Society of Auditors
Chennai For Private Circulation Only
October-November 2015 • Vol 9 Issue 10-11
Inside this Issue... •
From the Edit Pad
2
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‘Election’ Ramakrishnan’s take on ICAI elections
5
•
An intolerant CA voter
7
•
ICDS and Deferred Tax
8
•
An ‘Ordinary’ Member Laments
12
•
Indirect Tax Snippets
13
•
Recent Judicial Decisions Reported
15
•
Anyone Noticing? Anyone Bothered?
16
AUDITOR
Editorial Board
A periodical from Society of Auditors, Chennai Society of Auditors “Platinum Chambers”, 33, TNHB Complex, 4, Luz Church Road, Mylapore, Chennai - 600 004. Phone : 044-2498 6979 E-mail : society.auditor@gmail.com editor@societyofauditors.in Website URL: www.societyofauditors.in
CA P S Prabhakar, Editor Adv B Ramana Kumar CA R Sivakumar, President, Ex-officio Member CA Karthik A Bhatt
FROM THE EDIT PAD ICAI elections are around the corner. Aggressive, persistent and feverish campaigning is going on even in the comparatively docile South India. The serious candidates leave no stone unturned, no member unspoken to, no mailbox uncluttered, no smartphone undeluged with texts and whatsapps, no opportunity missed to take a jibe at competitors and so on. The desperation of the contestants and their active and vocal supporters is increasing by the day just like the levels of the lakes around the Chennai were increasing by the hour during the recent torrential downpour. In November 2012 issue of Auditor, I had written thus: Never in the past, during the run-up to the elections at ICAI, we have seen such kind of pre-poll frenzied activities in terms of campaigning of all sorts (that includes aggressive negative campaigning too), acrimonious e-discussions amongst the fraternity, the criss crossing of e-mails across the globe on the governance (or the lack of it) of the Institute (the waning credibility of which, unfortunately, is further marred by the news of a scam) as well as on the ‘contestants’ etc. In the earlier days, the situation used to be just binary - either support a candidate or do not support him. There will not be any opposition to someone’s candidature, much less the virulent type that we see this time. Yes, things have changed. There are several uncomfortable questions raised on the kind of governance of ICAI – ranging from matters like frequent changes in the education & training system with the consequent confusions, the continuing education of members, conduct of gala seminars and conferences, standard setting issues, concern for the SMPs, creation and augmentation of professional opportunities, corporate governance within ICAI itself, alleged financial misdemeanors in certain land deals etc. and reportedly the council members’ roles in such active misgovernance by Council. Nothing much has changed since. Those who were involved in Nagpur land scam and who should have been punished actually have been getting ICAI-sponsored legal defence. Last 2
P.S. Prabhakar three years, nothing significant was done in ICAI. All those who promised that they would move heaven and earth during last elections have either moved themselves away or are promising the same yet again. Of course, more number of ‘ordinary’ members have begun questioning and criticizing thanks to the email and social media. Looks like that the Council members cannot have comfortable cocoons anymore. With voices that demand better transparency on the functioning of the Institute, they will be open to more intense scrutiny. However, nothing has mattered to the contestants whose personal ambitions are driven by their own personal agendas. Of course their claim is ‘selfless service’, 24/7 availability, working tirelessly for members and students etc. for which they are even prepared to spend lakhs and lakhs of rupees. Have you come across nobler souls anywhere in this planet?) Now, let us see get to specifics: Four members from the current council are out of the race (at last!) and the remaining three, alongwith about half a dozen members from the current Regional Council and a host of others are contesting for Central Council. The editor, in his personal capacity, is before the Hon’ble Madras High Court with a prayer that those from the Southern India Regional Council should not be allowed to contest, as they have willfully not conducted the SIRC’s AGM for three years in a row, in complete defiance of CA Regulations. Notice has been ordered and the case is yet to be heard. My point is simple. They have violated CA Regulations and therefore coming under the deeming provisions to hold them guilty of professional misconduct and, in my view, therefore ineligible to contest. The Returning Officer should have rejected their nominations. The Central Council, in its entirety, is also responsible as they failed to take action even after knowing that there was a violation of Regulations. I do not have any idea as to how the cookie would crumble but I genuinely felt that it was time someone took these people head on. Let us rest this for a while and look at other issues concerning the (continued on next page)
AUDITOR • October-November 2015
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elections. To start with, the reduction of vacancies from 7 to 6 for South has been a dampener. Added to this, the ‘late but latest’ arrival on to the election scene by Mr M P Vijayakumar, a celebrated teacher who have many ‘worshippers’ has unnerved many. A man with a fan following that is spread across the five states and whose success is a given, is not leaving anything to chance though! The other Chennai candidates (including a sitting CCM) who were hoping on a good share in the harvest due to the exit of Mr SK and Mr VM (who together polled about 2800 first preference votes in 2012) may have to contend with what they might get. No other candidate from upcountry TN appears to be posing any serious challenge. Mr K. Raghu’s exit would mean that about at least 1500 votes are up for grabs for any other Karnataka candidate. (Four of them are contesting). Mr Madhukar, who served in the earlier Council and who got eliminated last on 2012 elections, in spite of getting 250 votes more than the current VP in first count, is trying for a come back. With a possible increase in voter turnout due to increased number of polling booths, Karnataka may have a chance to return two candidates this time around. In Andhra & Telengana, the strong sentiment of the exciting possibility of a First ever Telugu President of ICAI might see Mr Devaraja Reddy home, though in 2012 he polled less than 1000 votes and struggled his way from 9th position to barely make it to the Council. A second candidate from Andhra? Tirupati Balaji only knows! Kerala has a sitting CCM who is hoping to scrape through. In the actual counting, the ranking that the contestants get in the first count may keep oscillating through the process when quotas are hit and eliminations take place. All because of the peculiar system of the ‘single transferable ballot’ which in my view, is hardly ideal as it suffers from fallacies. I shall point out a few and leave you to judge the effectiveness of the system: Suppose there are 7 candidates to be elected and 24,000 votes are polled, the quota is fixed at 3000. (24000+1 divided by 7+1). Is it not possible for a candidate to rope in just a
gung-ho committed 3000 out of the 24000 voters, to cast their first preferences to him and find his way to the council even though NONE of the other 21000 would have given him ANY preference? That is, a person who gets rejected outright by an overwhelming 7/8th majority of the members can get to Council with the blind support of just 1/8th voting members. Even though it is only a theoretical but yet a possibility, can this be by any stretch of argument, reasonable or democratic? Let us conjure up a scenario: There are about 20 candidates for 7 seats. 24000 votes get polled. There is this candidate X, who gets 1000 first preference votes and comes 12th in the first count. When the elimination process starts, this man gets eliminated as the 10th candidate. And at that stage, after getting his shares of all the subsequent preferences of all those who got eliminated earlier, his vote number stands at say, 1500. Suppose after his elimination, it is found that in the subsequent elimination / election candidates, he in fact had huge 3rd or 4th preferences, they are of no use to him as he had already got eliminated. So, a voter’s preference is not respected in the way it should be. Continuing the example in the earlier para and this one, let us see how a person with a gung ho support of 3000 first preference votes and NIL preference from the rest of the electorate compares with this man, who, let us say, has 1000 first preferences, 1250 second preferences, 1750 third preferences, 2000 fourth preferences and 3000 fifth, sixth and seventh preferences spread across all the other contestants’ first preference votes. So, in spite of the fact that about 15000 out of 24000 (5/8th) voters have ‘preferred’ him in some order, he doesn’t get to win but instead a person who has been voted by just 1/8th of the membership in his region will get to the council, and with his charm and negotiating skills may even become the President and lead this profession! The point that is made is that the system of marking preferences loses all its value in most cases. As explained, in the case of an elimination candidate who might have got huge second and third preferences from a candidate who gets eliminated subsequent to (continued on next page)
AUDITOR • October-November 2015
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him, such preferences become completely worthless. Similarly, if a voter casts Candidate Y his fourth preference, if his first two preferences become quota candidates and the third preference gets eliminated early in the race, the Candidate Y becomes his First preference in complete distortion of the voter’s intentions. One can go on listing the fallacies like this. That this system has survived so long is possibly because it has remained largely un-understood, unexplained and therefore unquestioned. (Also, possibly that the complication actually is found convenient). Trust me, 9 out of 10 members of our profession have little idea of the intricacies of the system. The best and the simplest system would be to adopt a weighted marking system by which the preferences would be given appropriate weights and the required no. of candidates with the maximum number of points should be elected. So, if there are 7 preferences to be marked for as many candidates to be elected, the first preference should be multiplied by 7, second by 6, third by 5 and so on. (Any higher preference than seventh should be disregarded). This way, no preference given by any member can and will go waste and the results will also be completely reflective of voters’ intentions. Besides, the valuable resources of the Institute need not be put under so much of strain for over a fortnight. Yes, the counting process for all the Regions put together would go on all the 24 hours a day for over a fortnight because of the complications in the system. If we go and tell the outside world that we, the premier accounting body, take almost 20 days to count just about a lakh votes to elect 32 members, in a method the effectiveness of which we may hardly be able to defend, we may well become a laughing stock. After all, we have to be conscious of the fact that it is in our country, we boast of the largest democracy and when 60 to 70 crores of people go to the general polls, we are able to churn out the results in a matter of a few hours. Well, people may say that the system in
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general elections is a simple majority and that ours is a lot complicated. However, it seems to me that ours is complicated not by default but by design and doubt whether the leadership of the profession will ever make honest (too much to ask for?) introspection and bring in the required reforms. On the other hand, if we choose to be the slave of a monster that we ourselves have created, who can help us? Let me come to the final part of my edit pad. 2015 elections in ICAI is going to see the back of so many ‘veterans’ and consequently, a lot of fresh blood is set to get infused in the system. It is the earnest wish of the Editor and also of the Society of Auditors that the ICAI re-attains its glory by subjecting itself to an intense self-scrutiny to make sincere attempts on the following: Totally re-engineer the curriculum to match with best finance management schools’; Completely restructure the students coaching system; Fully redesign the members’ continuing education programme; Wholly reinvent the accounting and auditing standards (by refusing to cut-copypaste) that will suit the business and commercial environs of our nation; Entirely refine and conferences;
the concepts of seminars
Wholeheartedly attempt to revitalize the R&D efforts in the area of accounting, attestation etc. Sincerely redouble the efforts in augmenting the professional opportunities of SMPs; Meaningfully re-connect to the members abroad and members in the industry; For all of the above, what we need is a comprehensive re-look at the way in which things have been run so far. Yes, we need refreshing ideas to redevise strategies and to re-deploy resources to ensure we re-create a vibrant ICAI. In short, REBOOT ICAI.
AUDITOR • October-November 2015
‘Election’ Ramakrishnan’s take on ICAI elections An interview with CA. S. Ramakrishnan Mr S Ramakrishnan (Vice President, SOA), considered as the Prashant Kishore of ICAI elections, has involved himself in several Elections of ICAI – since the early eighties. Though he identified himself only to a specific contestant in the past few elections, as he became ‘free’ this time around, he appears to have been sought by some of the serious contestants for strategy planning or advices to run the campaign. Which, he said, he politely refused. In a candid chat with the Editor on the ensuing elections, he shared some of his views. He recounted as to how the Past President Mr R.Balakrishnan took on the seemingly invincible Mr Ashok Kumbhat and actually gave a run for his efforts in 1982. Mr Balakrishnan, he said, had a well chalked out strategy and ensured a person-to-person contact with most members, which has been the time tested method of enlisting support till now. Added to this he had the uncanny ability of connecting every person’s face with his / her name. His efforts in that election followed by the next few and his continued friendly demeanor ensured that he became one of the youngest and most charismatic Presidents. He also said how Mr Santhanakrishnan was hesitant to contest in 2000 (a far cry from today’s scenario when anyone and everyone throws his hat with gay abandon) especially, after tasting defeat in an earlier election. That was a time when Mr Bupathy and Mr Manoharan were riding on their coaching class popularity wave and were effortlessly making it to the Council. (Earlier to them, it was Mr Gururaja Upadhyaya, who enjoyed huge support from his students since turned as members). Mr SK was not actively involved initially and the campaigning was done for him in his absence. Many seniors had not even known Mr SK and when the name Santhankrishnan was mentioned, only Mr P B Santhanakrishnan was thought of! To his
credit, SK plunged in the scene and pulled all stops in the run-up to the elections and went whole hog! If Mr SK captured the imagination of the members with his canvassing style especially among the younger members and industry members, Mr Murali, with his coat-suit donned, well groomed photographs splashed all over the SIRC magazines repeatedly, entrenched his ‘image’ in to the minds of voters. His brochures used to consist of quotes from Voltaire to Valluvar, his own pearls of wisdom and unwanted information about his associations with various clubs (Lions to Mice) and NGOs ranging from a music sabha to some chamber of commerce. Those days, it was possible for the ‘election handlers’ who also doubled up as ‘foot soldiers’ – to influence the members to vote for the candidate they were working for. It was also possible that the ‘senior partner’ of a firm would issue an unofficial whip and that votes would get accumulated ‘office wise’. Now, of course, individual members have become wise, he said! There is a perceptible shift from loyalty-based voting to assessment-based voting. The deluge of information on the governance (or the lack of it) at ICAI that keep pouring in their inboxes, the consequent increased awareness of the voters and the increasing difficulties in practice situation are proving to be formidable challenges to the contestants. I asked him what his take would be for the ensuing elections. He said that the digital make over of the canvassing methodology, though is convenient, costeffective and instant for the contestants, is actually bordering on irritation to the members. In election time, the phones hang due to the barrage of texts and in order to avoid such hanging, people keep deleting messages all the time. And, by chance, if they see the sender’s name before such (continued on next page)
AUDITOR • October-November 2015
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deletion, they remember the name only NOT to give any preference! Ramakrishnan says that he is as disenchanted and disillusioned as many voters. He felt that this might even reduce the polling percentage this time. According to him, no matter who win and go to Council, it will only be for their own benefit and that it will ultimately be the tyranny of the elected over the hapless electors! He said that even today, people are spending a minimum of Rs. 10 lakhs for a CC election with the upper limits decided only by their desperation levels - and that decided my final question: Why spend so much and what is in it for them? “High stakes, Pr a b h a k a r – i t i s n o t s p e n d – i t i s a n investment. Most of them make much more in council terms – in every possible way – right from encashing the Frequent flier miles for private abroad trips to making money out of allowances, possibility of institutesponsored foreign trips, high visibility at all times, possibility of professional enhancements due to the interactions with authorities such as RBI, CAG etc., immunity from any possible disciplinary proceedings etc. etc. There is enormous benefit in it ”. I didn’t have the gall to disagree. A veteran – he knows – he says. Why would it be wrong? When I asked him why he was always a man behind someone and whether he had any
regret not having contested election himself, he recounted a short story that his dad would tell about an errand boy who got employed in a sweetmeat stall. That boy would stealthily savour every item of sweet when the boss was not watching and when this matter was brought to the attention of the boss, he used to simply ignore and even ask those who complained to keep quiet. This went on only for a few days and exactly as expected by the boss, slowly that boy, obviously grown indifferent to sweets having had ‘more than enough’, actually stopped eating anything and began working very diligently! Ramakrishnan laughed aloud and said that he was like that boy – actually got tired of electoral politics (and in fact asked me for my recommendations!). He has one regret though. His personal admiration for Mr SK, who he was propping election after election, for his knowledge and vision (and in spite of his shortcomings) makes him believe that SK should have made to the Presidency. Especially when a lot of people whose heads were far below even SK’s shoulders made it. That he said is the sardonic twist of the so-called democracy as practiced in ICAI. Right or wrong, he has a point. As I was signing off from the discussion, he began deleting the election text messages furiously!
MESSAGE FROM CA R. SIVAKUMAR, PRESIDENT, SOCIETY OF AUDITORS Having read the editorial of this issue, I am getting a feeling whether things would turn for the better if voting percentage increases. In our own normal sampling parameters, 2 or 3% may look insignificant but on a volume of 1,00,000, with 2 or 3%, a person can actually go to the council! Today it is increasingly becoming very difficult to differentiate between what is good or bad. Even the people whom we elect with the expectation that they would be ethical, may turn out to be otherwise. Hence let us all accept everything as such but at the same time voice our concern, still carrying with us our HOPE. Hope that things will change for the better. All the members should positively go to the polling booth and vote. SOA wishes all the contestants very best.
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AUDITOR • October-November 2015
An intolerant CA voter What bugs the society at large, bugs the CAs too. During the Bihar elections, though unconnected to that elections, (that is what I am told to believe by our patriotic, nationalist media), the intolerance within the country grew to such an extent that it collectively wiped out the entire tolerance this country has shown over atleast one kalpa! Can the CAs be left behind! The contestants to the CA central and regional councils, have a birth right to disturb any voter, any time (he need not be even a CA, it is enough the contestants think he is one!) even if the voter is a female, giving birth to her first child in the labour room or even one precariously hanging on a Bungee rope while on a holiday abroad! Blame it on the technology, not the contestants, for enabling and providing this far and wide reach! Without appreciating the fact that it is only an essential communication once in three years that too from avatars which are desperate to serve the profession without any personal motives, the voters are showing intolerance towards the contestants, if one were to go by the postings one can in the face book timelines, whatsappand mischievous mail circulations! Even if the CAs are tolerant enough to tolerate the council members repeatedly for any number of terms, the Government seems to be intolerant to the CA council members. MPs, MLAs and even Municipal council members continue to have no limits on the number of times they can hold on such posts, if elected, whereas there is an undue restriction on the CA council members! I shudder to think what will happen if the CA contestants or those who barred from contesting start protesting in the same way, the Sahitya award returnees protest! Having known t h e C A f r a t e r n i t y, t h a t t o o t h e s e l f l e s s contestants, I am sure no one will return anything but nothing prevents me from at least visualizing such a scenario. Let me share some of the novel ways of protest came to my mind, if I were to step into the shoes of the contestants/barred contestants. If you are an intolerant CA voter, quit, don’t read further. If a you a tolerant variety like that of an AUDITOR • October-November 2015
CA. R.G. Rajan electoral contestant, hang on. What will happen if a particular member decides not to wear his tie or his formal suit in protest? No one including his wife can identify him! The best way to protest an intolerant law makers/voters is to give one’s brand a go by even it affects personally! To get over this quagmire, the alternative can be to wear full suit but with no slippers or shoes! If he is still further adventurous he can try the costume style of superman! Another way to protest is send colourful brochure/manifesto of the candidate without affixing his/her ever smiling photos strewn over that literature. Those spaces can be left blank. After all we have seen magazines leave blank the editorial space to mark its protest! The nationalistic media will certainly appreciate this gesture and will give a wide coverage. This will in turn increase the popularity and possibility of vote share! An oth e r w a y to p rote st a g a i n st th e intolerant CA voters/Government can be in the form of resignation from government sponsored nominations into public sector corporate boards. One can copy the tactics of a Rajya Sabha MP from TN, who sent her resignation letter to her father. Similarly tactics can be adopted. If one is serious enough to return any monetary reward to the government, one can write a cheque in the name the Prime Minister, Government of India, knowing fully well that such a cheque cannot be encashed. Follow the food steps of AK, the crusader against corrupt! This will give enormous amount of satisfaction of return as well as retention! But my CA mind is poked with a question on this. That is, whether TDS needs to be deducted if one were to return any awards even if it is kind. The CA contestants can protest in another novel way by pledging not to stand outside the CA Institute premises or inside the premises upto the ballot box! Think what will be the fate of voters! He/She will feel like someone entering a ghost building at mid night 12. Appreciate, don’t protest if you want company of noble souls! (continued on page 11)
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ICDS and Deferred Tax Prelude The Pronouncement of CBDT on Income computation and disclosure standards has significantly impacted the computation of deferred taxes. This article aims at bringing light on the deferred tax aspect of ICDS. CBDT has pronounced 10 standards applicable from AY 2016-17 for all assessee having their income assessed under the head profits and gains of business/profession or income from other sources. These standards are applicable to all entities, following mercantile basis of accounting irrespective of their turnover and other classifications. This introduction has paved way to lot of potential issues and qualms for industry at large. Impact created on computation of Deferred Tax 1. Va l u a t i o n o f I n v e n t o r y A c c o u n t i n g standard 2 governing the valuation of inventory for books of account provides, inventory shall be valued at Cost or NRV, whichever is lower. It has also recognized following methods for arriving cost:
CA M. Venkatesan impact will be subsequently reversed in opening stock computation in ensuing financial year. 2. Construction contracts Accounting standard 7 - Construction contracts gives a detailed analogy on recognition of revenue and corresponding cost during the tenure of the contract. ICDS 3 – Construction Contracts, has array of differences with AS7 as discussed below: a. Foreseeable losses As per accounting standard 7, foreseeable losses are allowed as when it is envisaged considering prudence. ICDS 3 is silent on allow ability the foreseeable losses. However, combined reading of ICDS 3 with ICDS 10 (Provisions) indicates that no cost which is expected to be incurred in future can be allowed as expenditure. This results in foreseeable losses not being an eligible deduction under ICDS 3.
a. Specific Identification Method
This distinction on account of foreseeable losses is permanent in nature as in point of time foreseeable losses will be allowed under ICDS.
b. FIFO
Incurred Losses
c. Weight Average Cost
A c c o u n t i n g s t a n d a r d 7 b y Pa r a 3 3 mandates when it’s not probable to recover the contract costs which is incurred, the same shall be treated as an expense immediately. This treatment is not indicated / suggested in ICDS 3, and allow ability of such losses will be no different from other recoverable cost/ expenses, which will be absorbed as expenditure over the period of the contract by applying percentage of completion.
d. Retail method e. Standard cost However, while standard cost is applied, the entity shall substantiate that cost arrived under this method is approximately near to thereof value that would have been arrived if any other method is applied. On the other hand, ICDS 2 does not accept standard cost as method of valuation. A company which maintains inventory valuation under standard cost for books of account has to maintain another inventory valuation mechanism for ICDS (either FIFO or weighted average) for computation of taxable income. This difference arising in inventory valuation is temporary/timing in nature as the 8
i.e. The cost that are deemed to be irrecoverable will be allowed in full while arriving at profits for books of account, but under ICDS only a part of it, being in proportion to the percentage of completion will be allowed. This expenses absorbed in (continued on next page)
AUDITOR • October-November 2015
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ICDS shall be reviewed on a year on year basis considering the movement in percentage of completion. This distinction on allowability of incurred losses will create a timing difference resulting in deferred tax asset in the initial years when the taxable income will be on the higher side as against the profits arrived under AS 7. b. Stage of estimation of Revenue In line with accounting standard 7, Revenue recognition can be commenced when a reasonable estimate on outcome of contract can be reliably measured and till this point, cost incurred shall be treated as amount of revenue. Although ICDS is having similar footing on point of revenue recognition, it provides for the maximum time lag. Revenue recognition cannot be postponed beyond 25% of contract completion. Accordingly, when reasonable estimate of outcome of a contract could not measure even beyond 25%, for compliance under ICDS an entity has to mandatorily reckon revenue, while the revenue need not be reckoned for books of account. This treatment will be resulting in deferred tax asset on account of increased taxable income till the project reaches more than 25% completion. 3. Revenue Recognition Accounting standard 9 and ICDS 4 are postulating the point of revenue recognition for Sale of goods, rendering of service and usage of other's resources. While accounting standard 9 accepts both proportionate completion method and completed contract method for rendering of services, ICDS 4 is mandating only proportionate completion method. This distinction will result in timing difference on account of increased taxable income in years where percentage completion method is adopted for ICDS and completed contract method is adopted for books for account. 4. Fixed Asset While AS 10 and ICDS 5 are congruent in most of the postulates regarding fixed assets, AUDITOR • October-November 2015
there are divergent views on treatment to be adopted in accounting for exchange of assets. In accordance with AS 10, fair value of asset foregone or asset acquired whichever is more clearly evident shall be taken as value of acquisition. ICDS on the other hand provides that fair value of the asset acquired shall be the actual cost of acquisition. Similarly, if asset is acquired in exchange of securities, fair value of asset acquired shall be taken as actual cost for ICDS 5, on the other hand for AS 10, transaction can be recorded at fair market value of asset acquired or the securities issued, whichever is more clearly evident. These two distinctions will result in two distinct asset valuation, one for books of account and another for ICDS, giving corroborative impact on deprecation. This difference arising in deprecation and corresponding written down value of the assets would craft way to deferred tax impact. 5. Foreign Currency Translation ICDS 6 and Accounting standard 11 dealing with effects of changes in foreign exchange rates, classifies entity’s foreign operation as integral and non-integral. This classification depends on various factors such as degree of autonomy, repatriation ability and etc. While both these standards are providing similar judgments and parameters to define the integral and non-integral operations; they differ in treatment of losses/gain arising on account of translation of financial statements of non-integral foreign operations. Accounting standard 11 mandates creation of foreign currency translation reserve towards these losses/gain and does not permit routing losses/gains through the statement of profit and loss. ICDS 6 requires an entity to recognize the losses as expenses and gains as income, while computing the taxable income. (continued on next page)
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This difference in treatment of exchange losses between books of account and ICDS is permanent in nature as these foreign currency translation reserves will be set off against losses/ gains on disposal of such non integral operation and not anytime earlier. 6. Government Grants Classification and recognition of government grants are dealt by AS 12 and ICDS 7, while the former is detailing with books of accounts, later provides for computation for taxable income. The distinctions between these two standards are given below: a. Promoter grants Government grants are classified into three different categories under AS 12 viz. 1. Specific/General Asset related. 2. Revenue Grants 3. Promoter grants Asset related grants shall be accounted either as a reduction from the value of corresponding asset or as liability which shall be amortised over the period of grant. Revenue grants shall be credited to reduce the expenditure against which the grant was received. Grants in the nature of Promoters’ contribution are to be treated as capital reserve which can be neither distributed as dividend nor treated as deferred income. ICDS on the other hand classifies the government grants into following categories, such as 1. Grants relatable to depreciable fixed asset 2. Revenue Grants 3. Other grants Treatment and recognition of grants relating to depreciable fixed asset and revenue are similar to that of AS 12. Government grant not directly relating to the asset being in nature of promoter’s grants
shall be deducted from the actual cost of the asset or from the WDV of block of assets based on the following formula. To t a l G o v e r n m e n t G r a n t s X A s s e t s acquired / Total Assets in respect of grants are received. This discretion would result in two different asset valuations, one at actual cost of acquisition being purchase value under books of account and other at original value reduced by grants for compliance with ICDS. This will result in timing difference on account of depreciation computed on these two distinct values. b. Recognition of Government Grants Government grants shall be recognized in books of account only if there is a reasonable assurance that the enterprise will comply with the conditions laid down along with the allotment of grant and it is reasonably certain, grant will be received. While ICDS is accepting this analogy, it provides that recognition cannot be postponed beyond the date of actual receipt of grant. This would result in timing difference, when the grants received could not be recognized in books of account but ought to be recognized for compliance under ICDS. 7. Securities Accounting treatment of securities on its purchase, subsequent measurement and disposal are dealt by AS 13 – Investments, such treatment for computation of Taxable income and when the securities are held as stock in trade is dealt by ICDS 8. Both these standards have areas in common; they have divergent view on following aspects: • Exchange of one security for another security While AS 13 and ICDS 8 are similar in most of the postulates regarding accounting for securities, there are divergent views on (continued on next page)
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AUDITOR • October-November 2015
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treatment to be adopted for exchange of securities. In accordance with AS 13, fair value of security foregone or security acquired whichever is more clearly evident shall be taken as value for accounting. ICDS on the other hand provides that fair value of the security acquired shall be the actual cost of acquisition. Although this does not create a direct deferred tax impact, the real challenge will be on sale of the security as it will result in two different gains, one for books of account and another for computation of taxable income. The difference in gain is permanent
in nature and would be having impact only on effective tax rate reconciliation. ● Subsequent measurement on class of security Both ICDS 8 and AS 13 accept the concept of valuation of security eitherat cost or NRV whichever is lower. However, ICDS 8 departs itself from AS 13 on the factor whether such exercise of determining cost or NRV should be done on global basis or on individual basis. ICDS advocates global basis considering the class of securities similar to the concept of block of asset followed for depreciation whereas AS 13 mandates the securities are to be measured on individual basis.
Following table depict the valuation with more clarity. Category / Security
Cost (Rs)
Net Realizable Value (Rs)
Lower of cost or NRV at security level AS (Rs)
Lower of cost or NRV at category level under ICDS (Rs)
Class : Shares A
100
70
70
N.A.
B
300
550
300
N.A.
C
450
450
450
N.A.
D
150
400
150
N.A.
Total for shares
1000
1490
970
1000
Secondly under ICDS, \subsequent measurement of ‘Unlisted’ or ‘Listed but rarely quoted securities’ shall be carried only at cost whereas for books of account we are required to make an estimate of NRV and
compare the same with cost to determine whichever is lower. These differences on valuations would carve way to deferred tax impact being temporary in nature. (To be continued on next issue)
An intolerant CA voter (continued from page 7)
If one is daring enough, he/she can return (surrender) the CA membership. Only hitch is that in the event of winning, you cannot hang on to the post! Another method to protest the intolerant CA voters is not to host any party in the guise of strategy meetings. The party birds will surely suffer and never will open their mouth to complain. Yet another method of protest can be to send the CA voter with a professional book written by the contestant. If all the AUDITOR • October-November 2015
earlier methods fail to stop the intolerant CA voter, I am sure this will certainly! I can go on and on these lines. But being such a tolerant person, if you wish to know as to what would I do if I am a contestant and also win the CA council elections - I will amend the 1st Schedule to the Code of ethics to state that any protest against any contestants on being disturbed will invite professional misconduct proceedings on a suomoto basis!
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An ‘Ordinary’ Member Laments A letter was received from an 'ordinary' senior member CA. PL. Subramanian on the elections and contestants as well as on certain aspects of the functioning of ICAI. He is one of the several disillusioned members who have a lot of grouses on the elected members' apathy, indifference, arrogance and constantly-displayed temerity. His original letter is published here (after editing, of course!). - Editor The Central Council, from the days of the Presidentship of Mr.Raghu seemed to have informally decided to ignore any complaint from 'Ordinary Members'. Most of the Council Members believe that once elected as Council Member no 'Ordinary Member' has any right to ask any question on the working of the Institute. They believe that they are owners of the Institute for three years. CPE Melas: In the last week of December 2014 Mr. Santhankrishanan, Mr. V. Murali, Mr. Aruloli and Rajajeaswaran conducted mega CPE Programmes for 5 days (2 Days + 2 days + 1 day). The Venue was the Auditorium in SIRC Building, the capacity of which is 350. For each programme total enrolment was nearly 1900. So, in all 5700 enrolments when the capacity could not have permitted beyond 1050 (350*3)! Mr. V. Murali was announcing that CPE hours were required according to some International Organisation with which ICAI affiliated and in order help the Chennai Members, the fee was kept at Rs.750 for two days programme and Rs.300 for one day programme and that participants need not (actually) attend the programme. Moreover, the organisers were emphasising that fees was very low, participants get free tea, good quality lunch and two hours extra CPE hours per day. In the last day, when the fee was Rs. 300, they went on telling the participants that they were getting a free cake worth Rs.350, free tea, good quality lunch etc and also 2 hours of extra CPE besides another One Day CPE Programme free. They also repeatedly (more than 30 times) told that video recordings also would be given to the participants. After one month, I contacted Mr. Aruloli and politely enquired about the CD but he got angry and told that he was not working for me but for the welfare of all members. When the matter 12
was persisted with Mr. Babu after he became Chairman of CPE Committee, he instructed the Secretary of the Committee to send the CD to all participants. Till date, no sign of any CD. I am not particular about the CD but look at the way the Council members fool the 'Ordinary Members'. Members physically attended were nearly 350 but the organisers informed that they had arranged food for nearly 800 persons. I am unable to understand why. I have not done any enquiry on this but am merely stating what was informed by the organisers during the Programmes. I understand that this falsification etc. has been going on for the last six years. Regarding this I wrote to the President, all Council Members i.e. CC and RC and Past Presidents and I have not received any reply from any of them. Co-opted Members: ICAI co-opts various persons to various Committees. I came to know that Mr. Santhanakrishnan had co-opted his friend Mr. V. Murali's recently qualified son in the Corporate Affairs Committee (Mr. Murali's son was felicitated for services rendered to Corporate affairs Committee and the only service, as people say, was that he did not attend any of the committee meetings!) and I w r o t e t o M r. S a n t h a n a k r i s h n a n a s k i n g information regarding this co-option. I have not received any reply. Mr. Murali's son was a coopted member for two terms and it appears that now he is a co-opted member of Professional Development Committee and Re s e a r c h C o m m i t t e e ( M r. M u r a l i i s t h e Chairman of the Committee). Mr. Babu Abraham Kallivayalil informed me that it is the right of the members to co-opt anybody and he 'gently' reminded me that ICAI has power to take action against the members (continued on page 12)
AUDITOR • October-November 2015
Indirect Tax Snippets Service tax Where main contractor has discharged service tax, sub-contractor need not pay the tax The Tribunal observed that Andhra Pradesh High Court in the case of Larsen & Toubro Limitedhas held that when service tax can be demanded either from the subcontractor or from the main contractor, and when the main contractor has paid the service tax, the subcontractor is not required to pay service tax for the same services rendered. Relying on the Tribunal’s earlier decision which in turn relied on the above High Court decision, it was held that subcontractor need not pay service tax. Maharashtra Cricket Association vs CCE [2015-TIOL2418-CESTAT-MUM] Where service tax is discharged on cum-tax basis, unjust enrichment is attracted The taxpayer filed refund claim of the service tax paid under the category of Tour Operator Services by reverse calculation of the service tax amount (cum tax basis).The Tribunal held that once service tax liability is discharged on cum-tax basis on the value of services charged, it would mean that amount of service tax is being recovered by the taxpayer from the customer and principles of unjust enrichment gets attracted. Ganaraj Travels vs CCE [2015-TIOL-2314-CESTAT-MUM] Refund of Cenvat credit availed prior to registration is eligible for exporter of service The Chennai Tribunal has held that law is well settled by Karnataka High Court and similar ratio followed by the Tribunal in E-Care India Pvt. Ltd that the taxpayer is entitled to the Cenvat credit of the service tax paid prior to registration. Registration is not mandatory for refund and it has been prescribed only for the purpose of maintenance of accounts and for following procedure of law. Further, the Tribunal has held that Cenvat credit taken on (i) Security Maintenance Service (ii) Housekeeping Service and (iii) Mobile Phone Service are ineligible. Flemings BPO Private Limited vs CST [2015-TIOL-2413-CESTAT-MAD] Date of original submission of refund claim to be considered for limitation and not re-submission date The taxpayer filed refund claim of service tax erroneously paid. Further claim was re-submitted for demand of certain documents. The claim was rejected on account of limitation considering the date of re-submission of the claim. The Tribunal upheld the order of the lower authority holding that the original date of filing of the claim was within the time limit and the act of Revenue in returning the claim was without jurisdiction.
CA Debasis Nayak and CA Satish Sarda CST vsIntas Pharmaceuticals Limited [2015-TIOL2406-CESTAT-AHM] CBEC allows utilization of cess for payment of service tax post June 1, 2015 The Cenvat Credit Rules, 2004 has been amended by inserting a new proviso to clause (b) of Rule 3(7)(b) to deal with education Cess and Secondary & Higher Education Cess ("Cess") on inputs, capital goods and input services received by a service provider on or after June 1, 2015. The proviso allows credit of cess to be utilised for payment of service tax in the specified manner. Notification No 22/2015- Central Excise (NT) of October 29, 2015 VAT/CST Declaration Forms under the Central Sales Tax Act, 1956 (“CST Act”) filed after the passage of assessment shall be accepted by the Revenue authorities (“RA”) Form C and Form F can be filed even after the assessment order is passed by the RA. Though statutorily a period of three months has been prescribed for filing of declaration Forms in terms of Section 6A of the CST Act read with Rule 12(7) of the Central Sales Tax (Registration and Turnover) Rules, 1956. However, the very fact that discretion had been given to the Assessing officer to make an exception to the Rule would itself indicate that the same need not be viewed in a rigid manner. Accordingly, the declaration Forms furnished by the taxpayer shall be accepted by the RA. A.C. Tradersvsthe state of Andhra Pradesh and Another [2015-VIL-483-AP] Input tax credit (“ITC”) can be availed on purchase of DEPB Scrips under the Delhi Value Added Tax Act, 2004 (“DVAT Act”) Taxpayer is engaged in business of import and sale of goods. Taxpayer purchased DEPB scrips from registered dealers and availed ITC under the DVAT Act. Revenue Authorities denied the ITC availed by the taxpayer. High Court by referring to section 9 of the DVAT Act noted that ITC shall be availed on purchase of goods which are to be ‘used’ directly or indirectly for the purpose of making sales. By interpreting the above provision in the present context, HC observed that DEPB Scrips are ‘used’ for reducing the incidence of customs duty and should be held to constitute ‘use’ of DEBP scrip for the purpose of sale of imported commodities. The reduced customs duty is embedded in the resale price of the imported goods. Accordingly, DEPB scrip has contributed, if not directly then indirectly, (continued on next page)
AUDITOR • October-November 2015
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(continued from previous page)
to the price of the imported commodity sold by the taxpayer in the market. Further, 'usage' in this context has to be seen as a ‘use’ that affects the price of the goods although it may not be used tangibly in the goods themselves. Jagriti Plastics Ltd v Commissioner Of Trade & Taxes [2015-VIL-434-DEL] Enterprise Resource Planning (“ERP”) software implementation is a pure service activity not involving any sale of goods and thus not liable to VAT The taxpayer is engaged in providing business consultancy services and implementation of ERP software. In the process of integration of ERP software there is no transfer of property in goods involved. Further, even if any software comes into existence, the title of the software vests with the client and not with the taxpayer. During this process, there is no marketable commodity is in existence to be sold. Thus, the entire consideration received is for providing pure labour services and shall be subjected to levy of service tax. Therefore, no portion of consideration received by the taxpayer could be attributed to sale of software. The State of Karnataka v IBM India Private Limited [2015-VIL-431-KAR] Concrete sleepers sold to Southern Railways shall be subjected to VAT at the rate of four percent under TNVAT Act
An ‘Ordinary’ Member Laments (continued from page 12)
w h o c o m p l a i n a g a i n s t t h e I C A I . M r. Rajendrakumar was defeated in the last election but he has been co-opted as member of committees. It is advisable to abolish the co-option itself. However if it is not possible to abolish the co-option, then norms have to be formulated and followed meticulously. The contribution of each co-opted member to the concerned committee should be put in the ICAI Website. It is possible that it is not that only Mr.SSK and Mr.VM have done like this. Others also might have done the same. However that will not justify their act. Related Party Transactions: It is necessary that we shall formulate necessary regulation regarding 'Related Party Transactions'. We should follow the provisions of the Companies Act, 2013 with appropriate modification. 14
Notification No 421,II(2)/CTRE/5677/91 dated November 6, 1991 hereby reduces the rate of tax from eight percent to four percent on sale of concrete sleepers to Southern Railways. However, Notification No 77 II(1)/ CTR/12/(R-16)/2011 dated July 11, 2011 envisages a reduction in rate of tax to five percent on sale of goods to State and Central Government Departments including Indian Railways. AAR while resolving the conflict between these two independent Notifications noted that specific provision must prevail over general provisions. Further, provisions which are most beneficial to the taxpayer must be adopted. Accordingly, concrete sleepers sold by the taxpayer in the State of Tamil Nadu shall be subjected to VAT at the rate of four percent by virtue of the above Notification read with section 88(3)(i) of the TNVAT Act Advance Ruling in the case of Patil Rail Infrastructure Private Limited [ACAAR No 24/2015-16 dated October 26, 2015 Composition scheme under Uttar Pradesh Value Added Tax Act, 1956 (“UPVAT Act”) is not bad in law The composition scheme for payment of VAT prescribed under the UPVAT Act neither violates any fundamental or constitutional right of taxpayer nor it lacks legislative competence nor it is violative of any of provisions of UPVAT Act. The very purpose of the composition scheme is to provide alternative mode of realization of tax other than regular assessment. Thus, the compounding scheme cannot be held as ultra vires the provisions of UPVAT Act. SamratIntBhatta v ACT [2015-VIL-463-ALH]
Code of Conduct for Council Members: It is necessary that we shall have 'Code of Conduct' for Council Members. For example Mr. V. Murali, Mr. Devaraja Reddy, Mr. Murali's son Mr. Abishek Murali, Mr. Venugopal Swamy etc. send large number of SMS, E-mails etc. However, if you send any SMs or E-mail to them, they do not even acknowledge the SMS or E-mail. Even in the matter of sending brochures, we find that most of the existing members have not come out the work they have done as Council Members (CC & RC). For example, Mr. Babu Abraham Kallivayalil's brochure simply lists out the privileges enjoyed by him as Council Member. Mr Abhishek Murali's brochure follows the standard template of his father and gives ‘precious’ information of his involvement in many clubs, social organisations and even his marital relationships. With regards, PL. Subramanian AUDITOR • October-November 2015
Recent Judicial Decisions Reported Statute: Income Tax Act – Sec.2(15), 10(23C)(vi) – Sec.25 Company Title: India Trade Promotion Organisation vs DIT Citation: 371 ITR 333
P.M. Veeramani, FCA Decision in favour of: Assessee Bench: Delhi HC
The assessee was a company registered under section 25 of the Companies Act which specifically applies to entities which intend to apply their profits and income in promoting their objects and prohibits payment any dividend to its members. Prior to the amendment in 2009, assessee has been recognized as an institution established for charitable purposes. The assessee is entitled for approval. Statute: Income Tax Act – Sec.12AA – From Financial year applied Title: Andhra Pradesh Pollution Control Board vs DIT Citation: 38 ITR Trib 539
Decision in favour of: Assessee Bench: ITAT Hyderabad
Assessee submitted application for registration on 31.3.2008 and CIT granted the same from financial year 2008-09. In terms of section 12A(2) assessee would be entitled to exemption under section 11 from the assessment year following the financial year in which the application is made. Assessee applied for registration in the financial year 2007-08 and hence entitled for exemption from that year itself. Statute: Income Tax Act – Sec.12AA(2) – No deemed registration Title: CIT vs Muzafar Nagar Development Authority Citation: 372 ITR 209 FB
Decision in favour of : Revenue Bench: Allahabd HC FB
A legislative provision cannot be rewritten by referring to the Notes on Clauses which, at the highest, would constitute background material to amplify the meaning and purport of a legislative provision. Parliament has carefully and advisedly not provided for a deeming fiction to the effect that an application for registration would be deemed to have been granted, if it is not disposed within six months. Therefore, non disposal of application for registration, by granting or refusing registration, before the expiry of six months would not result in a deemed grant of registration. Judgment of the division bench in the case of Society for promotion of education, adventure sport and conservation of environment vs CIT (372 ITR 222) does not lay down correct position of law. Statute: Income Tax Act – Sec.37 – Fee for increase in share capital Title: Navi Mumbai SEZ Private Ltd vs ACIT Citation: 152 ITD 828
Decision in favour of: Assessee Bench: ITAT Mumbai
Where assessee incurred certain expenditure for increase in share capital , in view of the fact that the entire incremental share capital was used for purchase of trading stock, expenditure in question was to be allowed as revenue expenditure. The decision is rendered after considering the decisions of SC in 225 ITR 792/798. Statute: Income Tax Act – Sec.37 – Advance for capital assets Title: Hindustan Times Ltd vs DCIT Citation: 38 ITR Trib 165
Decision in favour of: Revenue Bench: ITAT Delhi
Assessee had advanced to companies for the purchase of capital assets and claimed deduction of the same as bad debt. The amount advanced for purchase of capital assets could not be allowed as bad debt or business less. Statute: Income Tax Act – Sec.37 – Software upgrading expenses Title: ACIT vs Sanghvi Savla Stock Brokers Ltd Citation: 152 ITD 820
Decision in favour of: Assessee Bench: ITAT Mumbai
AO relying on the appendix in income tax rules treated the expenditure on upgrading of software as capital expenditure. Software application expenses are upgradation of efficient working of operations through computers in day to day business management, which keeps on changing periodically and thus expenditure on such an upgradation of buying of software is revenue expenditure only. Statute: Income Tax Act – Sec.43B – Electricity Duty Title: ACIT vs Kerala State Electricity Board Citation: 38 ITR Trib 458
Decision in favour of: Revenue Bench: ITAT Cochin
Electricity Board collecting electricity duty and surcharge from customers and such duty if not remitted to Government within the time stipulated under Kerala Electricity Duty Act attracts disallowance under section 43 B Statute: Income Tax Act – Sec.69, 147 – Foreign Bank account Title: Mohan Manoj Dhupelia va DCIT Citation: 67 SOT 12 (uro) / 52 taxmann.com 146
Decision in favour of: Revenue Bench: ITAT Mumbai
Information received as part of tax information exchange treaty that assessee was a beneficiary of a trust in foreign country in whose account a huge balance was maintained by assessee. Deposit made in bank account of trust represented assessee’s black money assessable under section 69 as same was not disclosed in his return in India and hence re-opening is valid. Statute: Income Tax Act – Sec.161, 164(1) – Representative assessee Title: DCIT vs India Advantage Fund Citation: 67 SOT 5 (uro) / 50 taxmann.com 350
Decision in favour of: Assessee Bench: ITAT Bangalore
Where revocable trust was formed with object of investment in specified fund , trust deed gave clear description of beneficiaries / contributors assessee’s case was governed by provisions of section 161, on individual beneficiaries and therefore assessment passed under 164(1) taxing at maximum marginal rate deserved to be quashed.
AUDITOR • October-November 2015
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ANYONE NOTICING? ANYONE BOTHERED? Has not every one of the contestants violated the following provision? So, are we going to have a council full of people who will be deemed to be guilty of professional misconduct, eminently qualifying for disciplinary action. Isn't it a tragedy of sorts that some of them will actually sit on judgment about 'ordinary' members' disciplinary isues?
ELECTION CODE OF CONDUCT 1(g) No contesting candidate shall maintain/ use a separate website or other social media/ networking site, like twitter/ facebook/whatsapp, as a part of electioneering or for the purpose of election. In other words, website maintained by a Firm/member in practice, in accordance with the relevant Council Guidelines is outside the purview of this Code. However, such as website maintained by a firm/ member shall neither contain election manifesto or appeal of any candidate to voters nor any reference thereto in any manner whatsoever. Similarly, there is no restriction to any social media/networking site presently maintained/ used by any contesting candidates provided that such existing media is not made use of for the purpose of election. 2.
It is pertinent to mention here that the said Election Code, in terms of the aforementioned Rule is deemed to be a Guidelines of the Council under Item No. (1) of Part (II) of the Second Schedule to the Chartered Accountants Act and, therefore, it is obligatory for all concerned to comply with the same.
3.
Besides the aforementioned requirements, Rule 42 of the Chartered Accountants (Election to the Council) Rules, 2006 also places certain restrictions on members of the Institute in connection with the conduct of election. Non-compliance with the provisions of the Rule 42 shall also attract disciplinary action against a member of the Institute, in terms of the provisions of the Chartered Accountants Act, 1949 and the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007.
4.
In view of the aforementioned requirements of the statute, candidates, their authorized representatives and members associated with the Election of the Institute are hereby required to ensure that the relevant provisions referred to above are not violated in any manner whatsoever, in their own interest. It may be noted that non adherence of or violation of the Election Code shall be liable for disciplinary action.