Category: Letters to The Editor

Dear Editor,

We have been reading articles from Dr. Anup Shah for last over 2 decades. The breadth of and canvas of large number of issues dealt with, in an expertly manner and dealing with large number of topics of interest for practicing chartered accountants has been useful and complementary in doing practice. The selection of subjects have been contemporary and meaningful. The dealing with subjects with its judicial background gives more credence and reliability to the subjects dealt with by him. His reference and dealing with any topic with accounting and auditing aspects touching the subjects make the articles meaningful even for accounting and auditing points of view. His depth of knowledge of  large number of applicable laws has been exemplary and outstanding. We congratulate him and BCAS for bringing out the 6^th edition of his new book.

With regards

Mukesh Shah

Mumbai

BCAJ Admin

To

The Editor

BCAJ, Mumbai

This has reference to the
excellent article on ‘Transition to cash flow based funding’ by Suhas Paranjape
and others on bank lending. In fact it is a very good article and also timely
since I believe that the system of banking and its lending business were flawed
right from the inception of banking in India. The banking in India was a
glorified commercial venture of earlier money lenders. The money lenders had at
least the security of land as a mortgage or of gold given as a security. The
money lender of the yesteryear had therefore zero NPA and his only risk was the
danger of dacoity or robbery as is the new word used in the Indian penal code.
He was required to take care of his gold by having extra guards or some private
security arrangement. This was a minimal cost considering present day insurance
rates.

It was more than 100 year ago
that the banks like Central Bank or the Bank of India and the likes of which
were established in India. Their fund based business model was progressively
more comprehensive and refined from time to time as compared to the erstwhile
money lenders and progressively well regulated by the central bank of the
country.

However it was and is still an
asset based funding. The erstwhile money lenders did not have difficulty of
realizing the assets in the event of failure of loans but sale of assets is
increasingly a complicated model for the present day banking giving rise to
progressively increased ratio of NPAs. Earlier the money lender essentially
gave a loan to an agriculturalist and on few occasions to artisans. The banks
were more dynamic and started giving loans to increased manufacturing and
trading and service activity. This was however a mere increase in the area of
operation as a result of increased size of the business activity but
conceptually it remained the same with asset base as the principal security.
Such a security is very difficult to realise without closing down the business
and essentially the banking was without any security in real terms.

 All the loans given by the banks were and
still are essentially unsecured loans and even today the banking loan portfolio
is really without any security. This according to me is the real reason for
increased NPAs. It prevented the banker from finding out diversion of funds
which in any case was camouflaged and it also did not give early signs of
business failure or slow down and the banks came to know about it only when
things were out of control.

Another issue which should gather
further momentum is the relation between the banker and the customer. For the
last about 30 to 40 years, the relationship has become more impersonal, rule
based and rather inflexible. I was once a junior functionary in a well known
bank and the training college of the bank used to conduct sessions on bank
lending. We were constantly told that in banking ‘First class borrower with
second class security should always be preferred to a second class borrower
with first class security’. This sound banking principle has now remained on
paper because there is no time to judge a person who is a borrower.

Cash flow statement giving
separately operating cash flow, Investment cash flow and financing cash flow
would be more useful in present day banking and I believe that it should be not
only required from listed companies or the companies of a particular size but
it should be made compulsory for all bank loans to keep under control the
menace of NPAs.

It is in this context that the
article in April issue would assume more importance and may require further
elaboration in the months to come.

Ashok Dhere

Chartered Accountant  

The Editor

The Bombay Chartered Accountant
Journal

Mumbai 400020

Dear Sir,

Re: My article on Allowability of
Interest u/s 36(1)(iii) published on Page 15 of January, 2020 issue AND

Letter from Advocate Jignesh R.
Shah published on Page 100 of March, 2020 issue of BCAJ

At the outset I thank Advocate
Shri Jignesh R Shah for an enlightening letter. Let me say that there is hardly
a word of his letter that I disagree with. Since the point Shri Jignesh R Shah
has raised is valid, I need to offer my explanation.

Shri Jignesh R Shah states in his
letter that he is not on the correctness or otherwise of the conclusion of the
article. Then he says, I quote, ‘If I am not mistaken, it is tried to
canvass in the article that the word “acquisition” used in the proviso to
clause (iii) of sub-section (1) of section 36 of the Income-tax Act, 1961
connotes acquisition of an asset from a third party and it does not include an
asset which is “self-created” or “self-constructed” or “self-acquired”. This
interpretation would apply irrespective of whether the asset is
work-in-progress (which is the subject of this article) or a capital asset,
because the word employed in the proviso is “asset”. Unquote.
(Emphasis on the words ‘a third party’ is supplied). This inference is based on
the premise that the way I interpret the term ‘acquisition’, it is an act of
acquiring an asset from a third party and that asset should exist at the time
of acquisition, and therefore, it would exclude assets that are self-acquired
from the scope of the Proviso because the assets are not acquired from a third
party and they did not exist earlier. Shri Jignesh Shah gives an example of a
power generation plant which is assembled by the company itself by buying
parts, receiving technical service and using own labour, to show that the proviso
will yet apply to the power generation plant which is not acquired from a third
party and which did not exist when it was acquired.  He says, I quote, ‘Going by the
interpretation placed on the term “acquisition” in this article, the plant as a
whole cannot be called “acquired”, because the plant as a whole did not already
exist (as is stated in this article) over which the power generation company
gains possession; the plant is its own creation.’ Unquote.

In response, I first say that I
have nowhere said in the article that an ‘acquisition’ is not an ‘acquisition’
if it does not involve receiving or obtaining something from ‘a third party’.
Though obtaining something from a third party is no doubt an act of
acquisition, I have explained the term ‘acquisition’ in relation to an asset as
an act of acquiring the asset which exists at the time of its acquisition.
Things that do not exist cannot be acquired. After examining a few dictionary
meanings of the term ‘acquisition’ I finally explain the term ‘acquisition’
thus, ‘One can see that the normal meaning of “acquisition” carries in it
a sense of a thing that exists and the act of gaining possession of or control
over that thing is called “acquisition”.’’
I do not say that such possession and control over a thing should be
gained from a third party for it to result in an ‘acquisition’. I agree with
Shri Jignesh Shah that the word ‘acquire’ or ‘acquisition’ is of a very wide
import and can also be used to refer to self -created assets or things, like ‘I
acquired talent to play guitar’. ‘Talent’ in this case did not exist in me
before I worked on its development.

This leaves me with the second
aspect of the theory attributed to me, that in order that an asset may be
‘acquired’ the asset should be in existence at the time of its acquisition. The
example of the power generation plant, according to Shri Jignesh Shah, is an
instance of an asset which did not pre-exist. With respect, I say that in this
example and others that Shri Jignesh Shah has given in his letter, the things
are said to have been acquired when they come into their being, not before
that. A power plant is not acquired before it meets with all the
characteristics that a power plant possesses. Even the part quoted by Shri
Jignesh Shah in his letter from CIT vs. Mohanbhai Pamabhai [1973] 91 ITR
393, 408-409 (Guj.) later affirmed by the Supreme Court in [1987]
165 ITR 166 (SC) says so in these words, ‘When a capital asset is
created by an assessee, it becomes his property, he comes to own it and,
therefore, he acquires it the moment it is created’ (Emphasis supplied).
This means the person acquires a capital asset the moment it is created, not
before it is created.

If the company in the given
example, assembling in-house power plants was assumed to assemble power plants
not as a capital asset but as products for sale, the point I am making would be
clearer. So, let us presume that this very company is engaged in the business
of erecting and selling power plants, and three power plants are at different
stages of progress of work. The stage of erection at any point of time
constitutes WIP or saleable inventory which is the target of acquisition unlike
in the previous scenario where the power plant, a capital asset, as was under
erection was the target of acquisition. The company could say in the case of
erection of a power plant as a capital asset that the company was in the
process of acquiring a capital asset, but would the company engaged in
the business of erection and sale of power plants say, by the same logic, that
it was in the process of ‘acquiring’ WIP or inventory when what it meant was
that it was producing or manufacturing power plants? It is not my case that the
company cannot use this language, it can. But the question is: is such language
natural? My point is this: A company selling power plants is ‘producing’ or
‘manufacturing’ power plants rather than ‘acquiring’ power plants. Interest
paid on borrowing attributable to production of power plants held for sale
should not be disallowed, whereas the same interest, if paid for producing
power plants for own use, will be disallowed.

Anyway, I thank Advocate Shri
Jignesh Shah for bringing out a fine facet of the argument.

Yours truly,

BCAJ Admin