They have to be fair to the assessee.

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[Nishit M. Desai v. CIT (Bom.), W.P. No. 653 of 2012; dated 15-3-2012]

The assessee is a professional. For the A.Y. 2009- 10, the Assessing Officer passed assessment order u/s.143(3) of the Income-tax Act, 1961 determining the total income at Rs.22.43 crore as against the returned income of Rs.19.41 crore and raised a demand of Rs.1.18 crore. A refund of Rs.78 lakh was due to the assessee for the A.Y. 2010-11. The assessee filed appeal before the CIT(A) and also filed an application for stay of recovery till the disposal of appeal. The CIT(A) directed that the refund of Rs.78 lakh be adjusted and the balance of Rs.41 lakh be paid. He held that considering ‘the financial status and affairs’ of the assessee, the payment of the balance demand would not cause financial hardship.

The Bombay High Court allowed the writ petition filed by the assessee and held as under:

“(i) The power which vested in the Assessing Officer u/s.220(6) and on the CIT(A) to grant a stay of demand is a judicial power. It is necessary for both the Assessing Officer as well the Appellate Authorities to have due regard to the fact that their function is not merely to act as tax gatherers, but equally as quasi-judicial authorities, they owe a duty of fairness to the assessee. This seems to be lost [Nishit M. Desai v. CIT (Bom.), W.P. No. 653 of 2012; dated 15-3-2012] The assessee is a professional. For the A.Y. 2009- 10, the Assessing Officer passed assessment order u/s.143(3) of the Income-tax Act, 1961 determining the total income at Rs.22.43 crore as against the returned income of Rs.19.41 crore and raised a demand of Rs.1.18 crore. A refund of Rs.78 lakh was due to the assessee for the A.Y. 2010-11. The assessee filed appeal before the CIT(A) and also filed an application for stay of recovery till the disposal of appeal. The CIT(A) directed that the refund of Rs.78 lakh be adjusted and the balance of Rs.41 lakh be paid. He held that considering ‘the financial status and affairs’ of the assessee, the payment of the balance demand would not cause financial hardship. The Bombay High Court allowed the writ petition filed by the assessee and held as under: “(i) The power which vested in the Assessing Officer u/s.220(6) and on the CIT(A) to grant a stay of demand is a judicial power. It is necessary for both the Assessing Officer as well the Appellate Authorities to have due regard to the fact that their function is not merely to act as tax gatherers, but equally as quasi-judicial authorities, they owe a duty of fairness to the assessee. This seems to be lost sight of in the manner in which the authority has acted in the present case.

 (ii) The parameters for the exercise of jurisdiction to grant stay of demand has been set out in several judgments of this Court, including in KEC International v. B. R. Balakrishnan, 251 ITR 158.

(iii) The assessee’s submissions on merits require consideration. The CIT(A) ought to have devoted a more careful consideration to the issue as to whether a stay of demand was warranted. As out of total demand of Rs.1.18 crore, Rs.78 lakh has been adjusted, the balance has to be stayed.”

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(2012) 25 STR 514 (Kar.) — Bharti Airtel Ltd. v. State of Karnataka.

(2012) 25 STR 514 (Kar.) — Bharti Airtel Ltd. v. State of Karnataka.

Facts:

The appellants were providing services related to telecommunication wherein electromagnetic waves were used for transmission of data generated by the subscriber to the desired destination. The case was whether sales tax or service tax should be levied.

Appellant’s contention:

The appellant contended that in their terms of contract there was no mention of the words ‘sale of goods’. The contract was one for rendering telecommunication services and that the consideration was paid for the services rendered to subscribers. Also they were of the view that Artificially Created Light Energy (ACLE) which was the form of energy used by the telecom service provider as carrier of data or information in optical fiber cable (OFC) broadband line without which data or energy could not be transmitted, came into existence when electrical energy was converted into light energy. The question was whether such a conversion was liable to sales tax or service tax. A technical report stated that telecommunication service providers were using optical fiber cables for transmitting messages or data using light energy which could be transmitted by a service provider either through copper wire, OFC, etc. The Department called it ACLE which had the characteristics of goods, whereas the experts did not agree to the same.

Department’s contention:

The Sales Tax Department (Department) contended that in case of contract in which the appellant claimed that it had no mention of the words ‘sale of goods’ were in fact sales and hence liable to sales tax. For imposition of tax on ACLE the Department contended that it was sale of goods which was liable to sales tax. In case of technical report, the Department was of the view transmission of message with the use of light energy from one network to another had the characteristics of goods.

Held:

The ACLE was a form of electromagnetic wave which was not marketable or abstracted or consumed or delivered or processed or stored and it was not something available in abundance of which service provider abstracted a portion. Hence these were services and liable to service tax. Also it was a contract of rendering services and the state was not empowered to levy sales tax. For the contract in question, it was a contract of service simpliciter and there was no element of sales involved in it.

Housing project: deduction u/s.80IB(10) of Income-tax Act 1961: A.Ys. 2004-05 and 2005- 06: Multiple housing projects in one acre plot is permissible.

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[CIT v. Vandana Properties (Bom.), ITA Nos. 3633 of 2009 and 4361 of 2010 dated 28-3-2012]

The assessee-firm was engaged in the business of construction and development of housing projects. On a plot of land admeasuring 2.36 acres in Mumbai the assessee had constructed buildings A, B, C and D over a period of years, in respect of which no deduction u/s.80IB(10) of the Income-tax Act, 1961 was claimed. In the year 2001, the assessee became entitled to construct an additional building ‘E’ on the said plot of land. IOD was approved by the Municipal Corporation on 11-10-2002 and the commencement certificate was issued on 10-03-2003. For the A.Ys. 2004-05 and 2005-06, the assessee’s claim for deduction u/s.80IB(10) was rejected by the Assessing Officer. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue the following issues were considered by the Bombay High Court:

(i) What is a housing project u/s.80IB(10)?

 (ii) Whether, if the approval for construction of ‘E’ building was granted by local authority subject to the conditions set out in the first approval granted on 12-5-1993 for construction of A and B buildings, construction of ‘E’ building is an extension of the earlier housing project for which approval was granted prior to 1-10-1998 and, therefore, benefit of section 80IB(10) cannot be granted?

(iii) Whether the housing project must be on a vacant plot of land which has minimum area of one acre and if there are multiple buildings and the proportionate for each building is less than one acre, deduction u/s.80IB(10) can be denied?

The Bombay High Court upheld the decision of the Tribunal and held as under:

“(i) As the expression ‘housing project’ is not defined, it must have the common parlance meaning and means constructing a building or group of buildings consisting of several residential units. The approval granted to a building plan constitutes approval granted to a housing project. Construction of even one building with several residential units of the size not exceeding 1000 sq.ft. would constitute a ‘housing project’ u/s.80IB(10).

(ii) ‘E’ building is an independent housing project and not an extension of the housing project already existing on the plot, because when the earlier plans were approved, ‘E’ building was not even contemplated and came into existence much later. The fact that the approval was granted on the same terms as that granted to the other buildings does not make it an ‘extension’.

(iii) Section 80IB(10)(b) specifies the size of the plot of land but not the size of the housing project. While the plot must have a minimum area of one acre, it need not be a vacant plot. The object of section 80IB(10) is to boost the stock of houses. There can be multiple housing projects on a plot of land having minimum area of one acre.”

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Disallowance: Section 14A of Income-tax Act, 1961: A.Y. 2007-08: Section 14A does not apply to shares held as stock in trade.

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[CCI Ltd. v. JCIT (Kar.), ITA No. 359 of 2011 dated 28-2-2012]

 The assessee was in the business as a dealer in shares and securities. In the relevant year, the assessee had earned dividend income of Rs.46,67,190. The assessee had incurred an expenditure of Rs.28 lakh as broking charges for availing interest-free loan of Rs.14 crore for converting partly-paid shares into fully-paid shares. The Assessing Officer estimated the expenditure incurred on earning the dividend income at Rs.27,24,330 u/r. 8D and disallowed the same u/s.14A of the Income-tax Act, 1961. The Tribunal held that the Assessing Officer was not right in attributing the entire broking commission as relatable to earning of dividend income only. The broking expenditure has to be considered as business expenditure, as well. The Tribunal directed the Assessing Officer to bifurcate all the expenditure proportionately and allow the expenditure in accordance with law.

The assessee filed appeal before the Karnataka High Court and raised the following question of law:

“Whether the provisions of section 14A are applicable to the expenses incurred by the assessee in the course of its business merely because the assessee is also having dividend income when there was no material brought to show that the assessee had incurred expenditure for earning dividend income?”

The Karnataka High Court decided the question in favour of the assessee and held as under:

“(i) When no expenditure is incurred by the assessee in earning the dividend income, no notional expenditure could be deducted from the said income. It is not the case of the assessee retaining any shares so as to have the benefit of dividend. 63% of the shares, which were purchased, are sold and the income derived therefrom is offered to tax as business income. The remaining 37% of the shares are retained. It is those unsold shares have yielded dividend, for which, the assessee has not incurred any expenditure at all.

(ii) Though the dividend income is exempt from payment of tax, if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to his business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deductions.

(iii) In that view of the matter, the approach of the authorities is not in conformity with the statutory provisions contained under the Act. Therefore, the impugned orders are not sustainable and require to be set aside.”

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Capital asset v. Stock-in-trade: Section 50C of Income-tax Act, 1961: A.Y. 2006-07: Section 50C does not apply to land & building held as stock-in-trade.

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[CIT v. M/s. Kan Construction and Colonizers (P) Ltd. (All.), ITA No. 1 of 2012 dated 9-4-2012.]

In the A.Y. 2006-07, the assessee had sold a plot of land which was held by it as stock-in-trade. The Assessing Officer held that the land was a capital asset and computed the capital gain by applying the provisions of section 50C of the Income-tax Act, 1961. The Tribunal accepted the assessee’s claim that the land was a stock-in-trade and that the provisions of section 50C are not applicable.

The Allahabad High Court dismissed the appeal filed by the Revenue and held as under: “

(i) For applicability of section 50C, one of the essential requirements is that an asset should be a ‘capital asset’. Whether sale of land is sale of capital asset or stock-in-trade is essentially a question of fact. The assessee is a builder and the investment in purchase and sale of plots was ancillary and incidental to its business. The assessee had treated the land as stock-in-trade in the balance sheet.

(ii) The Tribunal has rightly held that the provisions of section 50C are not applicable with respect to the sale of land which was not a capital asset.”

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Appellate Tribunal — Strictures against Department for filing appeal in avoidable litigation.

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[Commissioner of Central Excise, Chandigarh-II v. Gee EMM Polyvin Ltd., 2011 (273) ELT 223 (P & H)]

The appeal had been preferred by the Revenue authorities u/s.35G of the Central Excise Act, 1944 against the order of CESTAT.

In original proceedings on the issue of deficient payment of excise duty on account of wrongful availment of Cenvat credit were dropped. This order had been upheld by the Commissioner (Appeals) and had been further upheld by the Tribunal. The Tribunal, inter alia, observed:

“The Department deserves to be complimented for their perseverance as the Tribunal’s decision dated 4-7-2008 in the previous set of proceedings on the main issue is in favour of the party, the question of allowing this appeal of the Department does not arise.”

In spite of the above observations, the Department had chosen to file the appeal before the High Court claiming that there is a substantial question of law. The Court held that the above action only shows total carelessness and nonapplication of mind. Apart from the fact that the original authority, the Appellate Authority and the Tribunal decided against the Department, the amount involved was only Rs.39,117. In spite of the judgments of the Supreme Court as well as observations made by the Court, the Department is turning a deaf ear and is wasting public money on avoidable litigation.

Accordingly, the appeal was dismissed with costs at Rs.10,000 to be recovered from the person taking decision to file the appeal within three months and to be deposited with the High Court Legal Services Committee.

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Appellate Tribunal — Precedent — Judicial propriety — Co-ordinated Benches of Tribunal.

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The Supreme Court while deciding an appeal under the Customs Act, 1962 against the order of CESTAT, noticed difference of opinion between co-ordinate Benches of Tribunal on an identical issue. The Court showed their deep concern on the conduct of the two Benches of the Tribunal while deciding appeals in the cases of two parties, namely, IVRCL Infrastructures & Projects Ltd. and Techni Bharathi Ltd. After noticing the decision of a co-ordinate Bench in the present case, they still thought it fit to proceed to take a view totally contrary to the view taken in the earlier judgment, thereby creating a judicial uncertainty with regard to the declaration of law involved on an identical issue in respect of the same Exemption Notification. It needs to be emphasised that if a Bench of a Tribunal, in identical fact-situation, is permitted to come to a conclusion directly opposed to the conclusion reached by another Bench of the Tribunal on earlier occasion, that will be destructive of the institutional integrity itself. What was important is the Tribunal as an institution and not the personality of the members constituting it. If a Bench of the Tribunal wishes to take a view different from the one taken by the earlier Bench, the propriety demands that it should place the matter before the President of the Tribunal so that the case is referred to a larger Bench, for which provision exists in the Act itself. The Court referred to the observations of a three-Judge Bench of the Court in Sub-Inspector Rooplal & Anr. v. Ltd. Governor & Ors., (2000) 1 SCC 644. The Court further directed that all the Courts and various Tribunals in the country shall follow these salutary observations in letter and spirit.
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Accident claim — Legal representative — Married daughter — Motor Vehicles Act, section 166.

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(Smt. Joy Minocha & Ors. v. Vijay Kumar & Ors., AIR 2011 Chhattisgarh 166)

The appellant No. 1 Smt. Joy Minocha was daughter of deceased persons Naresh Arora and Smt. Bharti Arora. The other appellants are minor children of the appellant No. 1. The deceased persons had expired in a road accident. The appellant along with the minor children being legal heirs had filed petition for compensation. The Tribunal dismissed the claim petition on the ground that the appellant No. 1 was married daughter of the deceased persons, therefore not entitled to receive any compensation.

The question that arose before the High Court was whether any compensation is payable where the claim is filed by legal representatives of the deceased who were not dependent on them?

The Court observed that the expression ‘Legal Representative’ had not been defined in the Motor Vehicles Act or the Rules made thereunder. However, it has been defined in s.s (11) of section 2 of the Code of Civil Procedure, 1908 which reads as under:

‘Legal representative’ means a person who in law represents the estate of a deceased person, and includes any person who intermeddles with the estate of the deceased and where a party sues or is sued in a representative character the person on whom the estate devolves on the death of the party so suing or sued;’

Almost in similar terms is the definition of ‘legal representative’ u/s.2(1)(g) of the Arbitration and Conciliation Act, 1996.

The Court relying on the decision of Smt. Manjuri Bera v. Oriental Insurance Company Ltd., AIR 2007 SC 1474, observed that the right to file claim application has to be considered in the background of right to entitlement. Further section 166 of the Motor Vehicles Act corresponds to section 110 of the Motor Vehicles Act, 1939 (old Act). It provides that an application for compensation may be made by all or any of the legal representatives of the deceased in case where death has resulted from the accident.

In view of the above it was held that though there is no loss of dependency, yet the claimants being legal representatives are entitled to inherit the estate of the deceased persons, therefore, in the facts of the present cases, the appellants were entitled to receive compensation under no fault liability in terms of section 140(2) of the Act. Hence the claim petitions was maintainable as filed by the legal representatives of the deceased.

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COMPANIES BIL, 2011 Provisions relating to Accounts and Audit

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The Companies Bill, 2009, was introduced in the Lok Sabha on 3rd August, 2009. It was referred to the Standing Committee of Finance which submitted its report on 31st August, 2010. After consideration of the recommendations of the Standing Committee and suggestions of various chambers of commerce, professional bodies and others, the Government has made changes in the original bill and now introduced a revised Companies Bill, 2011, in the Lok Sabha on 14th December, 2011. This Bill will replace the 55-year-old Companies Act, 1956 (existing Act). The new Bill proposes to introduce far-reaching changes which will have impact on the registration of companies, management and administration of companies, shareholder’s rights, director’s responsibilities, maintenance of accounts and audit of companies and other provisions relating to mergers, acquisitions, winding up of companies, etc. The new Bill is divided into 29 Chapters and contains 470 sections and 7 Schedules. The new Bill is likely to be considered and adopted in the Budget session of the Parliament in March, 2012 and may come into force on the date to be notified by the Government. In this article, some important provisions in the new Bill relating to Accounts and Audit are discussed.

2. Accounts of companies

Sections 128 to 138 deal with accounts to be maintained by all companies. It is provided in section 128 that every company shall maintain books of accounts on mercantile system of accounting. These provisions are on the same lines as provisions in section 209 of the existing Act. At present, a company can adopt any accounting year for maintaining its accounts. It is now provided that all companies will have to follow uniform accounting year ending 31st March of every year. The existing companies which are following different accounting years will have to comply with the new provisions within a period of two years from the date when the Companies Act, 2011, comes into force. Exemption from this provision can be claimed by obtaining permission of the National Company Law Tribunal (Tribunal) in respect of foreign subsidiary companies which are required, by the laws of the foreign countries, to adopt different accounting year.

3. Financial statements

3.1 Section 129 provides that every company has to prepare financial statements for each accounting year and place them before the Annual General Meeting of the company. The term financial statements has been defined to include Balance Sheet, Profit and Loss A/c. or Income & Expenditure A/c., Cash Flow statement, A statement of changes in equity and notes to accounts. These financial statements have to comply with Accounting Standards prescribed by the Government as provided in section 133. If the company has one or more subsidiary companies, associate companies or joint ventures, the financial statements of these companies and joint ventures will have to be consolidated and these consolidated financial statements will also be required to be placed before the General Meeting. Further, such a company is also required to attach with the financial statements a statement of salient features of the subsidiaries including associates and joint ventures in the prescribed manner. The Government has power to notify any class of companies to which these provisions will not apply.

3.2 Every company will have to prepare financial statements every year in the Form given in Schedule III. This Schedule gives forms of Balance Sheet, Statement of Profit and Loss and General Instructions for preparation of Consolidated Financial Statements. This Form of Balance Sheet and Statement of Profit and Loss is similar to present Schedule VI as revised from 1-4-2011. The above financial statements have to be approved by the Board of Directors. The procedure for adoption of these statements is similar to section 215 of the existing Act.

4. Reopening of accounts


4.1 This is a new provision. At present, there is no provision to reopen the accounts of the company. Section 130 now provides that if any Court or Tribunal passes an order that accounts for any accounting year have been prepared in a fraudulent manner or the affairs of the company were mismanaged and there is a doubt about reliability of financial statements, the accounts of that year shall be reopened. Before passing such order the Court/Tribunal shall invite comments from the Government and the Income-tax Department. If the financial statements are revised by the company as per the above order, such statements shall be final.

4.2 Section 131 provides that it is also possible for the Board of Directors to revise the financial statements or the report of Board for any of the three previous financial years if they find that these statements and/or report are not in accordance with the requirements of sections 129 to 134. For this purpose, the Board will have to take the approval of the Tribunal. Before giving such approval the Tribunal has to give notice to the Government and the Income-tax Department and invite their comments. Such revision of accounts can be made only once in a financial year. The Board will have to give detailed reasons for such revision of financial statements in its report to the members. Copies of the revised financial statements or Board Report will have to be sent to the members of the company and the Registrar of Companies. The revised financial statements will have to be approved by the members in General Meeting.

4.3 The Government is authorised to make Rules about the form in which application is to be made to the Tribunal for this purpose. These rules will also provide about the role of the company’s Auditors about their report on the accounts audited by them. The Directors have also to take such steps as may be provided in these rules.

5. Accounting and auditing standards

5.1 At present, the accounting standards to be followed by companies are formulated by the Institute of Chartered Accountants of India (ICAI). The Government has appointed a National Advisory Committee on Accounting Standards. This Committee examines these standards and makes recommendations to the Government. Thereafter, the Government notifies the accounting standards to be adopted by companies in the preparation of financial statements. So far as auditing standards are concerned, they are issued by ICAI and auditors have to follow these standards for conducting the audit of companies.

5.2 New sections 132, 133 and 143 give very wide powers to the Government to notify the accounting and auditing standards and to take action against the auditors who do not comply with these requirements. These provisions are as under.

(i) Section 132 provides that the Government will appoint a National Financial Reporting Authority (NFRA) for formulation of accounting and auditing standards and for enforcement of these standards. The NFRA will have a chairman and 15 members who will be appointed by the Government. For this purpose, the Government will notify the detailed rules and procedure.

(ii) The Government will notify the accounting standards as recommended by ICAI in consultation with NFRA u/s.133.

(iii) Similarly, the Government will notify the Auditing Standards as recommended by ICAI in consultation with NFRA u/s.143. This will mean that the present authority of ICAI to formulate auditing standards will now be taken over by the Government.

(iv) NFRA has been given powers to monitor and enforce compliance with the accounting and auditing standards, oversee the quality of professional services of auditors and suggest measures to make improvement in such services.

    v) NFRA can investigate about the professional or other misconduct of Chartered Accountants, Cost Accountants and Company Secretaries in practice while rendering professional services to any company and take disciplinary action against the members or firms rendering such services. Once NFRA starts disciplinary proceedings against any member or firm, the respective Institutes cannot take any action against such member or firm. This particular provision will mean that the powers of the three Institutes of Chartered Accountants, Cost Accountants and Companies Secretaries to take disciplinary action against their members in such matters will be transferred to this NFRA appointed by the Government.

    vi) NFRA has been given powers of a civil court for conducting this investigation. For the purpose of deciding whether there is professional or other misconduct on the part of the member or firm, it is provided that the items listed in section 22 of the Act governing the three Institutes will apply.

    vii) If a member or a firm is found guilty of professional or other misconduct, the NFRA has power to

    a) impose a minimum penalty of Rs. one lac on the Individual member and a minimum penalty of Rs.10 lacs on the firm, and

    b) debar the member or the firm from professional practice for a minimum period of six months or for such higher period up to 10 years.

    viii) Any member or firm aggrieved by the above order of the NFRA can file appeal before the Appellate Authority constituted u/s.22A the
Acts governing the three Institutes.

    ix) The detailed provisions are made in section 132 for day-to-day administration of the NFRA, its accounts, audit, etc.

    6. Report of the Board of Directors

Section 134 provides that the Board of Directors of a company shall adopt the financial statements for each financial year and get the auditors report on the accounts. The Board has to prepare its report to the members every year and submit to the members at the Annual General Meeting along with the financial statements and audit report. The report of the Board should contain the information as required under the existing Act as well as some additional items as under.

    i) Statement of declaration given by Independent Directors u/s.149(6).

    ii) In the case of a listed company or any other company as specified by the Rules as provided in section 178(1), the company’s policy on director’s appointment and remuneration, criteria for determining qualifications, positive attributes, independence of directors, etc.

    iii) Particulars of loans, guarantees or investments in subsidiaries as provided in section 186.

    iv) Particulars of contracts or arrangements with related parties as stated in section 188.

    v) A statement indicating development and implementation of risk management policy for the company which in the opinion of the Board may threaten the existence of the company.

    vi) Details about policy developed and implementation of corporate social responsibility policy.

    vii) In the case of listed and other specified companies a statement indicating formal annual evaluation made by the Board about its performance and of its committees and Independent Directors.

    viii) Such other matters as provided in the Rules notified by the Government.

6.2 The Board has to send the financial state-ments with Audit Report, Directors report, etc. to each member before the Annual General Meeting. The Meeting should be held within six months of close of financial year i.e., before 30th September every year. These provisions are more or less on the same lines as existing provisions. These statements and reports have to be filed with the Registrar of Companies in the same manner as at present.


    7. Internal audit

This is a new provision. At present, the Internal Audit can be conducted by the company’s staff. Now section 138 provides that such class or classes of companies as may be prescribed, the Board of Directors will have to appoint a Chartered Accountant, Cost Accountant or other professional for carrying out Internal Audit. For this purpose, the Government is authorised to make Rules as to how this audit should be conducted.
    

    8. Corporate social responsibilities

8.1 This is a new provision made in section 135. This section applies to every company having net worth of Rs.500 crore or more or turnover of Rs.1000 crore or more or a net profit of Rs.5 crore or more during any financial year. The Board of such a company has to constitute a corporate social responsibility committee consisting of 3 or more directors of which one should be an Independent Director. The Board Report to the members should disclose the details of composition of this committee.


8.2    The functions of this committee shall be as under:

    i) To formulate and recommend to the Board a Corporate Responsibility Policy giving details of activities in the fields listed in Schedule VII.

    ii) To recommend about the expenditure to be incurred for these activities.

    iii) To supervise the implementation of this policy.

8.3 The Board has to consider the recommendations of this committee and formulate the policy for such expenditure every year. The Board should make all efforts to spend at least 2% of the average profits of the preceding 3 years for this purpose. If the Board is not able to spend this amount it will have to give reasons for not spending the same.

8.4 The type of activities for which the company has to spend for its social responsibilities, as listed in Schedule VII, are as under:

    i) Eradicating extreme hunger and poverty.

    ii) Promotion of education, gender equity, empowerment of women, reducing child mortality and improving maternal health.

    iii) Combating HIV, AIDS, malaria and other diseases.

    iv) Ensuring environment sustainability.

    v) Enhancing vocational skills and social business projects.

    vi) Contribution to P.M. National Relief Fund or any other fund set up by Central or State Governments for social development and relief work, welfare of SC, ST and backward classes, minorities and women.


    9. Audit of accounts of companies

Sections 139 to 148 deal with provisions for audit of accounts of companies and auditors. Every company is required to get its accounts audited for each financial year from a Chartered Accountant or a Firm of Chartered Accountants. For this purpose, ‘Firm’ will include a Limited Liability Partnership (LLP) engaged in the profession as Chartered Accountants. U/s.139, the first auditor can be appointed by the Board of Directors. At present, auditors are appointed by the members at the Annual General Meeting every year. Now, at the annual general meeting the members have to appoint auditors for a term of 5 years. Thereafter, on expiry of every 5 years, the members have to appoint auditors for a further term of 5 years. It is also provided in section 139 that the members will have to follow the procedure for selecting the auditors as per the Rules which will be notified by the Government. The company has to file the notice of appointment of auditors within 15 days with the Registrar of Companies.


    10. Rotation of auditors

10.1 In the case of listed companies and such class or classes of companies as may be prescribed a new provision is made in section 139(2) for rotation of auditors. This provision is as under:

    i) An Individual auditor shall not be appointed for more than 5 consecutive years.

    ii) A firm of auditors shall not be appointed for more than 10 consecutive years.

    iii) The auditors who have completed the above term, cannot be reappointed as auditors of that company for a period of 5 years. This restriction for reappointment shall apply to the audit firm which is to be appointed after completion of the above term to any audit firm in which one or more partners are partners in the firm which has completed its term as stated above.

    iv) In respect an existing company to which this provision applies it is provided that such company shall comply with the above provision within 3 years from the date of commencement of the Companies Act, 2011.

    v) Members of the company can resolve that the firm of auditors appointed by them shall rotate the audit partner and his team every year or the members may decide to appoint two or more audit firms as auditors of the company.

    vi) The Government may frame rules about the manner in which the companies shall rotate the auditors.

10.2 As regards Government companies the procedure for appointment and removal of auditors by C & AG is the same as existing at present. The provisions relating to appointment of another auditor in the case of casual vacancy in the office of auditor due to resignation, death, etc. are more or less the same as existing at present.

  

 11. Removal of auditors

11.1 The auditor of a company once appointed can be removed before expiry of his term by passing a special resolution after obtaining previous approval of the Government as provided in the rules. If the auditor submits his resignation before the expiry of his term of office, he has to file within 30 days a statement in the prescribed form about the reasons and other facts relevant to whis resignation with the company and the ROC. If this statement is not filed by the auditor he can be penalised by levy of minimum fine of Rs.50,000 which may extend up to maximum of Rs.5 lac.

11.2 On the expiry of the term of the appointment of the auditor, the retiring auditor is to be appointed if he is eligible for this purpose. If the members desire to appoint another person as auditor in his place, special notice from a member is required for this purpose. The procedure to be followed by the company is similar to the existing provisions for appointment of another auditor in place of retiring auditor.

    12. Penal provisions

Section 140(5) gives very wide powers to the Tribunal to take action against the auditor or the audit firm. It is provided in this section that if the Tribunal is satisfied on its own, or on an application by the Government or any person that the auditor of a company has acted in a fraudulent manner or assisted in any fraud by the company, its directors or officers, it can order the company to change the auditor. Further, if the Government makes an application to the Tribunal, and it is satisfied, the Tribunal can pass an order within 15 days that the auditor of the company shall not function as auditor and the Government shall, thereafter, appoint another auditor in place of the auditor so removed. It is also provided that if any final order is passed by the Tribunal against the auditor u/s.140, such auditor will not be eligible for appointment as auditor of any company for 5 years. Further, section 447 provides that if found to be guilty of fraud he shall be punishable with imprisonment for a minimum period of six months which may extend up to 10 years. If the fraud involves public interest, the minimum period of imprisonment shall be 3 years. Apart from this punishment, such auditor shall also be liable to pay minimum fine equal to the amount of the fraud which may extend up to three times of the fraud amount.

    13. Qualifications of auditors

13.1 Section 141 provides that only Chartered Accountants can be appointed as auditors of a company. A firm of Chartered Accountants or LLP engaged in the practice as Chartered Accountants can also be appointed as auditors.

13.2 It is, however, provided that the following persons cannot be appointed as auditors of a company:

    i) A Body Corporate other than LLP.

    ii) An officer or an employee of the company or a person who is a partner or who is in employment of the officer or employee of the company.

    iii) A person (including his relative or his partner) who (a) holds any security or interest in the company, its subsidiary, its holding or its associate company, etc. It may be noted that if such security or interest is less than Rs.1,000 or such sum as may be prescribed by rules, this provision will not apply. (b) is indebted to or who has given guarantee for any debt in relation to the company, its subsidiary, its holding company or its associate company of such amount as may be prescribed.

    iv) A person or a firm has business relationship with the company, its subsidiary, its holding or its associate company directly or indirectly.

    v) A person who is relative of a director or is in the employment of the company as a director or key managerial personnel.

    vi) A person who is convicted by any Court of an offence involving fraud, and a period of 10 years has not elapsed from the date of such conviction.

    vii) Any person, firm or its associate is engaged on the date of appointment in consulting and specified services as provided in section
144.

13.3 A person who is an employee of any other organisation cannot be appointed as auditor of a company. Further, the auditor should not be auditor of more than the specified number of companies as provided by the rules to be framed by the Government.

    14. Remuneration of auditors and other functions

The remuneration of the auditors of a company shall be fixed in its General Meeting or shall be determined in such a manner as may be decided by General Meeting. As regards powers and duties of the auditors and the reporting requirements, the provisions are contained in section 143 which are more or less similar to section 227 of the existing Act. It is also provided that every auditor shall comply with the auditing standards as notified by the Government. The Government is also given authority to pass an order specifying the matters on which the auditors have to report. Such order can be passed in consultation with the NFRA appointed u/s.132. If the auditor of a company finds that an offence involving fraud has been committed against the company by officers or employees of the company he has to report to the Government within such time and in such manner as may be prescribed by rules. The above provisions apply even to a Cost Accountant in practice relating to cost audit of a company u/s.148 as well as to the Company Secretary in practice conducting secretarial audit u/s.204.

    15. Consultancy services

15.1 Section 144 is a new section in which it is provided that the auditors of a company can render such other services as are approved by the Board of Directors or the Audit Committee. It is, however, provided that such services shall not include:

    i. Accounting and book-keeping services.

    ii. Internal audit.

    iii. Design and implementation of any financial information system.

    iv. Actuarial services.

    v. Investment advisory, investment banking or any other financial services.

    vi. Management services.

    vii. Any other services as may be prescribed by rules.

15.2 It is clarified in this section that the above services cannot be rendered to the company either directly or indirectly by the auditors of the company. In the case of an individual auditor or an audit firm, such services cannot be rendered by any relative or any other partners or by any of the associate concerns in which the auditors have significant influence or control or whose name or trade mark or brand is used by the auditor or audit firm or any of the partners of the audit firm.

    16. Punishment for contravention

If the auditors of a company contravene the provisions of sections 143 to 145, the auditors shall be punishable with a minimum fine of Rs.25,000 which may extend up to Rs.5 lac. It is further provided that if the auditor has contravened these provisions with the intention to deceive the company or its shareholders or creditors or other persons interested in the company, he shall be punishable with imprisonment for a term which may extend up to one year or with a minimum fine of Rs.1 lac which may extend up to Rs.25 lac. Further, the auditor is also liable to refund the remuneration received by him and pay for damages to the company or other person for loss arising out of incorrect or misleading statement made in the audit report.

    17. Some suggestions

17.1 The above provisions relating to accounts and audit contained in the Companies Bill, 2011, will have far-reaching impact on the companies and auditors. It appears that these provisions are being made with a view to curb the present-day tendency on the part of some companies to manipulate accounts with a view to benefit those in management or with a view to reduce tax. Some of these provisions are harsh and they are likely to affect the development of the profession of Chartered Accountants.

17.2 At present, the National Advisory Committee of Accounting Standards (NACAS) is working satisfactorily. There is no need to replace this body by appointment of NFRA. Further, the provisions of sections 132 and 133 giving wide powers to this authority to regulate the auditing profession cut at the very root of autonomy conferred on ICAI which is set up by an Act of the Parliament. It is, therefore, suggested that the existing advisory body viz. NACAS should not be replaced by NFRA.

17.3 Further, ICAI is the only competent authority to issue auditing standards for members of C.A. profession. Therefore, provisions in section 143(10) giving power to the Government to notify the auditing standards will curtail the autonomy given to ICAI under the C.A. Act.

17.4 Section 139(2) provides for maximum limit of 10 years for an audit firm to continue as auditors of any listed or large specified companies. Thereafter, there is a cooling period of 5 years. When this provision is made there is no need of again providing in section 139(4) that the Government can notify the rules for rotation of auditors in cases of such companies.

17.5 The provisions of section 140 for removal of auditors and punishment of erring auditors as discussed in para 11 and 12 above are very harsh and apply to auditors of all companies. It is suggested that these provisions should be restricted to only auditors of listed and large specified companies.

17.6 Similarly, provisions of section 147 providing for punishment and fine as discussed in para 16 above also apply to auditors of all companies. These provisions should be made applicable to only auditors of listed and large specified companies.

17.7 The provisions of section 144 prohibiting auditors from rendering certain consultancy services apply to all companies. This will hamper the development of C.A. profession. It is, therefore, suggested that section 144 should be made applicable to listed and large specified companies only.

17.8 If the present Companies Bill is passed in its present form it will curtail the autonomy of ICAI in relation to issue of auditing standards and disciplinary matters. Further, considering the additional responsibilities being thrust on the auditors it appears that small and medium-size audit firms will find it difficult to continue in audit practice. This will affect the development and progress of auditing profession in India.

Whoever fights monsters should see to it that in the process he does not become a monster.
— Friedrich Nietzsche

A.P. (DIR Series) Circular No. 51, dated 23-11-2011 — External Commercial Borrowings (ECB) Policy.

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This Circular revises the all-in-cost ceiling for ECB as follows

This change which has come into force with immediate effect will be applicable till 31-3-2012.

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A.P. (DIR Series) Circular No. 50, dated 23-11-2011 — Comprehensive guidelines on over-the-counter (OTC) foreign exchange derivatives — Foreign currency — INR swaps.

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Presently, net supply of foreign exchange in the foreign currency — INR swap market cannot exceed US $ 100 million.

This Circular removes this cap/limit of US $ 100 million on net supply of foreign exchange in the foreign currency — INR swap market.

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A.P. (DIR Series) Circular No. 49, dated 22-11-2011 — Foreign investments in Infrastructure Debt Funds.

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This Circular permits eligible non-resident investors, subject to certain terms and conditions, to invest in Infrastructure Debt Funds (IDF) as shown in tabular form on next page: The original/initial maturity period of the securities must be 5 years with a lock-in period of 3 years. However, transfer between eligible nonresident investors is permitted during this period.

Eligible instruments/securities for non-resident investment in IDFs
Eligible non-resident investor Eligible instruments
(i) SEBI-registered eligible non-resident investors Foreign currency and Rupee denominated bonds and
in IDF — Sovereign Wealth Funds, Multilateral rupee denominated units issued by IDF
Agencies, Pension Funds, Insurance Funds and
Endowment Funds
(ii) SEBI-registered FII who qualify as (i) above Foreign currency and Rupee denominated bonds and rupee denominated units issued by IDF
(iii) SEBI-registered FII who do not qualify as (i) Rupee denominated bonds and units issued by IDF
above
(iv) NRI Rupee denominated bonds and units issued by IDF
Investments by non-residents, other than NRI, must be within the overall cap/limit of US $ 10 billion within the overall cap of US $ 25 billion for FII investment in bonds/non-convertible debentures issued by Indian companies in the infrastructure sector or by infrastructure finance companies. There is no cap/limit on NRI investment IDF by way of Rupee denominated bonds/units. Foreign currency denominated bonds must comply with the External Commercial Borrowing guidelines/regulations.

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A.P. (DIR Series) Circular No. 48, dated 21-11-2011 — Mid-sea trans-shipment of catch by deep sea fishing vessel.

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Annexed to this Circular are the GR declaration procedures based on the norms prescribed by the Ministry of Agriculture, Government of India. These have to be followed by exporters who undertake mid-sea trans-shipment of catches by Indian-owned vessels.

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WOULD BUYBACK RESULT IN AN OPEN OFER? — SAT says no and changes existing interpretation

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Recently, on 21st November 2011 (Appeal No. 134 of 2011, Raghu Hari Dalmia & Others v. SEBI) the Securities Appellate Tribunal (SAT) held that the increase in percentage holding of a person because of buyback of shares does not amount to acquisition and thus cannot result in an open offer. This is, in my view, a correct legal interpretation of the law (as also argued by me earlier in this column of the Journal for the April 2010 and September 2008 issues). But SEBI had, in practice, taken a view that such increase does amount to acquisition. On this basis, it granted exemptions, selectively and subject to certain conditions, from applicability of relevant provisions including open offer. Further, where such ‘acquisitions’ triggered the open offer requirements and the ‘acquirers’ did not make such offers, SEBI passed adverse orders (here and also here which case was now reversed by the SAT). It even inserted a proviso in the Regulations exempting increase in certain cases such ‘acquisitions’, thereby implicitly assuming that such increases were ‘acquisitions’.

My preceding articles referred earlier discuss this issue in more detail where I also expressed my views why such increase should not amount to ‘acquisition’. The regulations define ‘Acquirer’ as a person who ‘acquires or agrees to acquire’ shares, voting rights, etc. Hence, if an acquirer acquires:

  • 5% or more shares, he has to make certain disclosures.

  • 15% or more (under the 1997 Regulations), he has to make an open offer.

  • In additions there are other compliance requirements.
In case of buyback of shares, if a person does not participate in it — that is — does not offer his shares in buyback, there is an involuntary or passive increase of percentage holding. For example, a person holding, say, 60% shares and does not participate in a 20% buyback of shares then, post-buyback, his percentage holding would be 75%. Thus, his percentage holding would increase by 15 percentage points without his having acquired a single additional share. In my view, this passive increase does not make the shareholder an acquirer. One may argue that the intention of the law may be that such increases should also result in an open offer. One may also say a person holding, as in the above example, 60% shares, may initiate a buyback, and then not participate in it, thereby ensuring that his percentage holding increases. However, intentions or potential misuses cannot be allowed to stretch the interpretation of the law. Nevertheless, instead of simply making an amendment to the law, though several opportunities were available when other amendments were made, SEBI initiated and persisted in adopting a practice of taking a stand that such increases amounted to acquisitions.

The SAT rejected this attempt in fairly clear and emphatic words. In the case under consideration, consequent to a buyback, the holding of the Promoters increased from 62.56% to 75%. While there are other aspects and issues in the case, the essential question before the SAT was whether this increase should result in an open offer.

The SAT relied on the definition of an ‘acquirer’ under the Regulations as well as in a legal dictionary. It held that a passive increase in percentage holding pursuant to a buyback cannot amount to acquisition. It observed (emphasis supplied in all extracts):

“In this context the word ‘acquire’ implies acquisition of voting rights through a positive act of the acquirer with a view to gain control over the voting rights. In the case before us, it is the admitted position of the parties that the appellants (promoters of the company) did not participate in the buyback and that there was no change in their shareholding. The percentage increase in their voting rights was not by reason of any act of theirs, but was incidental to the buyback of shares of other shareholders by the company. Such a passive increase in the proportion of the voting rights of the promoters of the company will not attract Regulation 11(1) of the takeover code. The argument of the learned counsel for the Board that merely because there is increase in the voting rights of the appellants, Regulation 11(1) gets triggered cannot be accepted.”

Does such an increase amount to an ‘indirect’ acquisition? This argument too was rejected by observing:

“He also referred to the definition of ‘acquirer’ in Regulation 2(b) of the takeover code and strenuously contended that a passive acquisition of the kind we are dealing with is indirect acquisition and, therefore, the provisions of Regulation 11(1) are attracted. We have no hesitation in rejecting this argument outright. The words ‘directly’ and ‘indirectly’ in the definition of ‘acquirer’ go with the person who has to acquire voting rights by his positive act and if such acquisition comes within the limits prescribed by Regulation 11(1), it would only then get attracted. Passive acquisition as in the present case cannot be regarded as indirect acquisition as was sought to be contended on behalf of the Board.

The SAT also rightly highlighted another absurdity involved. If the view that passive increase may also amount to acquisition, then even a non-controlling shareholder holding, say, 14% may find the requirements of open offer getting triggered off if he does not participate in a buyback and finds his holding increased to, say, 16%. The SAT observed:

“Again, a non-promoter shareholder may increase his percentage of shareholding without participating in the buyback over which he has no control. In such an event he would be burdened with an onerous liability to make a public announcement. It is a well-settled principle of law that a provision ought not to be interpreted in a manner which may impose upon a person an obligation which may be highly onerous or require him to do something which is impossible for no action of his.”

Other difficulties in adopting such an interpretation were also highlighted. At the end, the SAT, in quite emphatic words, held that “we are of the firm opinion that passive acquisition does not attract the provisions of Regulation 11(1) of the takeover code.”

Once such an interpretation is accepted, the following situations, arising out of buyback and under the 1997 Regulations, need to be considered: 1. If a person’s holding increases to 5% or more, will disclosure be required?

2. If a person holding 5% or more finds his holding increased by 2% or more, will disclosure be required?

3. If a person holds less than 15% finds his holding increased to 15% or more, will an open offer be required?

4. If a person holding 15% or more finds his holding increased, will such increase be counted as part of creeping acquisition or will he be entitled to acquire a further 5% in a financial year ignoring such increase?

5. If a person holding 55% or less finds his holding increased beyond 55%, will he be deemed to have violated the Regulations? — And so on.

Applying the decision of the SAT, the answer to each of the aforesaid questions appear to be in the negative.

However, while this was the position under the 1997 Regulations, the question is whether will it also hold good under the 2011 Regulations. The curious thing is that while the corresponding wording in the definition of ‘acquirer’ under the 2011 Regulations remains exactly the same, the Regulations have made further provisions on the assumption that such a passive increase amounts to acquisition. It has exempted two types of such increases (from below 25% to 25% or more, and more than the creeping acquisition if holding is already more than 25%) if certain conditions are satisfied. It is submitted that considering that even the 1997 Regulations did contain such a provision, the ratio of the decision of the SAT should hold good.

One will have to wait and see whether SEBI appeals to the Supreme Court and, if yes, what view the Supreme Court takes. It is also possible that SEBI may amend the Regulations.

In conclusion, one cannot help expressing disapproval of adopting a practice — approach of SEBI — which results in the law becoming opaque and/ or arbitrary depending on the internal — administrative — preference or practice of SEBI.

PART A : ORDERS of CIC & the Supreme Court

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  • Section 8(1)(a) & (e) of RTI Act

CIC, Shailesh Gandhi has made an order of great interest.

The following information was sought: 1. Total amount of money deposited by Indian citizens in nationalised Indian banks during the period 2006 to 2010. Provide information for each year separately;

2. (a) Information till date regarding total amount of loan taken but not repaid by industrialists from Indian nationalised banks and total amount of interest accumulating on such unpaid loans; and

(b) Details of default in loans taken from public sector banks by industrialists. Out of the above list of defaulters, top 100 defaulters, name of the businessman, address, firm name, principal amount, interest amount, date of default and date of availing loan.

(c) Steps being taken for putting information sought in query 2(a) and list of defaulters on the website of the respondent — Public authority.

By letter dated 14-10-2010, the CPIO informed the appellant that query 1 was transferred to DEAP, queries 2(b) and (c) were transferred to DBOD/DBS.

By letter dated 22-10-2010, the CPIO denied information on query 2(b) on the basis that it was held in fiduciary capacity and was exempt from disclosure u/s.8(1)(a) and (e) of the RTI Act.

In the first appeal, the FAA stated inter alia that the CPIO, DEAP had provided certain information vide letter dated 12-10-2010. Further he stated: ‘As regards the contention of the appellant with respect to his query at point 2(b) (which relates to the default in loans taken by industrialists from public sector banks and matters associated with them), I find that the CPIO, DBS has specified that the information received from banks, in this regard is held by the Reserve Bank in fiduciary capacity and as such it cannot be disclosed in terms of clauses (a) and (e) of section 8(1) of the Act. There can be no doubt that the information on defaulters received from banks is held by the Reserve Bank in a fiduciary capacity and confidential in nature. Therefore, the exemption claimed u/s.8(1)(e) is, without doubt, proper in the eyes of law. Whether the exemption provided by clause (a) of section 8(1) would be attracted in given case would depend upon the factual position. In this matter, since section 8(1)(e) is clearly attracted, I do not propose to consider the other exemption which the CPIO, DBS has made use of for withholding the information.’

The order of CIC is very powerful and I consider it as gem, for information analysis of section 8. Hence, instead of my summarising it, I reproduce the Completer Decision announced on 15th November, 2011:

“Based on perusal of papers and submission of parties, it appears that no information has been provided in relation to query 2(c), despite the order of the FAA. As regards query 2(b), the respondent has contended that the information sought was exempt u/s.8(1)(a) & (e) of the RTI Act. The Commission will first consider the claim of exemption u/s.8(1)(a) of the RTI Act made by the PIO. The PIO has claimed exemption u/s.8(1)(a) but not explained how this would apply. The first Appellate Authority has not given any comment on this. No justification was offered at the time of hearing as well. Section 8(1)(a) exempts, ‘information, disclosure of which would prejudicially affect the sovereignty and integrity of India, the security, strategic, scientific or economic interests of the State, relation with foreign State or lead to incitement of an offence;’. It appears that the PIO is claiming that the economic interests of the State would be prejudicially affected. It is impossible to imagine that any of the other interests mentioned in the provision could be affected. This Bench rejects the contention of the PIO that the economic interests of India would be affected by disclosing the names and details of defaulters from public sector banks. If it means that such borrowers would not bank with public sector banks for fear of exposure, it would in fact be in the economic interest of the nation. This Commission does not accept the claim of exemption u/s.8(1)(a) by the PIO. It is also unlikely that the economic well-being of the nation could get affected adversely by disclosing the names and details of defaulters. The Indian economy is dependent on far stronger footings.

The Commission will now examine the claim for exemption u/s.8(1)(e) of the RTI Act.

Section 8(1)(e) of the RTI Act exempts from disclosure “information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information”.

This Bench, in a number of decisions, has held that the traditional definition of a fiduciary is a person who occupies a position of trust in relation to someone else, therefore requiring him to act for the latter’s benefit within the scope of that relationship. In business or law, we generally mean someone who has specific duties, such as those that attend a particular profession or role, e.g., doctor, lawyer, financial analyst or trustee. Another important characteristic of such a relationship is that the information must be given by the holder of information who must have a choice — as when a litigant goes to a particular lawyer, a customer chooses a particular bank, or a patient goes to a particular doctor. An equally important characteristic for the relationship to qualify as a fiduciary relationship is that the provider of information gives the information for using it for the benefit of the one who is providing the information. All relationships usually have an element of trust, but all of them cannot be classified as fiduciary. Information provided in discharge of a statutory requirement, or to obtain a job, or to get a licence, cannot be considered to have been given in a fiduciary relationship.

Information provided by banks to RBI is done in furtherance of statutory compliances. In fact, where RBI requires certain information to be furnished to it by banks and such banks have no choice but to furnish this information, it would appear that such requirement of RBI is directory in nature. Moreover, no specific benefit appears to be flowing to the banks from RBI on disclosure of the information sought by the appellant. Consequently, no fiduciary relationship is created between RBI and the banks.

The respondent has also argued that information about customers is held by banks in a fiduciary capacity and hence disclosure of the same would violate the fiduciary — trust placed by borrowers of the banks. The Commission finds some merit in this argument. Information of customers is held by banks in a fiduciary capacity. If this information is disclosed to the RBI and subsequently furnished to the citizens under the RTI Act — it may violate the fiduciary relationship existing between the customers and the banks. Therefore, the information sought in query 2(b) is exempt from disclosure u/s.8(1)(e) of the RTI Act. However, if a customer defaults in repayment, should the information about the default also be considered as information held in a fiduciary capacity, is a moot question. The lender is likely to take all measures including filing suits to recover the money due, and these actions would mean publicly disclosing the default amounts. In such circumstances the bank would make these details public, and not feel fettered by the fiduciary nature of the relations.

However, I am not going into delving into this trend of thought and accept that the information about the default by a borrower may be considered to be information held by a bank in a fiduciary capacity. When the Commission comes to the conclusion that the exemptions of section 8(1) of the RTI Act apply, it needs to consider the provision of section 8(2) of the RTI Act which stipulates as follows

:
“Notwithstanding anything in the Official Secrets Act, 1923 (19 of 1923) nor any of the exemptions permissible in accordance with s.s (1), a public authority may allow access to information, if public interest in disclosure outweighs the harm to the protected interests.”

Section 8(2) of the RTI Act mandates that even where disclosure of information is protected by the exemptions u/s.8(1) of the RTI Act, if public interest in disclosure outweighs the harm to such protected interests, the information must be disclosed under the RTI Act. There is no requirement for the existence of any public interest to be established when seeking or giving informa-tion. However, if an exemption applies, then it must be considered whether the public interest in disclosure outweighs the harm to the protected interests.

According to P. Ramanatha Aiyar’s, The Law Lexicon (2nd edition; Reprint 2007) at page 1557, ‘public interest’ ‘means those interests which concern the public at large’. Banks and financial institutions in India heavily finance various industries on a routinely basis. However, it is a fact that large sums of such amounts are sometimes not recovered. In some cases, loans availed of are not repaid despite the fact that the industrialist(s) may actually be in a financial position to pay. Where financial assistance is given to industries by banks, in the absence of financial liquidity, it would result in a blockade of large funds creating circumstances that would retard socio-economic growth of the nation.

At this stage the Commission would like to quote Thomas J. of the High Court of New Zealand 1995, ‘The primary foundation for insisting upon open-ness in government rests upon the sovereignty of the people. Under a democracy, parliament is ‘supreme’, in the sense that term is used in the phrase ‘parliamentary supremacy’, but the people remain sovereign. They enjoy the ultimate power which their sovereignty confers. But the people cannot undertake the machinery of government. That task is delegated to their elected representatives……the government can be perceived as the agent or fiduciary of the people, performing the task and exercising the powers of government which have been devolved to it in trust for the people.

I wish the Government and its instrumentalities would remember that all information held by them is owned by citizens, who are sovereign. Further, it is often seen that banks and financial institutions continue to provide loans to industrialists despite their default in repayment of an earlier loan. The Supreme Court of India in U.P. Financial Corporation v. Gem Cap India Pvt. Ltd., AIR 1993 SC 1435 has noted that “Promoting industrialisation at the cost of public funds does not serve the public interest; it merely amounts to transferring public money to private account”. Such practices have led citizens to believe that defaulters can get away and play fraud on public funds. There is no doubt that information regarding top industrialists who have defaulted in repayment of loans must be brought to the citizens’ knowledge; there is certainly a larger public interest that would be served on disclosure of the same. In fact, information about industrialists who are loan defaulters of the country may put pressure on such persons to pay their dues. This would have the impact of alerting citizens about those who are defaulting in payments and could also have some impact in shaming them. RBI had by its Circular DBOD No. BC/CIS/47/20.16.002/94, dated 23rd April 1994 directed all banks to send a report on their defaulters, which it would share with all banks and financial institutions, with the following objectives:

    1. To alert banks and financial institutions (FIs) and to put them on guard against borrowers who have defaulted in their dues to lending institutions.

    2. To make public the names of the borrowers who have defaulted and against whom suits have been filed by banks/FIs.

Many Revenue Departments publish lists of de-faulters and All India Bank Employees Association has also published list of bank defaulters. It would be relevant to rely on the observations of the Supreme Court of India in its landmark decision in Mardia Chemicals Ltd. v. Union of India, (decided on 8-4-2004). The Supreme Court of India was considering the validity of the SARFAESI Act and recovery of ‘non-performing assets’ by banks and financial institutions in India. While discussing whether a private contract between the borrower and the financing institution/bank can be interfered with, the Court observed:

“…. it may be observed that though the transaction may have a character of a private contract yet the question of great importance behind such transactions as a whole having far-reaching effect on the economy of the country cannot be ignored, purely restricting it to individual transactions more particularly when financing is through banks and financial institutions utilising the money of the people in general, namely, the depositors in the banks and public money at the disposal of the financial institutions. Therefore, wherever public interest to such a large extent is involved and it may become necessary to achieve an object which serves the public purposes, individual rights may have to give way. Public interest has always been considered to be above the private interest. Interest of an individual may, to some extent, be affected but it cannot have the potential of taking over the public interest having an impact in the socio-economic drive of the country.” (Emphasis added)

There are times when experts make mistakes, other times when corruption influences decisions. It is dangerous to put complete faith in the judgment of a few wise people to alert everyone. Democracy requires reducing inequality of opportunity. Asymmetry of information deprives the citizens of an opportunity to take proper decisions. The Commission is aware that information on defaulters is being shared by Reserve Bank with an organisation called CIBIL. In such a situation, it is difficult to understand the reluctance to share this information with citizens using RTI. RBI’s Circular of 1994, — mentioned above, — infact appears to promise to share this information suo moto with the public.

In view of the arguments given above, the Commission is of the considered view that the details of defaulters of public sector banks should be revealed since it would be in larger public interest. Revealing these would serve the object of reining in such defaulters, warning citizens about those who they should stay away from in terms of investments and perhaps shaming such persons/entities. This could lead to safeguarding the economic and moral interests of the nation. The Commission is convinced that the benefits accruing to the economic and moral fibre of the country, far outweigh any damage to the fiduciary relationship of bankers and their customers if the details of the top defaulters are disclosed.

Hence, in view of section 8(2) of the RTI Act, the Commission rules that information on query 2(b) must be provided to the appellant, since there is a larger public interest in disclosure.


The appeal is allowed.
“The PIO shall provide the complete information as per records on queries 2(b) and 2(c) to the appellant before 10th December 2011.

The Commission also directs the Governor, RBI to display this information on its website, in fulfil-ment of its obligations u/s.4(1)(b)(xvii) of the RTI Act.

This direction is being given under the Commission’s powers u/s.19(8)(a)(iii). This should be done before 31st December, 2011 and updated each year”.

[Mr. P. P. Kapoor v. PIO & Chief General Manager, Reserve Bank of India, Mumbai, [Decision No. CIC/SM/A/2011/001376/SG/15684, Appeal No. CIC/ SM/A/2011/001376/SG]

[Note: Full decision is posted on website of BCAS & PCGT]

As reported in The Times of India on 10-12 -2011, this judgment has been stayed by the Delhi High Court.
    
The Delhi High Court on 9-12-2011 stayed the direction of the Central Information Commission (CIC) asking the Reserve Bank of India to provide details of industrialists who have defaulted in re-payment of loan taken from nationalised banks.

A Bench of Justice Vipin Sanghi, in its interim ex parte order, asked the information seeker to respond to petition filed by RBI challenging the CIC order.

The Court listed the next hearing on 27th February, 2012, on RBI’s petition which said the CIC’s directives were in violation of the Right to Information Act.

Counsel T. R. Andhiyaarjuna, appearing for the RBI, contended that the CIC’s order would have a far-reaching impact as this kind of information is confidential and the Information Commissioner has dealt with the matter in a wrong way, without considering all the relevant provisions under the RBI Act.

He also said the order of the CIC was beyond its jurisdiction under the transparency law, as RBI is exempted from providing such info u/s.8(1)(a).

  •     Sections 18 and 19 of the RTI Act:

On 12th December, 2011, the Supreme Court of India has delivered judgment, very powerful and detailed, running into 30 pages dealing with the provisions of sections 18 and 19 of the RTI Act.

As decision reported is of many pages, the same is posted on BCAS and PCGT websites. Those interested may view it there. Only one para of it is reproduced hereunder:

“We are of the view that sections 18 and 19 of the Act serve two different purposes and lay down two different procedures and they provide two different remedies. One cannot be a substitute for the other.”

[Chief Information Comm. and Another v. State of Manipur and Another under civil Appeal Nos. 10787-10788 of 2011 (arising out of S.L.P. (c) Nos. 32768-32769/2010)]

Note: Please see part B for DNA’s report on above decision.

Maintenance — Dependents unmarried daughter — Hindu Adoptions and Maintenance Act, 1956 sections 20(3) and 21.

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[ Vijay Kumar Jagdishrai Chawla v. Reeta Vijay Kumar Chawla, 2011 Vol. 113(5) Bom. L.R. 3098]

The appellant — husband and respondent — wife got married as per Hindu Vedic rites. Out of the said wedlock daughter Shraddha and son Siddhesh were born. The parties, however, started staying separately due to their differences. The appellant, therefore, filed petition u/s.9 of the Hindu Marriage Act for decree of restitution of conjugal rights. The respondent on the other hand filed petition seeking maintenance for herself and her daughter and other consequential reliefs. The Family Court had found as of fact that daughter Shraddha who was staying with the respondent was pursuing Pilot Training Programme. For that, she had obtained loan of substantial amount to pay fees. The respondent-wife was not in a position to take the burden of the said education expenditure of Shraddha, nor was she in a position to pay the loan instalments. The respondent was being helped by her mother and brother financially. The Family Court found that on the other hand the appellant-husband was well placed in life. His income was substantial. He was engaged in business of restaurant/dhaba. The Family Court held that the husband shall pay maintenance to the wife at the rate of Rs.40,000 per month including accommodation charges payable from the date of this order and shall repay the loan amount of the daughter. The appellant had challenged the direction issued by the Family Court.

The moot question arose whether the wife can seek relief of maintenance for and on behalf of her major daughter/son. The Court observed that the petition was filed by the respondent-wife before the Family Court was one u/s.18 r.w.s. 20 of The Hindu Adoptions and Maintenance Act, 1956. Section 18 governs the scheme for providing maintenance to the wife. Section 20, on the other hand, deals with the regime of providing maintenance of children and aged parents.

In the present case, it is not in dispute that daughter Shraddha is residing with her mother. She is admittedly unmarried. Her mother does not own income or other property except the income by way of meager salary earned by her. She is thus not in a position to take the burden of education expenditure of her daughter Shraddha, which is quite substantial for undergoing the professional course. The Court observed that under Clause (v) of section 21 of the Act the term ‘Dependants’ encompasses unmarried daughter as Dependant. Therefore, there can be no doubt that the unmarried daughter was entitled to receive maintenance amount from her father or mother, as the case may be, so long as she is unable to maintain herself out of her own earnings or other property. Admittedly, Shraddha has no earning of her own and is pursuing her further education, as the income of the respondent-wife from her salary is very meager. For that reason, Shraddha would be entitled to maintenance amount and her education expenses from her father (appellant). Rather the father would be obliged to pay the amount towards maintenance of her daughter and for education expenditure, in law the mother is competent to pursue relief of maintenance for the daughters even if they have become major, if the said daughters were staying with her and she was taking responsibility of their maintenance and education.

The appellant would, therefore, be liable to repay the loan amount obtained by daughter Shraddha for pursuing her Pilot Training Programme forthwith.

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Doctrine of Spes Successionis — Muslim Law — Relinquishment of future share in property — Transfer of Property Act, 1882, section 6.

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[ Shehammal v. Hasan Khani Rawther & Ors., AIR 2011 SC 3609]

One Mr. Meeralava Rawther died in 1986, leaving behind him surviving three sons and three daughters, as his legal heirs. At the time of his death he possessed 1.70 acres of land which he had acquired on the basis of a partition effected in the family. Meeralava Rawther and his family members, being Mohammedans, they are entitled to succeed to the estate of the deceased in specific shares as tenants in common. Since Meeralava Rawther had three sons and three daughters, the sons were entitled to a 2/9th share in the estate of the deceased, while the daughters were each entitled to a 1/9th share thereof.

It is the specific case of the parties that Meeralava Rawther helped all his children to settle down in life. The youngest son, Hassan Khani Rawther, the respondent No. 1, was staying with him even after his marriage, while all the other children moved out from the family house. The case made out by the respondent No. 1 is that when each of his children left the family house, Meeralava Rawther used to get them to execute Deeds of Relinquishment, whereby, on the receipt of some consideration, each of them relinquished their respective claim to the properties belonging to Meeralava Rawther, except the respondent No. 1, Hassan Khani Rawther. The respondent No. 1, Hassan Khani Rawther filed a suit for seeking declaration of title, possession and injunction in respect of the said 1.70 acres of land, basing his claim on an oral gift alleged to have been made in his favour by Meeralava Rawther in 1982.

The issue arose as to can a Mohammedan by means of a family settlement relinquish his right of spes successionis when he had still not acquired a right in the property?

The Court observed that Chapter VI of Mulla’s ‘Principles of Mahomedan Law’ deals with the general rules of inheritance under Mohammedan Law. The Mohammedan Law enjoins in clear and unequivocal terms that a chance of a Mohammedan heir-apparent succeeding to an estate cannot be the subject of a valid transfer or release. Section 6(a) of the Transfer of Property Act was enacted in deference to the customary law and law of inheritance prevailing among Mohammedans.

As opposed to the above are the general principles of estoppel as contained in section 115 of the Evidence Act and the doctrine of relinquishment in respect of a future share in property. Both the said principles contemplated a situation where an expectant heir conducts himself and/ or performs certain acts which makes the two aforesaid principles applicable in spite of the clear concept of relinquishment as far as Mohammedan Law is concerned.

The Court further observed that there cannot be a transfer of spes successionis, but the exceptions are pointed out by this Court in Gulam Abbas v. Haji Kayyum Ali & Ors., AIR 1973 SC 554, the same can be avoided either by the execution of a family settlement or by accepting consideration for a future share. It could then operate as estoppel against the expectant heir to claim any share in the estate of the deceased on account of the doctrine of spes successionis. While dealing with the various decisions on the subject, reference was made to the decision of the Allahabad High Court in the case of Latafat Hussain v. Hidayat Hussain, (AIR 1936 All 573), where the question of arrangement between the husband and wife in the nature of a family settlement, which was binding on the parties, was held to be correct in view of the fact that a presumption would have to be drawn that if such family arrangement had not been made, the husband could not have executed a deed of Wakf if the wife had not relinquished her claim to inheritance. Thus, the general principle that a Mohammedan cannot by Will dispose of more than a third of his estate after payment of funeral expenses and debts is capable of being avoided by the consent of all the heirs.

Having accepted the consideration for having relinquished a future claim or share in the estate of the deceased, it would be against public policy if such a claimant is allowed the benefit of the doctrine of spes successionis. The five deeds of relinquishment executed by the five sons and daughters of Meeralava Rawther constitute individual agreements entered into between Meeralava Rawther and the expectant heirs. However, the doctrine of estoppel is attracted so as to prevent a person from receiving an advantage for giving up of his/her rights and yet claiming the same right subsequently. Being opposed to public policy, the heir expectant would be estopped under the general law from claiming a share in the property of the deceased.

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Guarantor’s Liability

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Introduction

How often have we come
across requests from close friends and relatives to stand as a guarantor
for a loan proposed to be taken by them? The loans could be housing
loans or for business. Further, one is also conversant with promoters of
companies/partners of firms standing as guarantors for loans obtained
by their entities. This is even true in case of large listed companies
where the promoters, managing directors, etc., are required to furnish
promoter guarantee. If the going is good and the original debtor meets
his dues, then all is well that ends well. However, what happens if the
original debtor cannot/does not meet his dues and the creditor/bank
invokes the guarantee furnished by the guarantor? Does the creditor have
to first approach the primary borrower or can he directly approach the
guarantor who may be in a better financial position than the borrower?
Let us look at some of the issues arising in this important aspect of
trade and commerce.

Meaning of Guarantee

Section
126 of the Indian Contract Act, 1872 defines a ‘contract of guarantee’
as a contract to perform the promise or discharge the liability of a
third person in the case of the third person’s default. Performance
guarantees/bank guarantees are also instances of contracts of guarantee.
For instance, Mr. A agrees to pay the housing loan amount borrowed by
Mr. C from a bank if Mr. C cannot/does not pay the loan. This is a
contract of guarantee.

A contract of guarantee is not a contract
in respect of a primary transaction but it is an independent
transaction containing independent and reciprocal obligations —
Industrial Finance Corp. v. Cannanore Spg. and Wvg. Mills, (2002) 5 SCC
54.

The person who gives the guarantee is called a surety or a
guarantor, the person to whom the guarantee is given is called the
creditor and the third person on whose behalf the guarantee is given is
called the principal debtor. Thus, the essentials of a guarantee are as
follows:

(a) It is a contract and so all the elements of a valid
contract are a must. Without a contract this section has no
application. Since a contract is a must, it goes without saying that all
the prerequisites of a contract also follow. Thus, if the contract has
been obtained by fraud, misrepresentation, coercion, etc., then it is
void ab initio and the section would also fail — Ariff v. Jadunath,
(1931) AIR PC 79. The contract may be oral or written.

(b) There
must be a principal debtor-creditor relationship. Without this there
can be no contract of guarantee. The surety’s obligations arise only
when the principal debtor defaults and not otherwise.

(c) It is a tri-partite arrangement, involving the surety, the principal debtor and the creditor.

(d) There must be a consideration for the surety. If there is no consideration at all, then the surety agreement is void.

However,
anything done or any promise made for the benefit of the principal
debtor is sufficient consideration to the surety for giving the
guarantee. A contract of guarantee is a complete contract by itself and
separate from the underlying contract. Enforcement of an on-demand bank
guarantee in accordance with the terms of the bank guarantee would not
be the subject-matter of judicial intervention. The only reason why
Courts would interfere if the invocation is not as per the terms of the
guarantee or it has been obtained by fraud — National Highways Authority
of India v. Ganga Enterprises, (2003) 7 SCC 410.

Nature of liability

The
liability of the surety is co-extensive with that of the principal
debtor. However, the contract may provide otherwise. Thus, the guarantor
has to pay all debts, interest, penal charges, etc., payable by the
principal debtor. He is liable for whatever the debtor is liable. Where
the liability arises only on the happening of some event, then the
guarantee cannot be invoked till such contingency has happened. Even if
winding-up proceedings have been filed against the principal debtor, the
surety would remain liable to pay to the creditor. A discharge of the
principal debtor by operation of law does not absolve the surety of his
liability — Maharashtra State Electricity Board v. OL, (1982) 3 SCC 358.

Continuing Guarantee

A guarantee which extends
to a series of transactions is a continuing guarantee. Whether or not a
contract is a continuing guarantee is to be ascertained from the
language of the transaction. For instance, Mr. A guarantees payment of
all dues by Mr. X to Mr. C in respect of goods supplied by Mr. C. This
is an example of continuing guarantee and does not come to an end with
the clearance of the first payment. A continuing guarantee can be
revoked at any time by giving notice to the creditor. However, the
revocation operates only in respect of future transactions.
Alternatively, the death of a surety revokes all future transactions
under a continuing guarantee.

Alterations

Any
variation made in the contract of guarantee without the guarantor’s
consent by the principal debtor and the creditor, discharges the
guarantor from all transactions after the variation. For instance, Mr. C
agrees to lend money on 1st June to Mr. B, repayment of the same
guaranteed by Mr. A. Mr. C instead lends on 1st April. The surety is
discharged from his obligations since the creditor may now demand a
repayment earlier than what was originally agreed upon. However, if
there is an unsubstantial alteration which is to the surety’s benefit,
then the surety is not discharged from his liability. However, if the
alteration is to the disadvantage of the surety, then the surety can
claim a discharge.

Discharge

The guarantor is
discharged by any contract between the creditor and the principal debtor
by which the debtor is released of by any act of the creditor which
results in the discharge of the debtor. For instance, A guarantees the
repayment of the loan taken by X Ltd from C Ltd provided C Ltd supplies
certain goods to X Ltd. C Ltd does not supply the goods as agreed. A is
discharged from his guarantee. Similarly, a contract between the
creditor and the principal debtor under which the creditor gives a
concession or extends the time for repayment to the principal debtor,
releases the guarantor from his obligations.

If the creditor
does anything which affects the rights of the surety or omits to do
anything which we was required to do to the surety, then the guarantee
contract comes to an end. Thus, the creditor cannot gain out of any
negligence on his own accord.

However, it has been held that the
discharge of the principal debtor by virtue of a Statute/Notification
does not discharge the guarantor — SBI v. Saksaria Sugar Mills, (1986) 2
SCC 145.

Guarantor steps into shoes of creditor

On
discharge of the liability of the principal debtor, the guarantor steps
into the shoes of the creditor, i.e., he becomes entitled to all
actions and rights against the principal debtor which the creditor had.
He also becomes entitled to the benefit of all security which the
creditor had against the debtor, whether or not the surety is aware of
the security. The term ‘security’ includes all rights which the creditor
had against the property of the principal debtor on the date of the
contract — State of MP v. Kaluram, AIR 1967 SC 1105.

In case the creditor loses or parts with security without consent of the security, then the surety is discharged to the extent of the value of the security. In one case, the debtor gave a guarantee and a pledge of his goods as security for loan to a bank. The surety was aware of the pledge. However, the bank lost the goods due to its own fault. Held, that the surety was discharged from his obligations — State Bank v. Chitranjan Raja, 51 Comp. Cases 618 (SC).

Must creditor first proceed against debtor?

The law in this respect is very clear. The creditor is free to directly proceed against the guarantor instead of first approaching the principal debtor and then failing him, the guarantor/surety.

In Bank of Bihar Ltd. v. Damodar Prasad, (1969) 1 SCR 620, the Supreme Court held that it is the duty of the surety to pay the amount. On such payment he will be subrogated to the rights of the creditor under the Indian Contract Act, and he may then recover the amount from the principal debtor. The very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety. In that case the creditor was a bank. It was held that a guarantee is a collateral security usually taken by a banker. The security will become useless if his rights against the surety can be so easily cut down.

In State Bank of India v. M/s. Indexport, (1992) 3 SCC 159, it was held that the decree-holder bank can execute the decree against the guarantor without proceeding against the principal borrower and then proceeded to observe:

“The execution of the money decree is not made dependent on first applying for execution of the mortgage decree. The choice is left entirely with the decree-holder. The question arises whether a decree which is framed as a composite decree, as a matter of law, must be executed against the mortgage property first or can a money decree, which covers whole or part of decretal amount covering mortgage decree can be execute earlier. There is nothing in law which provides such a composite decree to be first executed only against the principal debtor.”

In Industrial Investment Bank of India
Limited v. Biswanath Jhunjhunwala, (2009) 9 SCC 478, it was held that the liability of the guarantor and principal debtor is co-extensive and not in alternative and the creditor/decree-holder has the right to proceed against either for recovery of dues or realisation of the decretal amount.

SARFAESI Act vis-à-vis Surety

A related question which arises is what is the position of the guarantor under the SARFAESI Act in case he gives a security for a loan borrowed by the principal debtor from a bank/financial institution. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘the SARFAESI Act’) ensures that dues of secured creditors including banks, financial institutions are recovered from the defaulting borrowers without any obstruction. Secured creditors have been empowered to take steps for recovery of their dues without intervention of the Courts or Tribunals by directly taking over the properties of the borrowers.

In the case of Union Bank of India v. Satyawati Tondon, (2010) 8 SCC 110, the Supreme Court had an occasion to consider the position of the guarantor under the SARFAESI Act. In this case, the guarantor mortgaged her property as security for the loan given by the bank to the principal debtor. She also executed an agreement of guarantee for the principal and interest amount. The loan account became an NPA and the bank directly approached the guarantor for the amounts due. On her failure to repay, the bank invoked

the provisions of the SARFAESI Act against her and took possession of her mortgaged property. The Supreme Court held that nothing prevents the bank from directly approaching the guarantor without first approaching the debtor. It further held that the action taken by the bank for recovery of its dues by issuing notices under the SARFAESI Act cannot be faulted on any legally permissible ground.

It further held that if the guarantor had any tangible grievance against the recovery proceedings under the

SARFAESI Act, then she could have availed remedy by filing an application u/s.17(1) of the Act before the Debt Recovery Tribunal. The expression ‘any person’ used in the Act is of wide import. It takes within its fold, not

only the borrower but also guarantor or any other person who may be affected by the action taken under the Act. Both, the DRT and the Appellate Tribunal are empowered to pass interim orders under the Act and are required to decide the matters within a fixed time schedule. It is thus evident that the remedies available to an aggrieved person under the SARFAESI Act are both expeditious and effective.

Epilogue

The guarantor’s liability is like the proverbial ‘Sword of Damocles’ which is hanging by a very slender thread and can come down at any time. One may even rephrase the legal maxim of ‘Caveat Emptor’ to say ‘Guarantor be aware of what you guarantee’. Thus, it is very important that before giving any promoter/ personal guarantee, a person is well aware of the risks and consequences of the same.

Succession — Right of daughter-in-law — Devolution of interest — Notional Partition — Hindu Succession Act, 1956, section 6.

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The grievance of the appellant (Deft. No. 7) was that she being one of the daughters of the propositor should have been granted a decree for 1/3rd share in all the suit schedule properties, more particularly when it had been established on record that the suit schedule properties are the ancestral properties of the joint family consisting of plaintiffs and defendants of which her husband was a member. The Trial Court decided the issue in favour; however, due to some mistake the same is not reflected in the operative portion of the decree. Though a rectification application u/s.152 of CPC could be applied, however, the defendant No. 7 preferred the appeal.

The Court observed that the 7th defendant preferred the appeal with the ambitious intention of augmenting her share further. While 1/3rd share in terms of the judgment was the correct share to which the 7th defendant was entitled to, the further claim for augmenting her share by claiming a share in a share allotted to her father-in-law making a claim for 1/2 share is only an ambitious claim not tenable in law as the daughter-in-law in the family can claim only through her husband and not as a direct heir to her father-in-law. The appellant cannot get any share from out of the properties allotted notionally to the share of a father-in-law who was no more.

Even otherwise, in Hindu law the shares of joint family members are determined per stripes vis-àvis their position in the family and not by what they would have got with reference to a notional partition that has to be effected at that point of time when a member of the family who is no more as of now. This is not the legal position either by applying the customary law or by the Hindu Succession Act. Therefore, the claim of the appellant for enhancing her 1/3rd share to ½ share was not tenable and the appeal was to be disposed by affirming 1/3rd share granted by the Trial Court.

Insofar as the sharing ratio particularly vis-à-vis the 4th plaintiff was concerned, a daughter in the family, who was married and the partition taking place subsequent to her marriage.

The 1/3rd share allotted to the 4th plaintiff by the learned Trial Judge becomes validated by the strides taken by the legislation in amending section 6 of the Hindu Succession Act, 1956 by Act No. 39 of 2005. The share claimed by the appellant in the dwelling units on the premise that a married daughter cannot get a share in the dwelling house of the family also does not sustain in the wake of the legislative development, which would apply while disposing of the appeal.

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Recovery — Hire-purchase agreement — Taking back the possession of vehicle by use of force is against provision of law and RBI Guidelines — Consumer Protection Act, section 21.

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[Citi Corpn. Maruti Finance Ltd. v. S. Vijayalaxmi, AIR 2012 Supreme Court 509]

On 4th April, 2000, at the initiative of the respondent, a hire-purchase agreement was entered into between the appellant and the respondent, to enable the respondent to avail of the benefit of hire-purchase in respect of a Maruti Omni Car. Clause 2.1 of the hire-purchase agreement provided for payment of the hire charges in the manner stipulated in the agreement and it also indicated that timely payment of the hire charges was the essence of the agreement. On the failure of the respondent to pay the hire charges in terms of the repayment schedule, the appellant sent a legal notice to the respondent on 10th October, 2002, recalling the entire hire-purchase facility.

Pursuant to a request made by the respondent, the appellant made a one-time offer of settlement for liquidating the outstanding dues of Rs. 1,26,564.84p. for Rs.60,000, subject to payment being made by the respondent by 16th May, 2003, in cash. Thereafter, in keeping with the terms and conditions of the hire-purchase agreement, the appellant took possession of the financed vehicle and informed the concerned police station before and after taking possession of the vehicle from the residence of the respondent. It was also the appellant’s case that subsequent thereto, the date of the settlement offer was extended as a special case, but despite the same, the respondent failed to pay the amount even within the extended period. It is on account of such default that the appellant was constrained to sell the vehicle after having the same valued by approved valuers and inviting bids from interested parties.

In June, 2003, the respondent filed consumer complaint before the Consumer Disputes Redressal Forum, against the appellant alleging deficiency in service on their part. By its order dated 22nd December, 2003, the District Forum, directed the appellant to pay a sum of Rs.1,50,000, along with interest at the rate of 9% per annum, from the date of filing of the complaint till the date of payment, together with a further sum of Rs.5,000 towards harassment and cost of litigation. The National Commission, while dismissing the revision petition modified the order of the State Commission. The Commission directed the appellant to pay a sum of Rs.10,000 to the complainant/respondent by way of cost.

On appeal to the Supreme Court, the Court observed that the lower forum had held that the vehicle had been illegally and/or wrongfully recovered by use of force from the loanees. The Court observed that recovery process should be effected in accordance with due process of law and not with use of force. Although till such time as ownership is not transferred to purchaser hirer normally continues to be the owner of goods, but that does not entitle him on strength of the agreement to take back possession of vehicle by use of force. Such acts are in violation of RBI guidelines. Hence, recovery by financial corporation was against process of law and RBI guidelines and hence order of Consumer Forum directing financial corporation to compensate the purchaser was proper.

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Month — Interpretation of term ‘Month’ — Number of days in that month is not criterion and month alone is criterion — General Clauses Act — Section 3(35).

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An application was filed by the appellant to declare respondents Nos. 1 and 2 as insolvents which was allowed by the lower Court. The appeal against the said order was allowed by the Additional District Judge on the legal aspect that the application filed by the appellant was barred by time without going into other contentions. Before the High Court the appellant contended that the order of the lower Court holding that the application barred by limitation was not correct. Admittedly, as per the provisions of section 9 of the Provincial Insolvency Act an application to declare a person as insolvent shall be filed within a period of three months from the date of act of insolvency. The act of insolvency, in this case was on 8-6-2001. The application was filed on 7-9-2001. The lower Appellate Court has considered that the period of limitation as 90 days and consequently, held that the application had been filed after a period of 90 days therefore barred by time.

The Court observed that there was nothing in the provisions u/s.9 of the Provincial Insolvency Act that the period of limitation is 90 days. As per section 3 s.s 35 of the General Clauses Act, ‘month’ shall mean a month reckoned according to the British calendar. Therefore, it is not 90 days that has to be taken into consideration. Evidently, the months of July and August have got 31 days and consequently, the number of days in that month is not the criterion and the month alone is the criterion. In this connection, reliance was placed on a decision reported in in re V. S. Metha and others, AIR 1970 AP 234, wherein it was held by the Division Bench of the High Court that the expression ‘month’ in the statute does not necessarily mean 30 days, but goes according to the Gregorian calendar, unless the context otherwise requires. Therefore, when the period of three months was mentioned u/s.106 of the Factories Act in that case, the Court held that it does not mean 90 days and it means three calendar months.

Accordingly the appeal was allowed and matter was remanded to consider the matter on merits.

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Using the Internet for mass collaboration

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About this article:

This article is based on a video of Luis von Ahn aired recently on a popular site i.e., www.ted.com. The video itself was recorded sometime around April 2011.

Every once in a while you come across something, an idea or a vision, that knocks you down completely. The thing that strikes you the most, is the simplicity. This article is about one such idea and how few individuals have used their minds to harness energies of millions and millions of people to help make a difference.

The Internet, as a resource, is viewed differently by different individuals. For some it is a source of information and knowledge, for others it is a means of earning a livelihood, and then there are those who are able to use their limitless imagination and ingenuity to effortlessly harness the power and labour of millions and millions of individuals, to achieve the unbelievable or the next to impossible.

One honest confession I need to make is that, while I had heard about mass collaboration and had seen its practical application (one of which is Wikipedia), but, when I first saw this video, I was completely awestruck and blown away.

Here are a few statistics to tell you why:
  • Currently, more than 350,000 websites are using these ideas ?
  • Time spent per day is equivalent to 500,000 man-hours ?
  • The number of words digitised by these sites exceeds 100 million a day — that’s the equivalent of effort required to digitising (approx) 2.5 million books a year ?
  • The effort put in, is all done one word at a time/10 seconds per person by approximately 500 million people.
Mind you ! ! ! this is just a sample of what limitless imagination and ingenuity can achieve.
So what is this mind boggling, out of the box idea, that I am raving about? Well . . . . . . . all I can say are three words CAPTCHA, RECAPTCHA & DUOLINGO.
CAPTCHA:

Captcha = Completely Automated Public Turing test to tell Computers and Humans Apart
Whats that . . . . . you said ? ? ? Is a very common response, so let me translate that into non-geek language.
Let say you are trying to register or log into sites like Google, Facebook, Twitter (and several others) and you see some oddly distorted letters/words (see picture below).
These seemingly innocuous letters (or text pieces) are a common site today. While most recognise these as a security feature, lesser number of web surfers know that these are tools for identifying whether the person accessing the site is a human being or a computer (bot) and hence the name – Completely Automated Public Turing test to tell Computers and Humans Apart.
For those of you who are unaware, unlike humans, a ‘bot’ cannot read distorted words. When you type the (correct) words in the box, it proves that you are human and the website allows you to register/access content/purchase goods/make reservations, etc.
Over a period of time Captcha has become (almost) a standard security feature. In the video von Ahn revealed that (by April 2011) there were more than 350,000 websites using Captcha and some approximately 500 million users every day were spending 10 seconds each while accessing various e-commerce sites.
The first reaction to the above is ‘WOW’ — 350,000 websites, 500 million users. von Ahn too felt a sense of pride that his invention was being used by so many people, but then he also thought that each of these 500 million users were spending 10 seconds each during the verification process, this translated to 500,000 man-hours (approx). Then came the thought, “Is there something I can do to utilise this effort to do something — something huge but simple — something that machines cannot do (as yet) as efficiently as humans can?” Needless to say that stopping the use of Captcha, given its benefits, was not an option. This thought was the seed to another research, resulting in what is commonly known as RECAPTCHA.

RECAPTCHA: von Ahn and his associate/intern came up with this idea on the basis of the findings of their research. The idea was to use the efforts of the 500,000 man-hours to digitise books. There are several projects doing this already, including one being pursued by Google. It is common knowledge amongst most people who are involved in the endeavour to digitise books, that computers and more specifically, optical character recognition (OCR) technology is applied for digitising books. And that typically, this involves one person using a scanner device to scan one page at a time and then wait for the OCR software to convert the scanned image in to a document. What is not very commonly known (at least with the public at large) is that the technology is not 100% accurate. Machines and for that matter computers/ software, at times, are not able to ‘recognise’ many of the characters that are scanned by them. This is more so when the book being scanned is older than 10 years. The difficulty arises due to a variety of factors such as the typeface used, yellowing of the pages, creases in the pages, wear and tear/ condition of the book. In all such cases, human effort is required (computers cannot do it as easily as humans). Thus, RECAPTCHA was born. Once again the idea was a simple one, the visitor was presented with two words (instead of one in Captcha) one which was known to the software and the other which was required to be ‘recognised’. When both words were recognised, the visitor was granted access to the site he was visiting. All the time, in the background, RECAPTCHA was comparing this result with the response provided by another 10 users (who were given the same combination). If the result matched, then another word was digitised.

Once again the idea was a runaway success — The number of words digitised by these sites exceeds 100 million a day — that’s the equivalent of effort required to digitising (approx) 2.5 million books a year. Given the success, RECAPTCHA was acquired by Google.

von Ahn and team revisited their question and embarked on a yet another journey. This time they decided that all the parties involved in the process should have something to gain — in captcha human effort was used to verify their status as humans. While this helped the website owners, it resulted in wastage of human effort. Recaptcha used this human effort to convert books — once again website owners and book readers gained- nothing for the visitors who were assisting in the digitising process were not being compensated. This thought gave birth to DUOLINGO.

DUOLINGO:

Just like digitising books, translating content is another ‘skill’ which the machines/software do not posses (as yet). It’s one thing to merely translate words and a different thing to translate the words with context. It is the context in which the words are spoken, which makes the text readable and by that measure more comprehensible. If you don’t believe try using the translators available for converting a poem in Hindi to English and vice versa (no offence but its like watching a Chinese movie — dubbed in Tamil — the tone/pitch of the dialogue or a fight scene versus the body language — I have always found it hilarious — try it sometime). Coming back to the topic . . . von Ahn and team came up with the idea of DUOLINGO.
What von Ahn and team realised was that there was content on the web which needed to be translated. The video has cited the example of translating content on the English version of Wikipedia to Spanish version — currently the Spanish version is only 30% of the English version and the cost of converting the same — as the video suggest — from the lowest cost vendor, based on the effort of exploited labourers in a third-world country- was $ 50 million. Cost apart the other quandary was where do you find enough people who know more than one language and were willing to participate in the translation process. The solution was that there are hundreds and thousands of people who want to learn another language, they have to pay money to learn, here was an opportunity to learn and apply at the same time — without spending anything from their pockets. Now there is a win-win for almost all !

  •     Content can be translated
  •     With context, translation is easier, fun, improves the learning/experience
  •     The accuracy is far higher than that offered by software currently available and almost comparable to the accuracy of a professional translator
  •     Both parties don’t pay money but put in their ‘efforts’
  •     Both parties gain
  •     And on the hindsight lesser exploitation of labour

The result: based on current stats the translation can be done in a matter of weeks.

Now that’s what I call innovation.

Like I said earlier, I was completely blown away when I saw the video, I am sure after reading this write-up (and maybe watching the video) you will be too.

Wish you Merry Christmas and a Happy New Year.

Disclaimer:

The purpose of this article is not to promote any particular site or person or software. The sole intention is to create awareness and to bring in to limelight some thought-provoking content.

Related parties under Ind AS: Enhanced scope and disclosure requirements

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Related party relationships and transactions with such parties are an integral part of day-to-day business for many groups. Users of financial statements are likely to be interested in the existence of these relationships and in transactions, along with their potential impact, between such parties when they assess the operations, financial performance and financial position of an entity.

The accounting definition of a related party under AS-18, which is a part of the present Indian GAAP, is not as far reaching in its scope as the international practice.

As part of convergence to IFRS, the Ind AS attempts to address the above and introduces certain additional disclosure requirements to enhance the quality of financial information to the users of financial statements.

In this article we shall consider some of the key differences in the identification of related parties for financial reporting purposes between Indian GAAP and Ind AS.

Definition of related party

AS-18 defines a related party as follows — ‘Parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and/ or operating decisions’. It clarifies that AS-18 applies only to related party relationships described in the standard, which are as under:

(a) enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, the reporting enterprise (this includes holding companies, subsidiaries and fellow subsidiaries);

(b) associates and joint ventures of the reporting enterprise and the investing party or venturer in respect of which the reporting enterprise is an associate or a joint venture;

(c) individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise that gives them control or significant influence over the enterprise, and relatives of any such individual;

(d) key management personnel and relatives of such personnel; and

(e) enterprises over which any person described in (c) or (d) is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the reporting enterprise and enterprises that have a member of key management in common with the reporting enterprise.

Ind AS 24 states that a related party is a person or entity that is related to the entity that is preparing its financial statements referred to as the ‘reporting entity’.

(a) A person or a close member of that person’s family is related to a reporting entity if that person:

(i) has control or joint control over the reporting entity;

(ii) has significant influence over the reporting entity; or

(iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.

(b) An entity would be a related party if any of the following conditions apply:

(i) The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).

(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).

(iii) Both entities are joint ventures of the same third party.

(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.

(v) The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity.

(vi) The entity is controlled or jointly controlled by a person identified in (a). (vii) A person identified in (a) (i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

Related party relationships included and excluded

For the purpose of this section, we shall analyse these relationships from the perspective of Reporting Entity (RE), and reference to Parent, Associates and Joint Ventures of the reporting enterprise shall be denoted as P, A and J, respectively. Further, to highlight indirect relations within a group structure, for instance, Parent company’s investment in its Joint venture is referred to as P-J, where the ‘P’ denotes RE’s Parent Company and the ‘J’ that follows ‘P’ denotes to another Joint venture of the Parent Company.

Parent’s investment in Joint Venture (i.e., P-J) and associates (i.e., P-A)
Under the present Indian GAAP, parent’s investment in another subsidiary (i.e., P-S) is a related party, as that subsidiary is reporting entity’s fellow subsidiary. However, from the drafting of the relationships stated above, the parent’s investment in its joint venture (i.e., P-J) is not considered as related party under current Indian GAAP. Similarly, the parent’s investment in its associate (i.e., P-A) is also not considered as a related party to RE.

Under Ind AS, two entities are related if one entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member). Since the group is defined to include the parent company and each of entities under its direct and indirect control, the parent’s investment in its joint venture (i.e., P-J) is a related party to RE. Similarly, the parent’s investment in its associates (i.e., P-A) is also considered to be related party to RE.

Subsidiaries of joint ventures (i.e., J-S) and associates (i.e., A-S)

The present Indian GAAP does not specifically clarify whether a reference to the associates and joint ventures in AS-18 should be interpreted as those stand-alone entities or their entire group. As such, it is a common practice of not considering the subsidiaries of associates and joint ventures as related parties.

Under Ind AS, it is specifically stated that an associate includes subsidiaries of the associate and a joint venture includes subsidiaries of the joint venture. As such, for instance, an associate’s subsidiary (i.e., A-S) and the investor (i.e., RE) that has significant influence over the associate (A) are related to each other. Similarly, J-S is also considered to be a related party under Ind AS.

Key managerial personnel (KMP)

Under present Indian GAAP, a non-executive director of a company is not considered as a KMP by virtue of merely his being a director unless he has the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise.

Under Ind AS, KMP are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity.

Classification of investees as subsidiaries, joint ventures and associates

It may be noted that the reference to the terms subsidiaries, joint ventures and associates as stated above are required from the perspective of the Ind AS principles in assessing control, joint control and significant influence, considering the rights to participate in the financial and operating policies of the investee. As such, unlike present Indian GAAP, the percentage ownership of the investee’s capital may not be the determinative factor in assessing the relationship with the investee.

As such, the related party relationships may undergo a change not only on account of changes to the identified related party relationships in the standard, but also on account of change in classification of the investees based on the degree to which the company can influence the operations of the investee.

State-controlled enterprise/Government-related entities

The present Indian GAAP defines a state-controlled enterprise as an enterprise which is under the control of the Central Government and/or any State Government(s). Under the definition of state-controlled enterprises, those enterprises that are under joint control or under significant influence of the Central and/or State Government(s) are not considered as state-controlled enterprises. As such, the disclosure exemptions provided under AS-18 do not extend to such enterprises under joint control/ significant influence of the government.

Under Ind AS, a government-related entity is an entity that is controlled, jointly controlled or significantly influenced by a government. As such, disclosure exemptions provided under Ind AS 24 extend to enterprises under joint control/significant influence of the same government. Further, it follows that the differences stated above (such as subsidiaries of associates i.e., A-S) may additionally be considered for this purpose.

Disclosure requirements
Duties of confidentiality

Like the present Indian GAAP, the Ind AS states that the related party disclosure requirements as laid down under Ind AS 24 do not apply in circumstances where providing such disclosures would conflict with the reporting entity’s duties of confidentiality as specifically required in terms of a statute or by any regulator or similar competent authority.

However, this is a departure from the IFRS as issued by IASB (commonly referred to as a carve-out). As such, IFRS does not prescribe any such exemption from disclosure requirements prescribed under IAS 24 on account of duties of confidentiality as specifically required in terms of a statute or by any regulator or similar competent authority.

Compensation to KMP

Under the present Indian GAAP, the employee compensation provided to KMP is required to be disclosed. However, there is no specific requirement to disclose the breakup of such compensation.

Under Ind AS, the employee compensation to KMP is required to be disclosed, along with its breakup into short-term employee benefits, post-employment benefits, other long-term benefits, termination benefits and share-based payments.

Disclosure of terms and conditions of transaction

The present Indian GAAP requires disclosure of, amongst other things, name of related party, description of related party relationship and the description of the transaction.

Ind AS additionally requires disclosure of terms and conditions of the related party transactions, including whether they are secured, and the nature of the consideration to be provided in settlement; and details of any guarantees given or received.

Disclosure exemptions for government-related entities

As per AS-18, no disclosure is required in the financial statements of state-controlled enterprises as regards related party relationships with other state-controlled enterprises and transactions with such enterprises.

As per Ind AS 24, the reporting entity is exempt from the disclosure requirements in relation to related party transactions and outstanding balances, including commitments, with:

    a) a government that has control, joint control or significant influence over the reporting entity; and
    b) another entity that is a related party because the same government has control, joint control or significant influence over both the reporting entity and the other entity.

If a reporting entity applies the exemption as stated above, it shall disclose the following about the transactions and related outstanding balances:

    a) the name of the government and the nature of its relationship with the reporting entity (i.e., control, joint control or significant influence);

    b) the following information in sufficient detail to enable users of the entity’s financial statements to understand the effect of related party transactions on its financial statements:

    i) the nature and amount of each individually significant transaction; and
    ii) for other transactions that are collectively, but not individually, significant, a qualitative or quantitative indication of their extent.

Summary
One of the key GAAP differences between present Indian GAAP and Ind AS is that of indirect relationships, whereby Ind AS considers the all group entities of an entity (instead of that separate legal entity) to be related if that entity is related to the reporting entity. Accordingly, for instance, if an entity is related to a reporting entity in the capacity of an associate or joint venture, all entities controlled by such associates and joint ventures are considered as related parties under Ind AS. Similar is the case with the associates and joint ventures of the reporting entity’s parent company.

Overall, the implementation of Ind AS will require identifying the additional related party relationships covered within the scope of the standard. Further, the related party relationships need to be identified after appropriately classifying all the entities concerned as subsidiaries, associates and joint ventures, in accordance with Ind AS (that could be different from its classification under present Indian GAAP) from the perspective of the investor i.e., the reporting entity or its investee within its group or its associates/joint ventures as the case may be. It may particularly be difficult at times to assess the appropriate classification of the investees of an associate into subsidiary/ associates/joint venture, on account of associate company not reporting under Ind AS and limited access to the financial information of the associate.

While the Ind AS is not mandatory as yet, it is expected that preparers will want to evaluate their involvement with related parties under the new standard soon, as the changes in the group structure from an accounting perspective under Ind AS will have additional implications.

Revision for dividend declaration

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NHPC Ltd. (31-3-2011)
From Notes to Accounts
33. Subsequent to the approval of accounts for the year ended 31st March, 2011 by the Board of directors on 27th May, 2011, the members of the Board has recommended dividend @ Rs.0.60 per share [subject to rounding off to nearest Rupee in terms of Rule 23 of Companies (Central Government’s) General Rules & Forms, 1956] on the paid-up equity capital of the Company (as per Balance Sheet as at 31st March 2011) for the year ended as at 31st March 2011 in the meeting held on 30-6-2011. Accordingly the Company has reopened and revised its earlier finalised audited account for the year ended 31st March 2011 and a provision for dividend amounting to Rs.738.04 crore (subject to rounding off) @ 6% on the paid up equity capital amounting to Rs.12300.74 crore (divided into 1230,07,42,773 equity shares of Rs.10 each fully paid-up) and dividend distribution tax thereon, has been made.

From Auditors Report

1. We have audited the attached revised Balance Sheet of M/s. NHPC Limited as at March 31, 2011 and the revised Profit & Loss account, revised Statement of expenditure during construction and revised Cash Flow Statement of the Company for the year ended on that date annexed thereto. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

2. Reference is invited to Auditors’ Report dated 27-5-2011 given by us on the Financial Statements of NHPC Limited for the financial year ended as at 31-3-2011.

3. The Company has amended its aforesaid financial statements covered by the abovereferred Auditor’s Report so as to incorporate the provision for dividend and dividend distribution tax thereon in the books, which has been recommended by the Board of NHPC Limited. Accordingly, the Balance Sheet as at 31-3-2011 and Profit & Loss Account for the period ended on even date, audited by us (covered by our above-referred Auditors Report) has been amended by the Company (refer Note No. 33 of Schedule 24).

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Revision pursuant to merger

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Tata Communications Ltd. (31-3-2011)

From Notes to Accounts

The Board of Directors of the Company at its meeting held on 31st January 2011 had approved the merger of the Company’s wholly owned subsidiary, Tata Communications Internet Services Limited (TCISL) with the Company with effect from 1st April 2010. The Company had obtained the consent of the shareholders for the merger at Extra Ordinary General Meeting held on 27th April 2011.

In accordance to the final order dated 20th August 2011 as pronounced by the Bombay High Court the financials have been revised to reflect the merger of TCISL with the Company effective 1st April 2010.

In accordance to the said Scheme, the Company has accounted for this amalgamation in the nature of merger under the pooling-of-interest method. Consequently:

(i) All the assets, debts, liabilities and obligations of TCISL have been vested in the Company with effect from 1st April 2010 and have been recorded at their respective book values.

(ii) The net asset value of TCISL as on the date of amalgamation was Rs.15.28crore as against the investment of the Company of Rs.384.47 crore. The excess of the cost of investment of Rs.369.19 crore is adjusted against the general reserve to the extent of Rs.78.24 crore, Rs.0.56 crore against capital reserve and Rs.291.51 crore against the opening profit and loss account.

(iii) Consequent to the merger there has been a reduction in the current tax expense of Rs.37.97 crore and increase in deferred tax benefit of Rs.39.65 crore.

From Auditors’ Report

(3) The financial statements for the year ended 31st March, 2011 were audited by us and our report dated 29th May, 2011 expressed an unqualified opinion on those financial statements. Consequent to order dated 20th August, 2011 of the High Court of Bombay sanctioning the merger of Tata Communications Internet Services Limited with the Company, the audited financial statements for year ended 31st March, 2011 were revised by the Company to give effect to the said merger, effective from 1st April, 2010. We have accordingly carried out audit procedures and amended the date of our audit report in respect of this subsequent event. (Refer Note B9 of Schedule 19 to the financial statements.)

(1) As required by the Companies (Auditor’s Report) Order, 2003 (CARO) issued by the Central Government in terms of section 227(4A) of the Companies Act, 1956, we enclose in the Annexure a statement on the matters specified in paragraphs 4 and 5 of the said Order.

(2) Further to our comments in paragraph 3 . . .

                   For                                          ………………… & Co. Partner  (M. No. . . . . . . .)
__________________________
        Chartered Accountants
Mumbai 29th May 2011 (30th August 2011 as to give effect the amendment discussed in paragraph 3 above).
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GAPs IN GAAP — Amortisation of Leasehold Improvements

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Over what period does a lessee depreciate leasehold improvements that it makes to a property under an operating lease that contains an option for the lessee to extend the lease?

Fact pattern
A lessee enters into an operating lease for an office property. The lease has a term of 5 years, and contains an option for the lessee to extend the lease for a further 5 years. The rentals for the period under the extension option (i.e., years 6-10) are at market rates. Upon commencement of the lease term, the lessee incurs CU100,000 constructing immoveable leasehold improvements specific to the property. The economic life of the leasehold improvements is 7 years. At commencement of the lease, the lessee expects to exercise the extension option, but is not reasonably certain it will do so.

Conclusion View 1: The useful life of the leasehold improvements is the shorter of the lease term or the assets’ economic life.

The lessee depreciates the leasehold improvements over the lease term of 5 years.

Reasons for View 1

AS-19.3 states:
“The lease term is the non-cancellable period for which the lessee has agreed to take on lease the asset together with any further periods for which the lessee has the option to continue the lease of the asset, with or without further payment, which at the inception of the lease it is reasonably certain that the lessee will exercise.”

In this fact pattern, at the inception of the lease, the lessee is not ‘reasonably certain’ that it will exercise the lease option, although renewal may be expected. For the purpose of AS-19, the lease term is thus 5 years. AS-6.20 requires “the depreciable amount of a depreciable asset shall be allocated on a systematic basis to each accounting period during the useful life of the asset”.

AS-6.3.3 defines ‘useful life’ as either: “
(a) The period over which a depreciable asset is expected to be used by the enterprise; or
(b) The number of production or similar units expected to be obtained from the use of the asset by the enterprise.”

In addition, AS-6.7 states that:

“The useful life of a depreciable asset is shorter than its physical life and is:

(i) Predetermined by legal or contractual limits, such as the expiry dates of related leases.
(ii) ……………. ” In the fact pattern, one of the factors in determining the useful life of the leasehold improvements is the expiry date of the related lease. The expected utility of the leasehold improvements should be consistent with the reasonably certain lease term as defined in AS-19. Therefore, the useful life of the leasehold improvements is 5 years.

View 2: The expected economic life of the leasehold improvements is used as the useful life.

In the fact pattern, the lessee depreciates the leasehold improvements over 7 years, since it expects to extend the lease to 10 years and utilise the leasehold improvements for 7 years.

Reasons for view 2

AS-6.20 requires “the depreciable amount of an asset shall be allocated on a systematic basis over its useful life”.

AS-6.3.3 defines ‘useful life’ as either:

(a) The period over which a depreciable asset is expected to be used by the enterprise; or

In addition, AS-6.7 states that:

“The useful life of a depreciable asset is shorter than its physical life and is:

(i) Predetermined by legal or contractual limits, such as the expiry dates of related leases.”

The useful life of the leasehold improvements is based on the ‘expected utility’ (AS-6.3.3). To determine the expected utility, the lessee would consider ‘all the factors’ in AS-6.7. While 6.7 should be considered, the factor regarding ‘expected usage of the asset’ in AS-6.3.3 is equally relevant in determining the useful life. The condition contained in AS-6.7 reflects the necessity to consider the existence of legal or other externally imposed limitations on an asset’s useful life. However, in the fact pattern, the ability to extend the lease term is within the control of the lessee and is at market rates so there are no significant costs or impediments to renewal.

The lease term as defined in AS-19 does not include the extension period because the lessee is not ‘reasonably certain’ of extending the lease. However, a different threshold is used in AS-6 for the determination of the useful life, which is the period over which the lessee expects to use the leasehold improvements. The term ‘expected usage of the asset’ for the determination of useful life of an asset indicates a lower threshold than the ‘reasonably certain’ of extending the lease threshold for including the extension period in the lease term for accounting purposes. As a result, although the accounting lease term is 5 years, the leasehold improvements is depreciated over the period over which the lessee expects to use the assets (as it expects to extend the lease to 10 years), which is 7 years.

In accordance with AS-6.23, if the assessment of useful life changes as a result of the lessee not expecting to exercise the lease renewal option, the unamortised depreciable amount should be charged over the revised remaining useful life.

The author believes that view 1 is conservative and fits into the concept of prudence enshrined in Indian GAAP framework. On the other hand view 2 is also justified on the basis of AS-6.

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FINDING FRAUDS IN FINANCIAL STATEMENTS — 10 COMANDMENTS FOR AUDITORS

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Introduction

“Auditor is a Watch Dog But Not a Blood Hound” is the famous quote well known amongst the entire professional community; but the expectations of society from the auditors may not be exactly on these lines and it expects the auditors to play a role bigger than mere accountants confirming the numbers recorded in the financial statements. The gap in the expectation and the reality gets widened primarily because of the interpretations of the responsibility of the auditors in finding frauds through their audit of the financial statements. Though the fact remains that the auditor is not an investigator or a fraud specialist, he does have certain responsibilities in responding to the fraud risks in the financial statements subjected to the audit process. This article summarises the 10 important commandments for the auditors in responding to such fraud risks while discharging his professional responsibility.

Auditors responsibility towards frauds

The auditor should conduct the engagement with a mindset that recognises the possibility that a material misstatement due to fraud could be present, regardless of any past experiences with the entity and regardless of the auditor’s belief about management’s honesty and integrity. In India there is an Auditing Standard (SA-240) which deals with the responsibilities of auditors to consider fraud and error in the audit of the financial statements. This auditing standard is generally consistent in all material respects with those set out in the International Standard on Auditing (ISA) 240 on The Auditor’s Responsibility to Consider Fraud and Error in an Audit of Financial Statements.

According to this standard, the primary responsibility for the prevention and detection of fraud and error rests with both those charged with governance and the management of an entity. It also explains that the objective of an audit of financial statements, prepared within a framework of recognised accounting policies and practices and relevant statutory requirements, if any, is to enable an auditor to express an opinion on such financial statements. An audit conducted in accordance with the auditing standards generally accepted in India is designed to provide reasonable assurance that the financial statements taken as a whole are free from material misstatements, whether caused by fraud or error. The fact that an audit is carried out may act as a deterrent, but the auditor is not and cannot be held responsible for the prevention of fraud and error. An auditor cannot obtain absolute assurance that material misstatements in the financial statements will be detected. Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements will not be detected, even though the audit is properly planned and performed in accordance with the auditing standards generally accepted in India.

The critical principle arising out of this auditing standard is that an audit does not guarantee that all material misstatements will be detected because of factors such as the use of judgment, the use of testing, the inherent limitations of internal control and the fact that much of the evidence available to the auditor is persuasive rather than conclusive in nature. For these reasons, the auditor is able to obtain only a reasonable assurance that material misstatements in the financial statements will be detected.

Challenges and audit techniques

It is not always easy to find out a well-structured fraud if perpetuated by the management of the entity. The fact remains that irrespective of the audit procedures performed, the integrity and the honesty of those charged with governance and those running the operations of the entity and their corporate culture is very important and is the corner-stone for determining the content, quality and the transparency of the financial statements. Hence, due care needs to be taken while accepting a client. The auditor who has a tremendous responsibility of forming an opinion about these financial statements needs to perform his professional duty duly considering the fraud risks.

Dr. Steven Albrecht, the famous Professor in Accountancy who has done extensive studies and research on business frauds and ethics, wrote that fraud is seldom witnessed firsthand. Instead, only fraud symptoms (or ‘red flags’) exist to alert management or the auditors about the possible existence of fraud. He has identified six categories of fraud symptoms:

  •     Accounting or document symptoms: Anything that is wrong with the accounting records or documents of the entity — either electronic or paper (e.g., a copy where there should be an original, a journal entry or G/L that does not balance, a missing invoice, etc.).
  •     Analytical symptoms: Things that are too big, too small, unusual, wrong person, wrong time, out of the ordinary, unexpected, etc. (e.g., balances or ratios changing too quickly, new vendors with unusually high transactions/balance amounts, etc.).
  •     Lifestyle symptoms: This symptom is better for misappropriation of assets than for financial statement fraud, but when people embezzle money, they rarely save what they steal. Rather, they spend the ill-gotten gains to meet whatever financial pressures they had and then they start to increase their lifestyles. Sudden increases in lifestyles are fraud symptoms.
  •     Behavioural symptoms: When people commit fraud, they feel stress. Because they have to cope with this stress, they usually change their behaviour. Sudden changes in behaviours are fraud symptoms.
  •     Internal control overrides: It takes the combination of pressure, opportunity and rationalisation for someone to commit fraud, especially first-time offenders. Overriding internal controls provides fraud opportunities and often completes the fraud triangle. Such overrides are excellent fraud symptoms.
  •     Tips and complaints: While tips and complaints are often great fraud risk factors, it is often difficult to know what motivates them. Like the other five types of symptoms, they should be seriously considered, but their presence does not mean that fraud is definitely occurring.

Auditors have to identify these symptoms and then carry out the required procedures to form an opinion about the financial statements.

Commandment No. 1: Identification of fraud risk factors

While carrying out the audits, the auditors have to keep in mind that “If you were management, how could you manipulate an account balance AND conceal it from the auditors”. If they approach the audit with this mindset, there is every possibility of identifying the fraud risks affecting the financial statements.

In considering the risk of material misstatement resulting from fraud, the auditor should consider whether fraud risk factors are present that indicate the possibility of either fraudulent financial reporting or misappropriation of assets while identifying and responding to the fraud risks. The fact that fraud is usually concealed can make it very difficult to detect. However, using the auditor’s knowledge of the business, the auditor may identify events or conditions that provide an opportunity, a motive or a means to commit fraud, or indicate that fraud may already have occurred.

The presence of fraud risk factors may indicate that the auditor will be unable to assess control risk at less than high for certain financial statement assertions. On the other hand, the auditor may be able to identify internal controls designed to mitigate those fraud risk factors that the auditor can test to support a control risk assessment below high.

Commandment No. 2: Inquiries on fraud

Many times when you ask questions formally there is a tremendous pressure on the individual to tell you the truth. Hence, as part of the audit process, auditors should have formal inquiries on fraud not with the management but also with those in charge of governance. These formal inquiries should be adequately documented and minuted as part of the audit files. While structuring such inquiries, due care needs to be taken in choosing the number of persons to be inquired, their level in the hierarchy, representation across various divisions/departments, role/responsibilities etc. Further, such inquiries could focus on the following:

  •     obtaining an understanding of:

    i) Management’s assessment of the risk that the financial statements may be materially misstated as a result of fraud; and

    ii) The accounting and internal control systems management has put in place to address such risk;

  •     to obtain knowledge of management’s understanding regarding the accounting and internal control systems in place to prevent and detect error;

  •     to determine whether management is aware of any known fraud that has affected the entity or suspected fraud that the entity is investigating; and

  •     to determine whether management has discovered any material errors.

The auditor should also have formal discussions with those in charge of governance to have an understanding of their concerns, if any, affecting the financial environment, the adequacy of accounting and internal control systems in place to prevent and detect fraud and error, the risk of fraud and error, and the competence and integrity of management.

In addition to the formal inquiries, the auditor should also have informal discussions with the entity personnel. He should always keep his eyes and ears open. Many times, such informal discussions with the entity personnel may provide valuable information to the auditor, which can be evaluated for determining the extent/nature of further inquiries. At times, discussion discloses more information than documents. As the term auditor emanates from the word ‘audire’, which means ‘to hear’, he should keep listening to people and should have more and more discussions with people. He will get to know more about the entity he is auditing when he talks to people rather than by only going through the documents.

Commandment No. 3: Brainstorming amongst the audit team members

According to SAS 99, Consideration of Fraud (US Auditing Standard), brainstorming is a required procedure and should be applied with the same degree of due care as any other audit procedure, such as inventory observation or confirmation of accounts receivable. Brainstorming amongst the audit team members facilitates the following objectives:

  •     Reinforce importance of professional skepticism;

  •     Discuss external and internal fraud risk factors;

  •     Consideration of frauds on or by the entity which occurred in the past;

  •     Exchange ideas about how fraud could occur, including through management override;

  •     Consider how management could conceal financial reporting fraud and how assets could be misappropriated; and

  •     Consider audit procedures to address fraud risks — the nature, timing and extent of audit procedures.

The importance attached to such brainstorming sessions facilitates greater awareness about the responsibility on the part of the audit team and helps in gaining a better understanding of the potential for material misstatements in the financial statements resulting from fraud or error in the specific areas of the audit assigned to them, and how the results of the audit procedures that they perform may affect other aspects of the audit.

Commandment No. 4: Journal entry testing/ review of year-end entries

As part of the audit process, the auditors could perform Journal Entry Testing to address key fraud considerations. There is also a need to examine journal entries and other adjustments for evidence of possible material misstatement due to fraud, to mitigate the risk of management override of controls. The auditors are required to include procedures in their audits to test for management override of controls and to test manual journal entries.

Material misstatements of financial statements due to fraud often involve the manipulation of the financial reporting process by (a) recording inappropriate or unauthorised journal entries throughout the year or at period end, or (b) making adjustments to amounts reported in the financial statements that are not reflected in formal journal entries, such as through consolidating adjustments, report combinations, and reclassifications. Accordingly, the auditor should design procedures to test the appropriateness of journal entries recorded in the general ledger and other adjustments (for example, entries posted directly to financial statement drafts) made in the preparation of the financial statements. More specifically, the auditor should

  •     obtain an understanding of the entity’s financial reporting process and the controls over journal entries and other adjustments;
  •     identify and select journal entries and other adjustments for testing;
  •     determine the timing of the testing; and
  •     inquire of individuals involved in the financial reporting process about inappropriate or unusual activity relating to the processing of journal entries and other adjustments.

To identify and select journal entries and other adjustments for testing, the auditor should use professional judgment in determining the nature, timing, and extent of the testing of journal entries and other adjustments. For purposes of identifying and selecting specific entries and other adjustments for testing, and determining the appropriate method of examining     the underlying support for the items selected, the auditor should consider

  •     the auditor’s assessment of the risk of material misstatement due to fraud;

  •     the effectiveness of controls that have been implemented over journal entries and other adjustments;

  •     the entity’s financial reporting process and the nature of the evidence that can be examined;
  •     the characteristics of fraudulent entries or adjustments;

  •     the nature and complexity of the accounts; and

  •     journal entries or other adjustments processed outside the normal course of business.

Inappropriate journal entries and other adjustments often have certain unique identifying characteristics. Such characteristics may include entries (a) made to unrelated, unusual, or seldom-used accounts, (b) made by individuals who typically do not make journal entries, (c) recorded at the end of the period or as post-closing entries that have little or no explanation or description, (d) made either before or during the preparation of the financial statements and do not have account numbers, or (e) containing round numbers or a consistent ending number.

Further, a detailed/specific review of the entries recorded at the end of the reporting period could also give critical inputs required for the auditors in drawing overall conclusions.

Commandment No. 5: Surprise elements in the audit

The auditor should incorporate an element of unpredictability with respect to the nature, timing, and extent of audit procedures. He should never allow the auditee to predict the exact procedures he is going to perform. Surprise verification of cash and inventory is a classic example of such surprise audit procedures. He could insist on obtaining certain new types of confirmations every year in addition to the past types of confirmations. Further, by way of introducing new audit procedures, every year, the auditor not only brings in robustness in the audit process, but also addresses the important fraud risk criteria through this process.

Many times, by following the approach of ‘Same As Last Year’ (SALY), there is a possibility of overlooking the fraud risks inherent in the control environment. The auditor should not only challenge the past practice, but also evaluate its applicability/relevance every time so as to make sure that the audit procedures do not become redundant/a formality, but always challenge the status quo and gives the required comfort to the auditor in discharging his duties.


Commandment No. 6: Audit is for the entity and not for the finance team

Invariably, the audit process is considered as an event that occurs once in a year and this has something to do with the finance department. This mindset and the approach needs to change totally and there should be awareness both on the part of the auditor and the auditee that the audit process is for the entity as a whole. This would imply that the auditor has to necessarily interact with business heads/other non-finance teams as well to have an understanding of the entity as a whole. Many times, such interactions with non-finance personnel will provide valuable insights and also throw light on the various red flags which need to be investigated further.

Further, the auditor while interacting with various personnel from the entity needs to observe closely, their behavioural pattern, their thought process, culture, etc.

Needless to insist that in all such interactions, the auditor needs to evaluate the responses by applying common sense. If he is not satisfied/clear about the explanations, he should challenge the same rather than accepting them without understanding the explanations totally. Many times, well -managed frauds are covered by way of providing confusing explanations/diverting from the core issues with some incidental/trivial matters, etc.

At times, dominating characters would like to push through some vague explanations/rosy presentations and the auditor should be watchful in dealing with such situations.

The client management and interaction skills are extremely important in the audit process and the auditor should sharpen his skills in those areas to effectively manage the audit engagements.

Commandment No. 7: Make your presence felt!

In the real sense, the process of audit is more to put a moral fear in the minds of the people to make sure that there is an oversight and if there are any issues, the same will be checked by someone else. By way of having an independent examination, the auditor brings in credibility to the financial statements and also is playing the role of providing important checks and balances to the financial reporting system.

Considering this in mind, the auditor has to make sure that his presence is felt by the system. This could be done by way of meeting up with various people, discussing with them, identifying and raising issues at the right forum, performing surprise audit procedures, etc. Interactions with the junior-most persons in the organisation could help him in getting a better understanding of ground level issues since the basic recording of transactions is done by them. Further, the auditor should talk about the importance of the audit process, consequences of false/ incorrect reporting, its repercussions, and statutory requirements, etc. so as to create awareness in the minds of the people. The moral fear created across the system will help in creating an atmosphere for preventing people from engaging in fraudulent activities.

Further, such an environment could also set the tone for having smooth/purposeful interactions and transparent discussions with the auditee.

Commandment No. 8: Sanctity to the audit processes

The auditor should never dilute the importance attached to any audit process. The audit procedures carried out in any form, such as physical verification of inventory, sending confirmation requests, investigating the differences arising on any reconciliation exercise, performing walkthroughs for the various business cycles, disposal of the issues raised by the audit team members, etc. should be given utmost sanctity and importance. The extent of importance provided by the auditor drives and dictates the importance attached to those processes/importance gained from the auditee. Further, the auditor should escalate the key issues arising out of the audit on a timely basis to the management and those in charge of governance.

Commandment No. 9: Corroboration of the information from more than one source

The information obtained as part of the audit process should always be corroborated with other information/other sources. This would help in ensuring appropriate checks and balances and provide a platform for validating/cross checking the information. Such an exercise would also help in mitigating the fraud risks.

Commandment No. 10: Trust but verify!

The auditor should be alert and should be looking out for circumstances/situations requiring detailed scrutiny. He should never take any information at face value and should follow the golden principle of ‘Trust but Verify’ which requires eloquent application of ‘professional skepticism’. There is a need for fine balancing of challenging everything vis-à-vis accepting the same at face value.

Conclusion

Professional skepticism is the backbone of the audit process and the auditor has to apply this diligently and carefully. While designing his audit procedures, he should always keep in mind that he should not miss the woods for trees. Considering the expectations of society and the professional responsibility, the auditor should pay more attention to identifying and responding to the fraud risks affecting the financial statements. The Ten Commandments explained above is a combination of procedures he should perform and the precautions he needs to take while discharging his duties. Further, based on the major accounting failures and the fraud stories all across the globe, the auditor should continuously learn and fine tune the audit process. As quoted by Russel Means, If you learn from an experience, that’s good — so nothing bad happened to you!