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For Private Circulation Only • March 2012 • Vol 6 Issue 3



Society of Auditors


BUDGET SPECIAL Inside this Issue... •

From the Edit Pad


A budget of contradictions


Budget 2012 - Method in the madness


Robbing the Future and digging the Past


Indirectly Direct and Directly Indirect


Budget 2012 GAAR - Whither Standing Committee Recommendations?




Why I hate budget speeches?


Recent Judicial Decisions Reported





P.S. Prabhakar

I had a solid excuse (which even the otherwise ever-goading President Mr Anand could not help giving me the allowance for) to bring the issue slightly later than the usual 3 r d week of the month. And that is the National Budget. It was rightly felt that we should dedicate our March issue to that national annual tragedy. So, it is. You will see budget related articles by renowned people and writers most of whom are known to us. (With my usual temerity, I sent in a text message to Sri Gurumurthy that I would like to use his write up in Indian Express on Budget in AUDITOR and that I was assuming his benign permission! He had little choice except texting me back 'Pl do'). I picked up an interesting write up on on the Budget speech and decided to share it with our readers as well. My own take on the budget was that it was an exercise that had all the ingredients of a TV mega serial – conspiracy, vengeance, façade of goodness, making things miserable for the whole lot of population and on top of it making us spend our time and money to get such miseries etc. I have t w o m a j o r p o i n t s . F i r s t o n t h e Vo d a f o n e amendment. I hold no brief for the machinations of Vodafone to get around the tax laws and feel, like many others, that our tax laws should not have been in the first place, lax laws. However, after having made them go up to the Supreme Court and after getting an unfavourable ruling for the Government, the kind of nose thumbing that the Government gave to the Supreme Court in the guise of a retrospective amendment goes to prove that the Government of the day has utter disregard even to institutions such as the highest Court of the land. In my opinion, retrospective


amendments to laws to negate Court rulings are evidences of sick and repulsive minds of the powers that be. And look at the justification FM gave. That they have always been resorted to giving the example of Indira Gandhi's retrospective amendments to the Constitution during Emergency days. Even to get examples, Congress has to travel back to emergency days! Systematically, the institutions like CAG and the Supreme Court are made mincemeats by the Govt of the day. And to think that if even with a borrowed majority they can do so much, what would they (not) do if they had a brute majority. The second is on the merciless increase in indirect taxes and slapping service tax on anything and everything, making the compliance issues hell - all of which are going to take a toll on every citizen of this nation. Sri Gurumurthy calls it as pocketpicking. I respectfully disagree with him. It is daylight robbery. Some one was wrily commenting that we have to tolerate much nonsense as a cost of doing business in India. I feel that even to be in India, where we battle for basic needs like clean air, water, power etc. we are all paying enormous cost to the Government which takes three years even to make a shameless announcement that a white paper would be brought on the black money, after the Prime Minister openly declared that he would bring the black money stashed abroad in 100 days. Anyways, I agree with Banusekar that ICAI should not give any post budget memorandum to the Government. That villains can be reformed by advices can happen only in reel life but not in real life.

Editorial Board

A periodical from Society of Auditors Chennai CA P S Prabhakar, Editor Society of Auditors “Platinum Chambers” 33, TNHB Complex, 4, Luz Church Road, Mylapore, Chennai - 600 004. Phone : 044-2498 6979 E-mail : Website URL:


CA B Ramanakumar CA Mahesh Krishnan CA Subramania Sarma CA P Anand, President, Ex-officio Member CA R Sivakumar, Vice President, Ex-officio Member CA S Ramakrishnan, Vice President, Ex-officio Member CA B K Moorthy, Secretrary, Ex-officio Member

AUDITOR • March 2012

A budget of contradictions The national budget for the financial year 2012-’13 mirrors the paralysis within the United Progressive Alliance coalition and government. It is a shocking theatre of conflict between the Indian sociology and Anglo-Saxon theories, of the contradictions between the intents of the finance minister and the contents of the budget, and of the minister's confusion about what to do and what not to do in the light of his doubts about what the UPA government itself can and cannot. Anglo Saxon Economics Take first an example of the conflict between Indian sociology and Anglo-Saxon economics in the budget. Like every Union finance minister since 1991, Pranab Mukherjee has also attempted to solicit more subscribers for corporate stocks a vital element of Anglo-Saxon financial capitalism. He has given a deduction up to `50,000 for those who subscribe for stocks. The punters in stock markets who had had to pay short term capital gains tax a decade ago, were exempted and left with a small STT to bear. The corporates, FIIs, and also the government would like the households in India to move away from banks to stocks. But Indian households, like the Japanese and German households, refuse to. In Germany, less than 7 per cent of households own stocks, against 55 per cent in the United States, and 11 per cent in Japan. Most Germans and Japanese prefer bank accounts to stocks. The Anglo-Saxon economists consider that inefficient. Indian households are similar to German and Japanese households in seeking safety first. The Economic Survey of India 2012 submitted by the Union finance minister to Parliament the day before his budget testifies to how the Indian households trust banks more, despite the rise of Sensex from 1,000 in 1990 to over 18,000 now, topping 20,000, at times. The total savings of Indian households in banks was 34 per cent of GDP in 1990. It rose to 47 per cent in 2000-’01. This further rose to 58 per cent in 2006-’07. It continues to rise and stands at present at 67 per cent, thus doubling in two decades. Scams and Sensex During this period, when the Sensex rose by 20 times, Indian households had largely kept away from stocks. The share of stocks in Indian savings was some 7 per cent in 1992 thanks to Harshad Mehta. It crashed to 1.7 per cent in 1999. It rose to 4 per cent in 2000 thanks to Ketan Parekh. It crashed again to almost 1 per cent in 2004-’05. It again rose to 8 per cent thanks to the global subprime scam. Now it has again crashed to some 3 per cent. So scams, more than tax sops, seem to have enticed AUDITOR • March 2012

S. Gurumurthy the households to stocks. Yet, the budget is again enticing the households to stocks. Short on figures, Long on fantasies The budget is undeniably noble in words, but equally short on numbers. The bad numbers undo the declared intents of the Union finance minister and work to the opposite of the laudable objectives declared. Here is an example. Pranab Mukherjee says that a principal objective of the budget is to ‘focus on domestic demand driven growth for recovery’. With the world in turmoil, he has rightly turned ‘swadeshi’ to look to domestic strength as the alternative. But his budget contradicts his vows in the budget speech. The result is he miserably fails to activate domestic forces. If he has to spur domestic demand, he would have cut taxes and let people have more money to spend. But here he has raised the taxes and robbed the people. He puts into consumers' pocket a paltry sum of `4,500 crore by direct taxes cut, but picks their pockets almost by a huge amount of `46,000 crore by raising indirect taxes. Even he cannot deny that this will erode, not promote, domestic demand. Pranab Mukherjee’s expectation of ‘lower inflation and higher savings’ in the coming year is a contradiction in terms. In theory, other things remaining the same, a rise in savings, means lower demand and lower consumption. If, however, a budget releases inflationary forces by high rise in indirect taxes, as the present budget promises to, the same goods will sell at higher prices causing fall in both consumption and savings. Borrow, Borrow, keep borrowing Rise in indirect taxes will cause price rise and reduce savings. And with the price rise, not just savings, but real consumption also will fall. The Economic Survey 2012 notes that inflationary tendencies during 2010-’11 caused reduction in household savings. It does not stop here. The projected gargantuan government borrowings of `4,70,000 crore for 2012-’13 will suck away liquidity and up interest rates. The minister himself has provided for a huge interest burden for the budget year. Already banks are borrowing heavily from the Reserve Bank of India. If the high interest rates now rise further, that will also bring down consumption. Allowing FIIs to invest in government and corporate bonds cannot greatly ease the liquidity. In sum, the budget promises lower, not higher, savings and consumption, the very opposite of what the minister has declared. The domestic demand theme of the minister is thus a non-starter. Unable to contain the huge revenue deficit, Pranab Mukherjee seems to have turned to chartered (continued on next page)


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accountants for ideas to make his balance sheet appear more elegant. The innovation of ‘effective revenue deficit’ in the minister's budget speech bears the stamp of some questionable multinational accounting firm. Effective revenue deficit is to be arrived at by deducting from ‘the revenue deficit’ all grants made not only to state governments and constitutional authorities, but also to nongovernmental organisations for creation of capital assets not owned and held by the government. This innovation is being legalised by law now. Thanks to this window-dressing, from the revenue deficit of `3,50,000 crore, the grants for capital assets of `1,65,000 crore are deducted to arrive at the effective revenue deficit of `1,85,000 crore for 2012-’13 thus optically moderating revenue deficit

Budget 2012 - Method in madness Budget 2012 can be best explained by this conversation between a doctor and family patients. When the patient complains that his wife is suffering from cancer, father from TB, mother from arthritis, daughter from serious allergy and son from broken bones, the doctors wants to know whether there was any positive news at all. The patient replies that he is HIV positive. That in a nutshell explains Budget 2012. Whatever positive that the Government assumes is embedded in the Budget, is in fact a ticking time bomb. Put bluntly, the UPA government has reached a stage where if it reforms any further it is politically damned, and if it doesn't, the country is economically doomed. But any criticism of the Budget needs to factor the fact that even Jesus Christ after his crucification had more elbow room that the FM of India. This was brilliantly captured by the Economist in its issues of 27th January 2012 when it calculated the “wriggle room index” for various emerging countries. War torn Egypt ended up being high up on the list implying that there was no wriggle r o o m f o r m a n e u v e r i n g i t s e c o n o m y. I t i s a reflection of our times that the India governed by an economist PM scored just as much as Egypt! Countries like Pakistan, Malaysia and others (including China, Russia and Brazil) scored much lower implying the efficient management of their economy. It would seem that the North Block where the Finance Ministry is situate is completely bereft of any ideas. On inflation, cutting subsidies or for that matter any non-plan expenditure there seems to be no new thinking. When it comes to resource 4

of 3.5 per cent of GDP to 1.8 per cent effective revenue deficit. White on Black Yet, the Union finance minister's effort is not without positive elements. The bold retrospective law to tax the Hutch-Vodafone deal, the novel idea of holding company for the financial arms of government and the proposal for direct delivery of subsidies and many more. Pranab Mukherjee’s show finally ends as a comedy with his promise to bring a white paper on black money! It is now three years since the UPA-II government had promised by the president’s address to Parliament after the 2009 Lok Sabha elections that it would bring back Indian monies stashed abroad. Now, after three years, the Union finance minister says he will bring a white paper on the issue. Isn't it a comedy?

M R Venkatesh mobilization, the FM seems to raise customs of Gold, tinker with the Excise and customs just as Finance Ministers of 80's would do. Old habits die hard? No wonder the FM began quoting Shakespeare and said he was “cruel only to be kind.” Cruel he was certainly when it came to tax proposals. Unfortunately one could not locate the kindness. Much as the tax proposals do not make sense there is a method to the madness to the entire exercise. For once like in many countries, the Indian Income-tax Act too is now synchronizing with the provisions of the Prevention of the Money Laundering Act. The amendment to the Provisions of S 56(2) and 68 are basically out of experiences gathered by the Government in the 2G scam as to how crooks have routed their ill-gotten loot back into India as FDI. Similarly, the Budget papers explains that the Tax Residency Certificate would be “necessary but not sufficient” thereby providing the much needed leeway to the Revenue to investigate the origin of funds using the Mauritius route. Similarly the amendment to S 148 is borne out of experiences gathered by the department in the Hassan Ali cases. But the moot point remains. To catch a crook should the Government unleash a nuclear weapon? Well that is what happens when we live with crooks, vote for them, celebrate them, benchmark with them and eulogize them. It is time that we need to genuflect on these issues both as ordinary citizens as well as Professionals. The Author is a Chennai based Chartered Accountant. Comments can be sent to AUDITOR • March 2012

Robbing the Future and digging the Past The budget presented in Parliament by Hon. Finance Minister reminded me of the remark by Vidya Balan the heroine of Dirty Pictures with a slight modification. Budget for him seems to be all about expenditure, expenditure and expenditure. All that remains for him to say is, “Aur main expenditure hoon.” And sure he is. The so called deficit both revenue and fiscal has been cleverly reworked using divestment target (Rs. 30,000 Crore) which will never materialize (?), gap in the revenue and expenditure over Rs.1,85,000 crore, which is left unbalanced, assumes subsidy burden of 2% (which will in all probability be far more at 4% to 5% of GDP)……. the list is endless, and of course there is the borrowing, the growing debt of the Centre and the States. The Macro figures are not even worth going into in great detail, but one look is enough to show that the Indian Government led by the UPA team and our FM is all set to steal prosperity from the future with a burgeoning debt. As if not satisfied with it, they now want to turn grave diggers by digging money and taxes from the past with retrospective amendments dating back to 1961, when I was a three year old baby and many of us were not even born. The budget claims to aim at a faster, sustainable and more inclusive growth in a stable environment. He even reiterates in Para 8 of his speech. “I know that mere words are not enough. What we need is a credible road map backed by a set of implementable proposals to meet these objectives…”. Good words indeed but again words, words and more empty words. Our new Budget jingle will be “Spend it all, spend it all, spend it all the way. Oh what fun it is to spend, When you're not answerable any way.” Yes, there are increased doses of expenditure in all areas covering growth, agriculture, infrastructure, finance, transport, fertilizers, textiles, MSMEs, Backward areas, health, employment and skill development, even security. But it does not add up to a sustainable game plan. Primarily because: 1. Precious little has been done to rein in administrative expenditure, leakage, waste and losses. 2. Fiscal accountability, discipline and governance are paid lip service 3. Black money is addressed through a promise for a ‘white paper’ 4. Collections from disinvestment, controlling and limiting expenditure on subsidies, projected revenue collections from taxes are all wishful estimates and projections which in all probability will never be met. 5. Finally the taxman is back at the retrospective amendments a happy hunting ground for the taxman and the Government to extract the pound of flesh from those who have already committed themselves… going back over 51 years. 6. To cap it all is the regressive move to enlarge service tax burden by a whopping 20% from 10% to 12%,

AUDITOR • March 2012

Dr Vishnu Kanhere

making it an unfair tax which hits the poor and middle classes most not only by imposing an inequitable burden, but also by raising inflation making things impossible for them. To List a few, there is a lot of devil in the fine print: My prediction that “the Alternate Minimum Tax which was introduced on LLP's last year, will be extended to all other taxpayers,” has now become a reality and engulfed all classes of tax payers @18 ½% of gross total income. A tax deduction at source @1% transfer of immovable properties is introduced. A tax collection at source of 1% on cash sale of gold / bullion and jewellery is levied. Special tax courts for summary trials and prosecution and imprisonment of tax offenders, makes us look like petty offenders rather than honest law abiding citizens / tax payers. Then there is the retrospective amendment to section 9 and section 2, to virtually negate and nullify the judgement in the “Vodafone case”. To top it up are the GAAR General Anti Avoidance Rules which gives the assessing officer the power to look at every transaction if it results in tax benefit, where it can be presumed that (tax benefit) was the main purpose and it can be disallowed. The whole sense which it tends to convey is an extreme authoritarian hegemonistic attitude, where rather than treating the tax payers as partners in progress they are made to look like criminals and cheats, are browbeaten and herded and put into a straight jacket a lot of this with retrospective effect. In such a scenario, how do you expect, leave aside overseas investors, even Indian citizens, to ever be sure and hence ever believe tax laws framed in this country. Tax laws unlike in the past are now no longer going to be valid even in the year they are introduced, because they can and are going to be amended retrospectively. Imagine the Finance Act to be a railway pass with one year validity for your journey as a tax payer. The taxman backed by the FM is going to visit after several years and retrospectively declare your “pass” as invalid and book you for ticketless travel consequences - recovery, fine, penalty, prosecution and may be even imprisonment etal, after 51 years. Well the carpet has been swept off from under my feet because what the law was till today is no longer the law now “since last 51 years” at the stroke of a pen. Digest it, if you can, at your leisure if you want to read it as just another piece. But if you want to act, like Nani Palkiwala, would I am sure have, now is the time to act, with not a moment to lose. Else as illustrated in the Sanskrit couplet “Ashwam Naiva, Gajam Naiva, Vyagrham Naivacha Naivacha, Ajapuram Balim Dadyat Devo Durbala Ghatalkaha”. (Not the horse, nor the elephant, and never the tiger, it is the kid goat that is sacrificed even by the Gods.) We will be the sacrificial lambs. 5

Indirectly Direct and Directly Indirect Cruel now! Kind next year? When the Finance Minister quoted Shakespeare's Hamlet and said that “I must be cruel to be kind”, the nation braced itself for taxes. Reading between the lines, 2012 Budget is probably the only Budget where stiff taxes can be levied since 2013 Budget would be the last Budget before elections. Therefore the Minister probably would present a 'kind' Budget in 2013. It is amazing that a country reeling under high inflation for nearly a year would be force fed a dosage of indirect taxes which is expected to generate and net a revenue gain of Rs. 45,940 crores. In fact, going by the para headings given in the speech, the Minister could have very well have categorized the increase in duties under the heading 'Inflation'. Restoration of excise and service tax rates to 12% signals that all the problems are over; industry has fully recovered; business is booming; and the Indian economy d o e s n o t h a v e a n y p r o b l e m s w h a t s o e v e r. However if one were to look at it with quirky optimism, the increase in indirect taxes would result in an increase in prices which in turn would reduce domestic consumption and achieve what RBI could not achieve through increase in interest rates. Shiny(!) budget If there is one sector which appears to have been targeted, it is the jewellery sector. How else would one explain a 2% customs duty on gold introduced just two weeks before the budget being increased to 4% in the budget; levy of Excise duty on all kinds of jewellery; introduction of tax collection at source on sale of jewellery, through Section 206C (1D) of the Income Tax Act, 1961. The sector is more worried about the compliance and procedures under excise law rather than the impact of duty which is only 0.3% of the invoice value. Imagine a loyal customer choosing particular jewellery who is allowed to take home the jewellery to get the opinion of her childhood friend (not husband). This would be considered a removal of excisable goods and excise law requires payment of duty with removal under the cover of an invoice. Since there is no selling price the jeweler will have to examine whether Rule 4 or Rule 11 read with Rule 8 of the Central Excise Valuation Rules, 2000 is applicable. Further, when the lady returns the jewellery it would be 6

K. Vaitheeswaran, Advocate

return of duty paid goods to the factory with debate on applicability of Rule 16 of the Central Excise Rules, 2002. Court court go away, never come in my way! It is strange that the Government seems to be intent on making life complicated both for the assessees as well as the already burdened department officials. This is with reference to transfer pricing being extended to specified domestic transactions. The justification given for this unbelievable exercise is the observation of the Supreme Court in the case of CIT Vs. Glaxo SmithKline Asia Pvt. Ltd. The respect that is given to the decision of the Supreme Court is to be commended. Only thing is that this respect is very selective in nature and there is an unabated desire to overturn settled judicial principles with retrospective effect. Supreme Court's decision in Vodafone is attempted to be nullified with retrospective amendment from 01.04.1962. Even assuming that the Government had its own reasons for doing what it did in the Vodafone saga, there is no rationale behind the nullification of the decision of the Supreme Court in the case of Tata Consultancy Services through retrospective amendment to Section 9 of the Income Tax Act, 1961 w.e.f. 01.06.1976 or the nullification of the decision of the Supreme Court in P.V.A.L. Kulandagan Chettiar through retrospective amendment to Section 90 w.e.f. 01.10.2009. (’Dis)service tax The proposed concept of imposing service tax on 'any activity for a consideration' unless it is in the negative list or in the exempted list is a recipe for chaos. Firstly the persons who will become liable will have no idea about their liability (auto rickshaw, pundits, carpenters, plumbers, electricians, domestic servants, cooks - the list is endless). The argument of basic exemption does not survive in an environment where harassment cannot be ruled out. Secondly taxability of items such as compensation, capital subsidy, project specific grants, retirement benefits, amounts payable on maturity of policy, insurance compensation would all become matters of interpretation this list is also endless. The Minister ended his speech by saying the announcements would help in shaping the headlines that describe India a decade from now. Whether that is true or not it is going to be decade of debate and litigation. AUDITOR • March 2012

Interesting posts


Post: Sir, I am bugged with your complaining, what is the problem with our professional bodies Inaction

Action or

Response: Inaction is tolerable, Action is Intolerable ! Post: The budget was sleepy .. almost dozed off Response: Budget 2012 was FM's support and response to World Sleep Day on March 16 Post: FM seems to have shown his anger on Mamata against the entire womenfolk (no special threshold seems to have been prescribed for women). Response: May be his irritation against Sonia also! Post: When can we have a zero-deficit budget in this nation? Response: When we make Kapil Sibal the FM Post: All Congress schemes are named after Jawahar, Indira and Rajiv. Why not one yet on Rahul? Response: Wait till Digvijay becomes FM **** Dear God, Please give me strength to pay my Income Tax, GST, VAT, CST, Service Tax, Excise Duty, Customs Duty, Octroi, TDS, ESI, Property Tax, Stamp Duty, CGT, Water Tax, Professional Tax, Road Tax, STT, Education Cess, Wealth Tax, TOT, Capital Gain Tax, Congestion Levy etc etc etc. and don't forget Hafta, Donations, Bribes, Chanda etc. If I have some money left after that I will do business. Sincerely, An Indian...

Budget 2012 GAAR - Whither Standing Committee Recommendations? Union Budget 2012 was most eagerly awaited by the tax fraternity to know on the introduction of the Direct Taxes Code (DTC), which has remained enigmatic ever since the DTC bill 2010 was introduced in the Lok Sabha on 30 August 2010. The Standing Committee on Finance (SCF) headed by former Union Finance Minister Shri Yashwanth Sinha, in September 2010 to which the bill was referred to, for their suggestions and recommendations, submitted its report on 9 March 2012 during the Budget Session. With the Union Budget scheduled at 16 March 2012 it hardly left any time for Finance Minister and his team to examine the same and do anything about it in the Finance Bill. (So, it was said. Apparently, FM had to take Mamata's placating as his primary job in that week!) GAAR?...... Grrr...... Looking at the Direct Tax proposals made during this budget which numbers to precisely 108 (an ostensibly auspicious number), it definitely augurs to be auspicious for the department and otherwise to the assessees. Prima facie, some of the key proposals made in this budget seem to be a prelude towards the AUDITOR • March 2012

CA T G Suresh and CA K Sudarshan

DTC viz.the introduction of General Anti Avoidance Rules (GAAR) and Advance Pricing Arrangements. When GAAR was introduced in the draft DTC bill, it generated huge amount of interest globally amongst the stakeholders e s p e c i a l l y w i t h t h e c a s e o f Vo d a f o n e i n subjudice. Tax avoidance versus Tax evasion controversy has been around from time immemorial and therefore the GAAR provisions were looked at with keen interest primarily to salvage some sanity from this inherent controversy. The GAAR introduced into the Finance Bill to avoid tax avoidance broadly echoes the provisions contained in the DTC. GAAR provisions empower tax authorities to declare any transaction as impermissible and determine the tax consequences thereof, if the transaction has been entered into with the main object of obtaining a tax benefit and it lacks commercial substance. It is surprising to note that the several key recomomedations of the SCF were not considered by the Finance minister while introducing the GAAR Bill. (Time inadequacy cannot be a credible reason when such important issues are involved) (continued on next page)


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Finance Bill 2012

SCF Recommendations


The onus is on the assessee to prove that he is not obtained any tax benefit

Onus to be made on the Government.

Powers to Tax Officer

Vast and discretionary powers to the tax authorities

Such powers to be removed as it shall create uncertainty with regard to conducting business

Grandfathering Provisions

Tax benefit obtained in current or any other Previous year shall be liable for GAAR Provisions

To provide safeguard for structures that are currently in place. Hence should be made prospectively

Treaty Override

Chapter X-A specifically overrides treaty even if act is not beneficial to the assessee

Tax treaty override could raise concerns about the sanctity of benefits conferred under treaties and affect India’s credibility as a reliable treaty partner

Threshold limit for GAAR

No limit specified for GAAR applicability. Even small transactions may trigger GAAR **

Threshold limit to be specified year on year basis.

Advance Ruling

Not specified on advance ruling for GAAR transactions

Advance ruling for GAAR transactions to avoid prolonged litigations.

Impermissible arrangement

Once an arrangement is declared to be impermissible, then as per the provisions entire arrangement may be declared as impressible, even if part of the arrangement is impressible.

Only that arrangement which is impermissible to be treated as impermissible

Approving Panel

Approving Panel shall comprise a minimum of three members of the rank of the commissioner and to be set up by CBDT . Purely a department panel.

As the panel comprises of department persons, it was recommended to have independent technical persons along with the department panel for invoking GAAR.

Exhaustive Definitions

The conditions/definitions dealing with ‘tax benefits’’ and the ‘manner applied for the arrangements not for bona fide business purpose’ and ‘lacks commercial substance’ are very widely worded and creates ambiguity.

Recommended to specifically define the meanings so as to avoid undue discretion to the Department.

** Sec 101 provides that guidelines and conditions will be prescibed. CBDT may bring in threshold limit in the guidelines

Conclusion As the objective of GAAR is to deter tax avoidance it should not leave scope for avoidable litigation. The objective of bringing in a new tax framework in the form of DTC is to have a simple, unambiguous tax laws. However with the existing GAAR provisions, the objective of the Government to prevent a tax payer from using legal construction or transactions to gain undue fiscal advantage may be lost. Therefore it is 'better late than never' for the Government to incorporate the recommendations of the SCF. 8

Even if it is conceded that the Government did not have adequate time to factor the recommendations before presenting the Budget, if it has any semblance of regard to the Parliamentary democracy, it must bring in the changes before the unreasonable provisions of the Bill become part of an already a draconian law. It is also important that the professional bodies and industrial associations step up the pressure on the government to bring the recommended changes before the Bill is passed by the Parliament. AUDITOR • March 2012

Elsewhere A ‘wakeup call’ for Canadian auditors; Major gaps found in their audits of Chinese firms Canada's audit regulator has demanded accounting firms fix deficiencies in their audits of 12 China-based companies whose shares trade on Canadian stock exchanges, saying their work has been a “disappointment.” The Canadian Public Accountability Board released results in late February a three-month review of work done by Canadian audit firms with Chinese clients, and said it found major gaps, including a failure to follow basic audit procedures required in Canada. CPAB is calling its report “a wakeup call” for Canada's auditing profession to improve its work in foreign jurisdictions. The review highlights the wide gulf in auditing standards between Canada and China, says University of Alberta accounting department chairman Karim Jamal. Canadian audit firms have to rely on local partners licensed to audit in China, he says, and those partners don't appear to have the training or experience to meet Canadian standards. One unidentified audit firm has been restricted from doing further audits of Chinese companies until it improves its procedures. Other firms have been told to fix flaws in audits of 12 of the 24 companies examined. CPAB's review, launched in October, comes amid widespread concerns about the quality of financial reporting by Chinese companies listing their shares on the Toronto Stock Exchange. In 2011, 56 companies from China and other parts of Asia were listed on the TSX or TSX Venture Exchange, many of which gained listings through reverse takeovers of dormant shell companies. However, he says if CPAB can spot weaknesses and errors after reviewing the Canadian audit files, so should the Canadian partners who sign the audits after reviewing the work done in China. He said the report will give audit partners a greater excuse to pressure their local partners for better work. There have been calls for years for audit firms to try to standardize the quality of work done in AUDITOR • March 2012

other countries, says Lynn Turner, former chief accountant at the U.S. Securities and Exchange Commission who now writes extensively on audit regulation. Mr. Turner says there are legitimate questions about whether global accounting firms should put their names on audit work that is done to different standards in Asia and elsewhere.

Peer questions suitability of accounting rules for banks The British government is facing fresh questions about whether current accounting rules are suitable for banks, amid claims they permit the overstatement of profits and fail to provide a proper picture of losses. The issue is being raised by Lord MacGregor, chairman of the House of Lords economic affairs committee, in a letter to Norman Lamb, the newly appointed employment minister, who also has responsibility for auditing. Drawing on quotes from Bank of England executive Andy Haldane, who used a speech last month to argue that accounting rules had helped in "both over-egging the financial upswing and elongating the financial downswing", MacGregor asked whether the international financial reporting standards (IFRS) were "in conformity with UK law". "I should be grateful if you would look into the question of the conformity of IFRS with applicable British law and let me know the government's considered view. I should also welcome your views on the suitability of IFRS for t h e a u d i t o f b a n k s , " s a i d M a c G r e g o r, a C on se rva ti ve MP u n ti l 2 0 0 1 a n d on e - ti me government minister. He also cited evidence the committee had received last year in its inquiry into auditors and views expressed by witnesses about adoption of IFRS to replace UK rules. The witnesses had argued "that in practice [IFRS] had weakened the obligation on auditors under company law to give a true and fair picture of audited accounts and led to a rule-compliant, box-ticking approach instead of the exercise of prudent judgment". (continued on next page)


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MacGregor added: "They argued in particular that IFRS was unsuited to audit accounts of banks, failed to capture losses and overstated profits in the run-up to the financial crisis." Lamb is expected to respond in early March - a date set in the letter - but he is not expected to deviate from answers given by ministers in the past. For instance, the government has disputed previous assertions that auditors' roles had been weakened, saying it did "not accept that IFRS has led to a loss of prudence".

U.S. Nears Accounting Shift Regulators are edging closer to switching U.S. companies to global accounting rules, as the Securities and Exchange Commission's top accountant suggested they were moving toward recommending a long-discussed compromise approach. International authorities are pushing the SEC to move U.S. companies to use the global rules, known as International Financial Reporting Standards, to unify companies world-wide under

the same accounting system. American corporations are watching intently for a recommendation from the SEC's staff about whether the commission should do so. Big accounting firms and multinational companies say a move would simplify their accounting and make it easier for them to raise capital around the world, while skeptics say it would be too costly and burdensome. Most companies world-wide now use IFRS, but the U.S. still uses its own set of rules, known as generally accepted accounting principles. IFRS allows companies more flexibility and judgment than GAAP. The global system is centered on applying guiding principles of accounting rather than following GAAP's set of detailed rules. The SEC's staff hasn't made a recommendation yet. But on Monday, SEC Chief Accountant James Kroeker discussed the matter in terms that hinted that he and his staff were gravitating toward a middle-ground "endorsement" proposal, under which IFRS would be incorporated into U.S. rules and U.S. rule makers would retain the authority to evaluate future global rules for U.S. use.

Indian tax in 2015, if UPA III gets to power(!!!) (wild thoughts - as of now!) 1.

Any transaction in West Indies is now taxable in India since the word ‘Indies’ substantially involves an Indian nexus.


A retrospective amendment is also proposed to bring to tax the income earned by ‘Indiana Jones’ movies.


All income earned by persons with first / last name of Indian origin, irrespective of residence, is fully taxable in India.


Transfer of last name of Indian origin to a western name would be transfer of capital asset taxable in India.


Any income earned from the sale of chicken tikka masala, dosa or biryani would now be deemed to be taxable in India.


Use of number ‘0’ which originated in India is subject to royalty taxation.


Income of taxable in India in ratio Indian users to total users.


Fundamental basis for any decision issued by the Supreme Court in favor of a taxpayer would be deemed to be retroactively amended without any specific requirement for a specific law to this effect to be passed.


Any income earned from the practice, training or any other manner whatsover pertaining to yoga will now be taxable in India.

10. Borrowing sugar, tea leaves or any other perishable item from a non-related person would now be subject to service tax. 10

AUDITOR • March 2012

Why I hate budget speeches? I consider myself a survivor. I have survived many C grade Bollywood movies, Rakhi Sawant's swayamvar on television, the utterly boring and occasionally brilliant art house movies, Geoffrey Boycott's dour batting, discourses of the insufferable spiritual gurus, Mumbai's rush-hour tra ffic , th e e xp re ssi on le ss w on de r ca lle d Manmohan Singh and a translated work of Friedrich Nietzsche. I have a stomach for the boring and the insipid. Some of my former editors would vouch for that. I have lasted the rather lengthy drinking sessions with them, tolerating their nonsensical take on everything from caselaws to cauliflowers. One editor, in particular would invariably veer into the subject of sex beyond his fourth peg. I am still not sure whether it was his idea of humour but I have survived him and others like him. I can digest almost everything. But a budget speech? Pleeeeease. That's the ultimate challenge to my rather incredible survival skills. I love a good nap as much as the next person, but nothing lulls me into a deep slumber like a finance minister going on and on with what he is going to do with my money the next year. You may say I am not worried about the country. Well, to be very frank, I am. But if I have to endure a long, boring reading out session for that, I would prefer to sleep. I would rather read tomorrow's newspapers to make sense of what he said. Why is that? I would make amends if I knew the answer. It could be the fear of numbers. I never loved numbers maths was never my favorite subject in school. I always thought my math teachers were aliens and the finance minister just goes on bombarding me with numbers and statistics that are just out of the world. It is difficult to bear. I am not an economist. When the minister says ad vaolrem tax, I start thinking, for some reason, about the movie Extra Terrestrial. Is it an animal from Mars or is it a new drug promising to enhance amorous prowess? I am still confused. The first half of the speech is about the more profound aspects of the country's e c o n o m y. H o w t h e h e l l a m I s u p p o s e d t o understand that? The experts analysing the budget complicate my situation more than simplifying it. What would you do when five nuclear physicists start talking their trade around you? Go to sleep, of course. My interest in the budget revolves around the price of cigarettes and alcohol. That comes up at the very end of the speech. That's unfair. I believe there are many who want this precious bit of news first, along with the bit on the income tax exemption limit. The next Finance Minister who presents the budget should keep this mind. The minister drones on and on to make a point I don't understand. He throws in a bit of shayari or a couplet from Mirza Ghalib or an extract from Shakespeare to lighten matters. But it hardly helps. Even the regular Parliament proceedings are better. At least you have some entertainment in the form of members hurling expletives, mikes and papers at each other. There's just so much of physical activity around. You cannot just doze off lest you miss the action. Imagine a budget presentation. All other members are silent, pretending to be listening. Dear finance minister, next time you present the budget please think about people like me. (Courtesy : An article that appeared in

ANNOUNCEMENT The April month’s B.B. Naidu Study Circle Meeting will be held on Friday, 20th April 2012 at 6.00 p.m. at The Society of Auditor premises, Luz, Chennai. Speaker is : Mr. G.S. Rajasekar, MBA, CEO of Active Point Business Consultants Pvt. Ltd. Topic: Emerging Opportunities in the Digitised World. AUDITOR • March 2012


Recent Judicial Decisions Reported Statute: Income Tax Act 1961 – Section 37 – Application software Title : CIT vs Asahi India Safety Glass Ltd Citation: 64 DTR 63

P.M. Veeramani, FCA

Decision in favour of : Assessee Bench: Delhi HC

Expenditure incurred by assessee on software is allowable as revenue expenditure as the software acquired by it was an application software which enabled it to execute tasks in the field of accounting, purchases and inventory maintenance. Said expenditure cannot be treated as capital merely for the reason that assessee has not written off the same in its books in the first year and has written off only a part of it in the succeeding year. Statute: : Income Tax Act 1961 – Sec.70(3) – set off capital loss vs capital gains Title : Vipul A Shah vs ACIT Citation: 63 DTR Trib 272

Decision in favour of : Assessee Bench: ITAT Mumbai

Expression ‘similar computation’ used in section 70(3) refers to the computation under sections 48 to 55 and not the computation under second proviso to section 48 vis a vis proviso to section 112(1) and therefore, set off of indexed long term capital loss against non indexed long term capital gains allowable Statute: Income Tax Act 1961 – Sec.92 C – Documentation required for CUP method Title : ACIT vs Tara Ultimo Private Ltd Citation: 63 DTR Trib 333

Decision in favour of : Revenue Bench: ITAT Mumbai

Assessee has purchased diamonds from its AE and also exported same to AE and for the purposes of benchmarking these transactions applied CUP (comparable uncontrolled price) method. When there was no documentation in support of the comparable uncontrolled price of the diamonds imported and exported, application of CUP method for computing ALP not valid. When ALP cannot be reasonably determined by CUP or any other direct method (Cost plus or resale), the application of TNMM or other indirect methods is inevitable. Statute: Income Tax Act 1961 – Sec.92 C – Domestic price vs export price Title : Arviva Industries Ltd vs ACIT Citation: 48 SOT 418

Decision in favour of : Assessee Bench: ITAT Mumbai

Assessee exported fabrics to its AE at Panama at $1.16 per meter and same fabric was sold in domestic market at Rs.72 (equivalent $ 1.515). TPO adopted domestic price as ALP for export sales to AE. Assessee objected it on ground that adjustments were required to be made while comparing domestic prices with export sales with regard to factors like incentives on exports, discounts on domestic sale, sales promotion and advertisement expenses for domestic sales and once adjustments were made export sales would be at ALP. TPO was clearly in error in not taking into account above said factors and therefore, TP adjustment was to be rejected. Statute: Income Tax Act 1961 – Sec.115BBC – Anonymous donation Decision in favour of : Assessee Title : Hansraj Samarak Society vs ADIT Citation: 133 ITD 530 Bench: ITAT Delhi AO called for confirmation letters in respect of donation , but assessee could not produce same for all cases. Cash vouchers not produced in respect of cash donations. AO treating such cases as anonymous donations. Anonymous donation means voluntary contribution in respect of which a person receiving such contribution does not maintain a record of identity indicating name and address of contributor and such other particulars as may be prescribed. No other particulars are prescribed under this section. Since assessee had filed donation receipts containing details in respect of name and address of contributor, same cannot be taxed as anonymous donation. (continued on next page)


AUDITOR • March 2012

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Statute: Income Tax Act 1961 – Sec.144C – DRP cannot give directions to AO Title : Dredging International NV vs ADIT Citation: 48 SOT 430

Decision in favour of : Assessee Bench: ITAT Mumbai

Dispute Resolution Panel can issue direction only in respect of objections raised by tax payer and objections are to be in terms of variation proposed in draft order and it cannot go beyond proposed draft order. Assessee claimed future loss in the return which was proposed to be disallowed by AO in draft order. DRP directed to adopt 20% of the contract @8% as income which was at variance with draft order. Variation proposed was only with reference to disallowance of future loss and DRP is wholly without jurisdiction to direct AO to adopt a certain percentage as income Statute: Income Tax Act 1961 – Section 147 – Change of Opinion Title : Rotary Club of Ahmedabad vs ACIT Citation: 63 DTR 388

Decision in favour of : Assessee Bench: Gujarat HC

Following notice under section 142(1) assessee filed revised return showing total income less than original return. Assessment completed under section 143(3) accepting income as per revised return. AO re-opened the assessment on ground that assessee was not entitled to file revised return beyond the statutory period allowed under section 139(5). An error committed by the AO who framed the original assessment cannot be a subject matter for re-opening of the assessment. An opinion having been formed on the very issue on which the assessment is sought to be re-opened, and that too the only issue, it can only be viewed as change of opinion on the part of the successor AO. Statute: Income Tax Act 1961 – Section 2(47), 45, 53 A of TPA - No capital gain on conditional transfer Title : K.Radhika vs DCIT Citation: 65 DTR Trib 250

Decision in favour of : Asssessee Bench: ITAT Hyderabad

Handing over possession of the property is only one of the conditions under section 53 A of the Transfer of Property Act but it is not the sole and isolated condition and it is necessary to go into whether or not the transferee was willing to perform its obligation under consent terms.No action was taken on the development agreement and municipal sanction for development was not received during the year. Assesssee has received only a meager amount out of total consideration and there is no evidence to show that right to receive the sale consideration accrued to the assessee. Capital gain not taxable in the year. Statute: Income Tax Act 1961 – Section 17(2) – Tax paid is perquisite and not salary Title : Isao Sakai vs JCIT Citation: 49 SOT 154

Decision in favour of : Assessee Bench: ITAT Delhi

Tax paid by employer on behalf of employee is perquisite under section 17(2) and therefore, not includible in salary under rule 3 of IT Rules for purpose of computing perquisite value of accommodation supplied by employer to employee. Statute: Income Tax Act 1961 – Section 22, 56 – Amenities is income from other sources Title : J.Farm House vs ACIT Citation: 49 SOT 218

Decision in favour of : Revenue Bench: ITAT Chennai

Assessee leased out building along with amenities like tables, chairs, sofa, fridge, TV, geyser, airconditioner, fans etc with separate agreements for building and amenities. Aggregate rent for both building and amenities offered as income from house property. In view of section 22, annual value of property consisiting building or land appurtenant thereto alone could be considered under income from house property. Since none of amenities was inextricably connected to building in such a way that it could be considered as part of building, income from letting out amenities should be taxed under income from other sources.

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AUDITOR • March 2012


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Statute: Income Tax Act 1961 – Section 37 – ISO certificate Decision in favour of : Assessee Title : CIT vs Infosys Technologies Ltd Citation: 65 DTR 347 Bench: Karnataka HC ISO certificate is granted after inspection of the procedure followed and also the quality maintained in the production and does not confer any benefit of enduring credibility and is rightly held to be revenue expenditure. Statute: Income Tax Act 1961 – Section 37 – Ransom Decision in favour of : Assessee Title : CIT vs Khemchand Motital Jain Citation: 340 ITR 99 Bench: Madhya Pradesh HC Ransom money paid to kidnappers for release of one of the directors who was kidnapped while on official duty is an allowable expenditure. Statute: Income Tax Act 1961 – Section 92C – Increase in cost not a reason for adjustment Title : DCIT vs Hope (India) Polishing Works Pvt Ltd Citation: 49 SOT 138

Decision in favour of : Assessee Bench: ITAT Mumbai

Merely because labour cost had gone up, same could not basis for assuming that processing income had also gone up. TPO was not justified in making adjustment on basis of labour cost to revenue ratio of previous year without providing any independent comparable cases Statute: Income Tax Act 1961 – Section 147 – Not a full and true disclosure Title : Indian Hume Pipe Co Ltd vs ACIT Citation: 65 DTR 26

Decision in favour of : Revenue Bench: Bombay HC

Assessee having claimed exemption under section 54EC without making any reference to the dates on which amounts were invested in the specified bonds either in the return or in the disclosures which were made in response to the query of the AO, there was no full and proper disclosure of all material facts by the assessee and therefore, AO was justified in reopening the assessment beyond the period of four years on the ground that income had escaped assessment. Statute: Income Tax Act 1961 – Interest u/s 234 A – credit for tax paid Title : Sachin Jain vs DCIT Citation: 13 ITR Trib 161

Decision in favour of : Assessee Bench: ITAT Delhi

Interest charged from due date of filing return to date of return without giving credit to tax paid. Assessee had paid tax after the close of the financial year and such tax paid was to be treated as self assessment tax and interest under section 234A to be computed after giving credit for such tax paid. Statute: Finance Act 1994 – Service Tax – Leasing of Mobile Towers Decision in favour of : Assessee Title : Essar Telecom Infrastructure Private Ltd vs Union of India Citation: 25 STR 16 Bench: Karnataka HC Erection of tower sites and leasing out space on such sites to various telecom / cellular operators whether liable for service tax under renting of immovable property services or liable for sales tax under right to use goods and super structure. Though towers are fixed to earth and cannot be treated as mobile, they cannot be treated as immovable property to contend that it is only service rendered and not transfer of right to use goods. Except the platform to fix equipment / tower, structure does not acquire character of immovable goods. Only semblance of service was being rendered and factually it was movable super structure lent to various telecom companies. It was only a transfer of right to use of goods which attracts VAT and though incidentally service was involved, in pith and substances, what was being lent was right to use goods and superstructure raised.



AUDITOR • March 2012

CROSSWORD Clues Down C1 FM’s reference to the Bard, any eggs served C11 BECkon Debt for working capital E12 With SDT for local transactions, this man is on the TOP H5 Zozo is lost - the network does not follow, the tax man does J1 Keep it low - under par L2 Foreign friends In aviation - liberalised never say Die again N2 This opposite is actually positive in service tax list O9 This Minister got derailed - Didi said no way !

Across 1F Framework roll out in 2012, month of eminence 3A We no longer save Vitamin M on taxes 3J Never balances - annual comedy, tragedy but always dramatic 6A MIDAS would be upset but the call beckons

9F 9K

Import directly, state has no FAT, confusion! The sun did not set on the profit linked incentives , 20% more - re energised 12A A tailor’s tool, now for measuring cars 12M The devil fights the _______ , may charge the new comer premium to tax 14F Padharakshulu - how many pairs can you afford?

Compiled by: Ms. Sripriya Kumar

We are grateful.... The Society of Auditors sincerely thanks Mr. T. Banusekar, our member for having sponsored this issue of Auditor. AUDITOR • March 2012


AUDITOR March 2012  

March 2012 issue of Auditor, the official journal of Society of Auditors, Chennai, edited by PS Prabhakar