For Private Circulation Only • December 2013 • Vol 7 Issue 11
Society of Auditors
Chennai Inside this Issue... •
From the Edit Pad
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Analysis of Amendment to Rule 37 BB - Furnishing of Information on payment made to Non Residents
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Case study in auditor's reporting responsibility on Going Concern
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FRRB Corner: Issues discussed in regard to compliance with Accounting Standard 15 - ‘Employee Benefits’ 7
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Old Madras Road
12
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Success secrets of Nani Palkhiwala – the all time great lawyer
13
Recent Judicial Decisions Reported
15
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FROM THE EDIT PAD
P.S. Prabhakar
Season's greetings to each one of you! Let the N e w Ye a r 2 0 1 4 b r i n g a l o t o f c h e e r i n everyone's life! 2013 is drawing to a close. At Chennai, the climate is friendly and musical. The recent State election results have brought in a sense of feeling that that the decade of misgovernance of UPA-II would thankfully end soon. However, when we look at our limited sphere of profession, ICAI etc., we are not seeing a very happy scenario. Lot of things keep happening that catch our attention and deserve our commentary. Anyway, let me start by praising ICAI for one good act. Most of ICAI's publications which were all priced, have been made freely downloadable from ICAI's website and whichever Council members were responsible to make such knowledge available free of cost to members deserve sincere appreciation. Also, I am told that some Council members are also trying to tie up with some leading tax publishers to get the web access to all resources in taxation, audit & assurance etc. free of cost to the members and that the Council is to take a decision on this. It is hoped that wisdom dawns on the Council and that such knowledge dissemination service is done without much second thoughts. Now, on to other things: CPE credits: Though in a matured profession such as ours, knowledge acquisition and augmentation are of paramount importance, the method by which everyone wants to have the same should be left to the individual professional members. However, the manner in which ICAI is conducting itself in
this matter is irritating, deplorable and borders on immaturity. Without doubt, it is the duty of ICAI to facilitate knowledge enhancement by arranging seminars and workshops but forcing the members to attend such seminars by linking them with CPE credits which are in turn linked with the Bank / CAG audit allotments is ludicrous. And as if it is not enough, sending out letters to members with veiled threats (of putting their names in the web sites and letting the audit allotting authorities know that by not having earned enough CPE credits, the members are not as knowledgeable as they are ought to be etc.) at the fag-end of the year smack of immature thinking almost akin to asking the school students who did not do their home work to stand up on the bench in the classroom. ICAI has steadfastly refused accrediting institutions of repute that include BCAS to conduct seminars that could grant CPE credits and has also not recognised other forms of knowledge acquisition. This actually is an abuse of its dominant position among the members of the profession. 'Knowledge is what I give you not what you acquire of your own' seems to be the arrogant message that ICAI gives. Ok, at least do they get good faculty or arrange decent programs? Half the time is spent on council members vying with each other to steal stage space & attention, mutual adulations and selfgranted sessions etc. to make members suffer their incessant blabbering. The net result is that members grudgingly pay up, show up for a few minutes, the (continued onsign next page)
AUDITOR
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 : society.auditor@gmail.com editor@societyofauditors.in Website URL: www.societyofauditors.in
Adv B Ramana Kumar 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, Secretary, Ex-officio Member CA Karthik A Bhat
(continued from previous page)
attendance registers and disappear. ICAI gets the money it needs to cough up to the lawyers for meeting out the court cases that are filed and to pay up for the travel expenses for council members who have to attend meetings held in various parts of the country coinciding with some marriage or family functions of their Council colleagues and also to send some of the problemcreating council members on some missions abroad with a view to rein them in and to fund the council meetings at exotic places (recent meting was in Gangtok, where Council members went with their families) etc. As long as the gullible members are willing to 'purchase' their CPE credits and not question anything, why should ICAI shy of 'selling' the same? After all, CPE is Carefully Planted Extortion! Now, phrases like 'eminent' faculty, 'scintillating speakers', 'nominal fee', 'exclusive background material' are being used to lure members for such 'mega' seminars. Fortunately, 'gala' entertainment sessions with 'titillating' dances have been left out. In their limitless gluttony for 'fame' and 'money', the council members who do such aggressive marketing even fail to inform the members that the deadline for completing the CPE quota has been extended to March 31st 2014. Conventions: Amusingly for some and atrociously for some, there seem to be going on some discreet and cunning moves to challenge the convention of the automatic elevation of the Vice President of ICAI to the Presidential post at Central level. O b v i o u s l y, s e t i n m o t i o n b y s o m e C o u n c i l members who, according to the current scheme of things can never hope to reach Presidency, this is perhaps not the first time this has been mooted. Sometime earlier also, some other section of peeved members seemed to have done some machinations on this, which has prompted MCA, Govt of India to issue a strong advisory to the ICAI (No.3/Misc/2011-PI dt. 1st August, 2011) that if there would be any situation of nonobservance of the (already-in-place) healthy convention and a contest was forced, then “all the Govt. Nominees may cast their vote in favour of the Vice President in the election of the President”. Of course, notwithstanding this advisory, moves are likely to be made by first trying to bring a resolution in SIRC where also a similar convention is followed, to break the AUDITOR • December 2013
same. That the elected members unabashedly clamour for positions is a fact that is well known but this is the first time that this is being demonstrated with utmost brashness that would make even notorious politicians squirm. Until now, we had credited the current council of SIRC only with supreme inaction but when they decide to act, they seem to do so to eliminate aspects which reflect the last surviving bastions of professional elegance at ICAI. Perhaps it is even better that they revert to their eternal and most suited state of inaction quickly! There is this Madras High Court ruling that the AGM of SIRC has to be held as per regulations and a stay was granted for a move that was planned to hold the AGM without taking on board certain validly moved resolutions. Not a credible word on this from SIRC which has taken the stay as a convenient escape route. But, it prepares itself to hold another exclusive meeting to examine conventions. So, the issues like SIRC financials not being all right (how can it be right, when such financials are discussed and passed when the honourable members are in ‘high spirits’?), that there was dissent on the true & fair aspects, resolutions on the governance aspects have all been sidelined and only the issue of who should be (and more importantly, who should not be) the Chairman next term has become all-important. Only one word to describe the reported on-goings Shame! There is a Upanishad saying that reads “Vinasha Kale Viparidha Buddhi”. The literal translation is that “Whom the Gods wish to die, they first make mad”. The New Companies Act has almost dealt a death knell to our profession. The loss of confidence in our profession is obvious and our most respected (well, we shall give it to them!) council members do not understand that by such flippant acts put the entire profession at risk as being unreliable, unfocussed, silly, lacking leadership, and trivial. We have been choosing to ignore the risks and threats facing our profession and been behaving like an ostrich burying its head in the sand. If this goes on like this, long before, the Ostrich itself will be buried. Of course, majority of us do not bother about any of these. And that is the strength of those who misgovern.
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Analysis of Amendment to Rule 37 BB Furnishing of Information on payment made to Non Residents Effective 1st October 2013, furnishing of information in respect of payments made to non residents has undergone a big change due to the 14th Amendment Rules issued by CBDT. The CBDT has made certain relaxations in obtaining Form 15CB for persons making remittances to non residents and even reporting the transactions in Form 15CA. This has resulted in a situation where the persons making remittances can streamline their thoughts to first identify whether the payments are made in respect of a item which is taxable in India or not. Only if the answer to the above question is to the affirmative, need such persons proceed further in furnishing information in Form 15CA and obtaining certificate in Form 15CB. A comparative analysis of the scenario before and after the amendment is discussed below. Prior to 1st October 2013 Hitherto, the persons making payments to non residents were required to submit the details of remittance in Form 15CA and they were also required to obtain certificate from an accountant in Form 15CB, notwithstanding whether the payment made is taxable in India in the hands of the payee or not. As a result, even payments made in respect of reimbursement of expenses, repayment of loan taken from non residents etc. were also required to be reported. If the payments were made in respect of items which were not taxable in India in the hands of the payee, the reason(s) for the same was also required to be stated in Form 15CA by the remitter as well as by the accountant issuing Form 15CB.
CA Shyam V. Mahadevan, ACA
non-resident, not being a company or a foreign company. This signifies the intention of the law that what is required to be reported only items which are chargeable to tax in India
Non taxable items need not be reported After the Fourteenth Amendment Rules, the situation has changed tremendously wherein the remitter is first required to ascertain whether the remittance made is taxable in the hands of the payee. If the payments are made in respect of non taxable items viz., reimbursement of expenses, repayment of loan etc. no reporting need be made under Rule 37BB by the remitter. This helps in reducing a lot of burden in having several paper works getting done unlike the earlier situation. Hence, determining the taxability of the remittance forms the primary limb in deciding whether the same needs to be reported under Rule 37BB of the Income Tax Rules 1962.
Items falling under Specified List need not be reported Additionally, no reporting is required under this Rule if the nature of remittance is specifically covered under the “Specified List” as per Explanation 2 to Rule 37BB. The “Specified List” consist 28 kinds of remittances and if the remittance made falls under any of the nature specified in the said list, then the remitter need not report the same in Form 15CA and consequently need not obtain certificate from an accountant in Form 15CB.
Limits prescribed for reporting
Further, CBDT has also prescribed limits for determining the reporting requirement of From 1 October 2013 remittance based on the individual as well as Change of head note for Rule 37BB aggregate remittances during a financial year. The head note of the rule which read as Where the individual remittance does not Furnishing of information under sub-section(6) exceed Rs. 50,000 and if the aggregate of such of section 195 is now changed to Furnishing of payments does not exceed Rs. 2,50,000 during a information by the person responsible for financial year, then the same has to be reported making any payment including any interest or salary or any other sum chargeable to tax, to a st
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AUDITOR • December 2013
(continued from previous page)
only under Part A of Form 15CA and no Form 15CB need be obtained from an accountant in this regard. This forms one of the important parts of the amendment ie., even if the remittance is chargeable to tax, no certificate needs to be obtained in Form 15CB if the remittance is below the limits prescribed. Hence, care needs to be taken by the remitter in estimating the remittance required to be made during the financial year concerned. Where the remitter estimates that the aggregate of payments in a financial year exceeds Rs. 2,50,000, then for each of the individual remittances, certificate has to be obtained from an accountant in Form 15CB. In such cases, ie, where the remittances
exceed the limits prescribed, the reporting is required to be made under Part B of Form 15CA.
Other options If the remittance made exceeds the limits prescribed under the Rule, the remitter may, in lieu of obtaining a certificate in Form 15CB, can also opt for obtaining a certificate from the Assessing Officer under section 197 of the Income Tax Act 1961 or an order from the Assessing Officer under section 195(2) or under section 195(3). Summarizing the amendment Hence, the steps for ascertaining whether a remittance needs to be reported or not may be summarized as mentioned below:
Step 1 Determine whether the remittance is taxable in India in the hands of the payee OR Identify whether the remittance is covered under the "Specified List" under Rule 37BB Step 2 If the remittance is not taxable or if it is covered under the "Specified List", then no reporting is required Step 3 If answers to both questions in Step 1 are negative, then identify whether the remittance is within the limits prescribed. If the remittance is within the limits prescribed, then reporting is only required in Part A of Form 15CA. If the remittance exceeds the limits prescribed, then reporting is required to be made in Part B of Form 15CB after obtaining either of the following:
Form 15CB from an accountant, or
Certificate u/s 197 from the AO, or
Order u/s 195(2) or 195(3) from the AO
Conclusion Though it may be construed that the opportunities of a Chartered Accountant in the arena of issuing certificate in Form 15 CB has been reduced to a great level, the fact that there is in fact a great mismatch in terms of accompanying responsibility should be actually a relief! Also, the fact that CBDT has restricted the
AUDITOR • December 2013
reporting requirements drastically to only those cases where the remittances are taxable in India may be welcomed too. It is only hoped that the banks are updated immediately on the change of requirements and not continue to insist certificates before making foreign remittances.
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Case study in auditor's reporting responsibility on Going Concern Issue: X Ltd vide an agreement dated 1 Oct 13 transferred its operations, employees, assets and liabilities to Z Ltd with effect from 1st Dec 13. Pursuant to this agreement X Ltd ceased to function and is in the process of winding up, which has not happened till 31st Mar 14. Solution: Step 1 The company's management can be requested to make the disclosure as suggested below in the notes to accounts. Notes on Accounts A Back ground ……. B1 Basis of Preparation ……… B2 Going Concern The company decided to transfer all its employees, operating assets and liabilities to st Z Ltd with effect from 1 Dec 2013 vide Agreement to Transfer Asset dated 1 st Oct 2013. Pursuant to this acquisition, the Company is in the process of being wound up st and effective 1 Dec 2013 the Company has ceased to carry out its business activities. Hence the financial statements of the Company have been prepared under the
CA RG Rajan
liquidation basis of accounting whereby the carrying value of all assets as at 31 March 2014 are presented at their estimated realizable value and all liabilities are presented at their estimated settlement amounts Step 2 Under CARO 03 under the fixed assets reporting. The Company has disposed off all of its fixed assets during the year. The Company has so far not made any plans to replace the fixed assets that have been sold. These factors along with other matters as set forth in note B.2 of notes to accountraise substantial doubt about the Company's ability to continue as a going concern in the foreseeable future. The Company's financial statements have been prepared on a liquidation basis and appropriate disclosures have been made. Note: The above paragraph has to be in bold and italics as it is considered to be an auditor's comments which has an adverse impact on the functioning of the company. Step 3 In the Profit and Loss account Profit or Loss before tax should be disclosed as follows ‘Profit/(Loss) Before Tax from Discontinuing Operations’ to comply with AS 25.
BB NAIDU STUDY CIRCLE MEETING – JANUARY 2014 Issues in Professional Misconduct
Topic
:
Speaker
: Advocate K. Ravi
Date & Time : Saturday, the 31st January 2014 at 6.00 p.m.
(High Tea: 5.30 p.m.)
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AUDITOR • December 2013
FRRB Corner: Issues discussed in regard to compliance with Accounting Standard 15 ‘Employee Benefits’
CA. S. Aditya Kumar
The Standard deals with recognition and measurement of employee benefits and disclosure thereto. The Standard classifies the recognition of employee benefits as follows: Nature of Benefit
Example
Short Term Benefits
Benefits payable within 12 months viz., the wages, salary, incentives, etc.,
Other Long Term Benefits
Benefits payable beyond 12 months viz., leave encashment, incentive to retain employees, etc.,
Termination Benefits
Benefits payable at the time of retirement or exit of the employee by the Company viz., provident fund, gratuity, etc.,
Post Employment Benefits
Benefits payable after the employee’s tenure in office viz., medical benefits to the employee or their family, etc., Post Employment funds are further classified as Defined Contribution Plans and Defined Benefit Plans.
The FRRB has discussed issues relating to accounting and disclosure of employee benefits in the financial statements. The Long Term Employee Benefits, Termination Benefits and Post-Employment Benefits(wherein it is a Defined Benefit Plan) to Employees have to be provided based on the actuarial valuation. Whereas the Post-Employment Benefits and Termination Benefits are long term in nature, s o m e o f t h e b e n e f i t s l i k e L e a v e Tr a v e l Encashment could either be Long Term or Short Term depending upon the entity’s employment rules. Nevertheless, there has to be a specific mention on how the valuation of each of the employee benefit is conducted. The accounting policy would be incomplete without the mention on how the valuation is conducted. FRRB on its review remarked that non-disclosure of the method of valuation in the accounting policy would not portray the correct accounting practice of the entity and were also inconsistent with the Accounting Standards. It was viewed that the accounting treatment followed by certain companies were contrary to AS 15(R) Employee Benefits, as well as accrual basis of accounting as mandated under section 209(3)(b) of the Companies Act, 1956.
employees from the application of PUC method, i.e., these enterprises can use other rational method for accrual of liabilities. However, the Companies (Accounting Standards) Rules, 2006 do not contain such exemption. Therefore, the exemption provided by AS 15 cannot be utilized since, as per the Companies Act, 1956, Accounting Standards notified under Companies Act, 1956 has to be complied with. The Companies (Accounting Standards) Rules, 2006 do not contain such exemption and hence all the entities have to comply with AS 15 in its entirety, as far as valuation of the employee benefits is concerned. The Auditor of the financial statement should also consider mentioning about the non-compliance with Accounting Standard 15 in the Audit Report and it’s impact on the financial statements in the Opinion paragraph, if the difference is considered to be material. Ideally, an accounting policy should contain the principles adapted by the Company and also should be in consonance with the relevant accounting standard. The Auditor has to evaluate whether the Accounting Standards were correctly applied and whether the application of the standard was appropriately showcased in the Accounting Policy. Following are the extracts from the financial statements of some companies with regard to disclosure in accounting policy on the employee benefits and comments by the FRR Board:
AS 15 (Revised 2005) issued by ICAI exempts Level II and Level III enterprises having less than 50
AUDITOR • December 2013
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Accounting Policy of Companies observed by FRRB
Improvement Comments
Gratuity and Leave Encashment are charged to Profit and Loss Account through a provision for accruing liabilities based on the assumption that such benefits are payable to eligible employees at the end of the accounting year.
The use of actuarial valuation, which is mandatory for termination benefits, is not mentioned in the accounting policy. Hence, the entity is not complying with AS-15(R ) Employee Benefits.
The liability in respect of leave encashment as determined on the basis of accumulated leave to the credit of employees as at the year-end is charged to the Profit and Loss Account. Leave Encashment benefit is provided on the basis of actual liability as at the year end depending on the last drawn salary and the un-availed leave, subject to the maximum ceiling prescribed, to the credit of each eligible employee
Leave Encashment could either be of long term in nature or short term in nature, depending on the type of the scheme and employment rules. If Leave Encashment is a long term liability (in this case, having regard to rules of encashment / adjustment) has to be measured using actuarial valuation. Any other method of calculation of leave encashment in any other method is not in compliance with AS -15 (R ) Employee Benefits.
A Group Gratuity Scheme with Life Insurance Corporation of India covers the liability towards Gratuity in respect of eligible employees and the premium paid during the year under the Scheme is being charged to Profit and Loss Account
The actual payment to employees from the Fund is governed by the Company’s Rules. However for the purposes of provision in accounting, principles of actuarial valuation have to be adopted. Taking to P&L on payment basis tantamount to cash basis of accounting, which is not allowed under Companies Act. Further, premium paid for the Group Gratuity Scheme is for the fund management and is like any other financial funding. The actual liability to be accounted has to be determined based on actuarial valuation basis, the fact of which has not been mentioned in the Accounting Policy nor implemented. Further, the actuarial valuation when being done for the first time, should also consider Past service costs. (Past Service Costs arises when an enterprise introduces a defined benefit plan or changes the benefits payable under an existing defined benefit plan. Such changes are in return for employee service over the period until the benefits concerned are vested). Past service cost is measured as the change in the liability resulting from the amendment. In case of group gratuity scheme of Insurance Company, it was not clear whether the group gratuity scheme had covered all past as well as present liabilities for the current year. FRRB viewed that in absence of any mention on the coverage of gratuity, it could be viewed that the gratuity scheme of the insurance company did not cover past liabilities and / or that the contribution made was not the appropriate accrual of the liability for the year.
Provision for Gratuity is determined by the Company based on the assumption that all its employee retire on the balance sheet date.
The assumption that all the employees would retire on the balance sheet date is highly unrealistic and excessively conservative assumption. Further, it does not consider actuarial risk, and the principles of actuarial valuation are not followed while valuing its liability towards gratuity, which is against AS 15. (continued on next page)
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AUDITOR • December 2013
(continued from previous page)
Accounting policy on termination benefits of a company states that payments under Voluntary Retirement Scheme are recognised in the profit and loss account of the year in which such payment are affected.
Other Aspects: 1. Accounting of shortfall of interest to a provident fund trust which is managed by the Employer: Wherever the employer is compensating the Provident Trust, such provident fund contribution would amount to defined benefit plan (Para 26(b) of AS 15). Most PF Trust deed have an express clause saying any shortfall in interest needs to be made good by the Company and only if this clause is present, the trust is eligible for tax exemption. Any provident fund scheme administered through such trusts should be treated as defined benefit plan rather than defined contribution plan, and therefore the liabilities towards such benefit should be based on actuarial valuation. Further, the disclosure requirements for such defined benefits should be made as required under Para 119 and Para 120 of AS 15. Example: In Financial Year 2008:Extract from Annual Report of Infosys, prior to the clarification given by Actuarial Society of India: The Guidance Note on Implementing AS 15, Employee benefits (revised 2005) issued by Accounting Standards Board (ASB) states benefit involving employer-established provident funds, which require interest shortfalls to be recompensed, are to be considered as defined benefit plans. Pending the issuance of the guidance note from the Actuarial Society of India, the Company’s actuary has expressed an inability, to reliably measure provident fund liabilities. Accordingly the Company is unable to exhibit the related information. AUDITOR • December 2013
It was viewed that considering the provision given under paragraph 134 of AS 15, an enterprise is required to provide for termination benefits on accrual basis. Accordingly, the stated accounting policy is observed to be against the requirements of AS 15 as well as Section 209(3) (b) of Companies Act, 1956. Considering that the enterprise has a present obligation as a result of a past event or even a contractual obligation and there is a probability of outflow of resources and also the amount is determinable, creation of provision is required.
In Financial Year 2012: Extract from Annual Report of Infosys, after the clarification given by Actuarial Society of India: The Group contributed ‘238 crore and ‘198 crore towards provident fund during the year ended March 31, 2012 and March 31, 2011, respectively. The Guidance on Implementing AS 15, Employee Benefits (revised 2005) issued by Accounting Standards Board (ASB) states that benefits involving employer established provident funds, which require interest shortfalls to be recompensed are to be considered as defined benefit plans. The Actuarial Society of India has issued the final guidance for measurement of provident fund liabilities during the quarter ended December 31, 2011. The actuary has accordingly provided a valuation and based on the assumptions provided below there is no shortfall as at March 31, 2012, 2011, 2010, 2009 and 2008, respectively. 2. Disclosure of Other Matters, apart from the actuarial valuation. The actuarial valuation report normally includes the disclosures required to be made in accounts, however these need not be the only disclosures that are required to be made in accounts. It is observed that many entities reproduce the actuarial valuation as part of it’s accounts. H o w e v e r, c e r t a i n a s p e c t s n o t c o v e r e d i n actuarial valuation but are required to be disclosed are: * Para 120(m) requires “the effect of an increase of one percentage point and the effect of a decrease of one percentage point in the assumed medical cost trend rates on: (continued on next page)
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o The aggregate of the current service cost and interest cost components of net periodic post-employment medical costs; and o The accumulated post-employment benefit obligation for medical costs.
The above paragraph requires the entity to have a sensitivity analysis on the provision of postemployment medical costs (and not on other employee benefits) if there is a change in assumptions by 1%. The above calculation may not be part of the actuarial valuation, but still is mandatory to be disclosed.
Extract from L&T 2012-13 Report: 9
A one percentage point change in assumed healthcare cost trend rates would have the following effects on the aggregate of the service cost and interest cost and defined benefit of obligation: Rs. Crore Effect of 1% increase Particulars
Effect of 1% decrease
2012-13
2011-12
2012-13
2011-12
Effect on the aggregate of the service cost and interest cost
2.73
2.15
(2.10)
(1.67)
Effect on defined benefit obligation
11.11
8.74
(8.84)
(7.02)
*
Para 120(n) requires “the amounts for the current annual period and previous four annual periods of : -
-
* The plan liabilities expressed either as (1) an amount or (2) a percentage of the plan liabilities at the balance sheet date, and
The present value of the defined benefit obligation, the fair value of the plan assets and the surplus and the surplus or deficit in the plan; and
* The plan assets expressed either as (1) an amount or (2) a percentage of the plan assets at the balance sheet date.
The experience adjustments arising on:
Extract from Note Q8 –(FY 2012-13) of L&T Limited g) The amount pertaining to defined benefit plans are as follows: Rs. Crore As at
As at
As at
31.3.2013
31.3.2012
31.3.2011
Post-retirement medical benefit plan (unfunded) Defined benefit obligation Experience adjustment plan liabilities
105.31 1.62
87.01 (6.60)
91.31 7.91
78.99 5.73
70.97 1.13
Gratuity plan (funded/unfunded) Defined benefit obligation Plan assets Surplus/(deficit) Experience adjustment plan liabilities Experience adjustment plan assets
364.45 311.80 (52.65) 26.26 13.01
341.07 291.66 (49.41) 30.52 (0.45)
336.33 308.38 (27.95) 30.00 4.48
320.41 279.30 (41.11) 30.67 2.21
272.93 244.71 (28.22) 8.38 13.13
Post-retirement pension plan (unfunded) Defined benefit obligation Experience adjustment plan liabilities
198.36 (2.79(
184.03 23.21
162.14 17.46
135.61 (4.11)
151.80 (6.89)
Particulars 1.
2.
3.
4.
As at
As at
31.3.2010 31.3.2009
Trust managed provident fund plan (funded/unfunded) Defined benefit obligation
1675.94
1544.72
1396.21
1199.77
1001.10
Plan assets
1648.23
1507.47
1369.08
1186.01
1017.06
(27.71)
(37.25)
(27.13)
(13.76)
15.96
Surplus/(deficit)
(continued on next page)
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AUDITOR • December 2013
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The above paragraph requires the company to disclose the movement of provision for the liability and the availability of assets over a period of 4 years (and not just the previous financial year, as done in the disclosure of other financial elements in the financial statements). · Para 120(o) requires “the employer’s best estimate, as soon it can reasonably be determined, of contributions expected to be paid to the plan during the annual period beginning after the balance sheet date.” If the entity is unable to determine the amount, it should be disclosed that the amount cannot be determined. Non-disclosure of the expected amount (even if it is not determinable) would amount to noncompliance with AS 15. Extract from Note Q8(ii)(f)(7) –(FY 2012-13) of L&T Limited *
Basis used to determine the overall expected return: The trust formed by the Company manages the investments of provident funds and gratuity funds. Expected return on plan assets is determined based on the assessment made at the beginning of the year on the return expected on its existing portfolio, along with the estimated increment to the plan assets and expected yield on the respective assets in t h e p o r t f o l i o d u r i n g t h e y e a r. N o t e Q(8)(ii)(f)(7). The Company expects to fund Rs. 51.53 crore (previous year: Rs. 48.56 crore) towards its gratuity plan and Rs. 108.96 crore (previous year: Rs. 84.45 crore) towards its trustmanaged provident fund plan during the year 2013-14.
3. Disclosure requirements of “Post Retirement Defined Benefit Schemes” and “Other Long Term Employee Benefit Schemes”
The Standard makes a difference between the above schemes. Whereas the “Post Retirement Defined Benefit Schemes” such as gratuity are payable on cessation of service, “Other Long Term Employee Benefit Schemes” such as compensated absence may be payable during the tenure of the service also. Benefits such as gratuity, pension or post retirement medical are categorized by the AS 15(R ) under the heading “Post Employment Defined Benefits Plans”. Such benefits require detailed disclosures under Para 119 to Para 125 of the Standard. However, the disclosure requirements for “Other Long Term Employee Benefits” are covered under Para 132 of the Standard, which requires no such disclosures.
Para 132 of AS 15 states: “Although this Statement does not require specific disclosures about other long-term employee benefits, other Accounting Standards may require disclosures, for example, where the expense resulting from such benefits is of such size, nature or incidence that its disclosure is relevant to explain the performance of the enterprise for the period (see AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies). Where required by AS 18 Related Party Disclosures an enterprise discloses information about other long-term employee benefits for key management personnel.”
Similarly, Para 66 of AS 29 “Provisions, Contingent Liabilities and Contingent Assets” require disclosure of the movement of the provision during the financial year.Hence, the movement in liability has to be disclosed for the compliance of AS 29 and also to comply with AS 15, Para 132.
READERS / MEMBERS OF SOA ARE WELCOME to contribute articles of topical importance for consideration of publication in AUDITOR. The articles, which have to be original, may be opinionated, critical and analytical. In fact, the intention should be to share knowledge laced with opinions that could open up discussions and debates within the fraternity on subjects of professional significance. AUDITOR • December 2013
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Old Madras Road T.R.Tawker & Sons
Oakes & Co.
T.R.Tawker and Sons were leading diamond merchants of the Madras Presidency in the late th th 19 and early 20 century. They belonged to the Gujarati community, with their presence in South India dating back to the mid 1600s.
Founded in 1843 as Oakes, Partridge & Co., it was the city's first department store, selling everything short of a “wife or housekeeper”. Originally founded in Broadway, they moved their headquarters to Mount Road opposite the Government House in 1895, when they reconstituted themselves as a limited liability company. As general merchants, they held a large and varied assortment of all kinds of hard and soft goods, wines and spirits and were representatives of a number of insurance and shipping companies. They also established a cigar factory in 1892. The “Beehive Foundry” was their iron foundry and engineering works division, which successfully executed several projects for the railways, shipping companies and many leading merchants of the Madras Presidency. In the 1920s, Oakes & Co was taken over by the Spencers, with the “takeover king” J.O.Robinson spearheading the move. The Beehive foundry still survives today as a part of the Beehive Kowtha Group, having been taken over by Kowtha Suryanarayana Rao, the scion of a leading business family from Vijayawada.
The business was a flourishing one with customers that included Zamindars, royalty and leading musicians. The Official Catalogue of the Exhibition held in connection with the Coronation Durbar in Delhi in 1903 valued their collection displayed on the occasion at Rs.60 Lakhs. Their showroom, designed by the legendary Henry Irwin was next to where the V.G.P building today stands on Mount Road. The New College came up o n t h e s i t e o f t h e i r r e s i d e n c e , “ Ta w k e r s Gardens”. The business ran into financial problems following a payment that did not materialise for an expensive robe studded with diamonds they had made for the VIth Nizam of Hyderabad. It was a huge blow they never really recovered from. They were declared insolvent in January 1925.
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AUDITOR • December 2013
Success secrets of Nani Palkhiwala – the all time great lawyer The book “Nani Palkhivala: Courtroom Genius” by Soli Sorabjee reveals some incredible secrets of Nani Palhivala’s success formula that can be emulated to the extent possible by those of us who are in the representation / litigation practice. Thorough study of facts & research into law: To a casual observer, it appeared as if Nani Pa l k h i v a l a h a d a q u i c k g l a n c e a t t h e b r i e f , immediately absorbed its contents and was instantly ready to argue the entire matter extempore. This was a myth that Palhivala cultivated and even seasoned advocates were taken in by it. Iqbal Chagla, eminent senior advocate, recollects how he was briefed in a trust matter with Nani Palkhivala. Chagla had a conference with Palkhivala and pointed out a few authorities on the subject. Palkhivala speed-read the judgements and noted their citations on a chit of paper. 10 days later, as the matter was called out in Court, Palhivala breezed in, pulled out the chit of paper and appeared to remember all the facts and principles laid down in the judgements cited by Chagla. However, this may not be an entirely correct depiction of how Nani Palkhivala worked. While Palkhivala gave the impression in conference of having just browsed through the papers, the reality was that he was very meticulous in studying the facts and researching the law. This is best exemplified by Nani Palkhivala’s preparation for the Keshavananda Bharati’s case, the biggest constitutional matter ever argued in the Supreme Court. Palkhivala formed a team of topnotch Counsel including Soli Sorabjee, Anil Divan etc with clear instructions that they should scrutinize the research material and judgements and then brief Palkhivala in the night and morning. Each morning, Palkhivala would indicate the outline of the submissions that he proposed to make during the day and his team had to ensure that all the books and papers were kept ready. Palkhivala’s defense in the copyright infringement case that was foisted against him by Sampath Iyengar also reveals careful strategic planning and preparation and an approach that no chances would be taken against the opponent. Focus & Concentration on the task at hand: Nani Palkhivala had the ability to focus and concentrate on the task at hand. He did not believe in multi-tasking. Do one job at a time and do it well was his motto. AUDITOR • December 2013
When Palkhivala conducted a conference, one could see that his table was cleared of all other papers. Only the brief and authorities required for the conference would be placed before Palkhivala. Phone calls and other distractions were not allowed to disturb the proceedings. The other aspect of Palkhivala was that he would have read up the brief before the conference. His questions on facts were precise and focused and he would keep a list of authorities that he would ask the instructing CAs to keep ready for the hearing. Well-thought out strategy before starting the matter: Nani Palkhivala would formulate his propositions well in advance of the hearing and compartmentalize the facts. So, when he was arguing the matter, it was very clear to the Judges on what propositions of law Palkhivala was advancing, what were the facts and what were the case laws on the subject. Palkhivala would, at least in important matters, prepare written submissions or propositions that would act as an aide-de-memoire for the Judges. Persuasive style of advocacy: Nani Palkhivala had a two-fold strategy to convince the Court of the correctness of his propositions. Apart from an interpretation of the statutory provisions, Palkhivala loved to paint a dark picture of what adverse consequences would follow if his interpretation of law as not accepted. Palkhivala’s style was highly persuasive and his expertise of addressing large numbers of the public in the Budget speeches came in handy because Palkhivala instinctively knew what the listeners wanted to hear and gave it to them with a bit of rhetoric. Courtesy to the Bench & the Bar: Palkhivala welcomed legal problems and complications. He enjoyed solving these problems the way ordinary people enjoyed solving crossword puzzles. Palkhivala did not regard work as ‘work’ or as something that one had to do to earn a living while craving to do something else. For him, work was itself a source of pleasure; a tool of amusement and something that would refresh him Pa l k h i v a l a w a s v e r y e n d e a r i n g t o e v e r y o n e because, though gifted with incredible intellectual prowess, he was very simple and down to earth. 13
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Iqbal Chagla described him as “a man of genius who never lost the virtue of humility; a man of singular simplicity graced with unbounded warmth and kindness; a man of letters as much as of the law”. Vahanvati also spoke of his experience with Palkhivala. He always treated his clients and juniors with “unfailing courtesy” and when the conference was over, Palkhivala would get up from his chair, open the door, led everybody to the lift and made them feel so special. Vahanvati adds that this was not contrived but “came naturally to him. Humility was part of his psyche and he made people comfortable. A great man is one who is truly humble. He doesn’t need to put on airs. He doesn’t need to throw his weight around”. Made complicated issues look simple and boring issues look interesting: Nani Palkhivala had the incredible ability of making his argument sound so simple and convincing that the Judge would be left spellbound. We could all see this in his budget speeches where his speech was full of quotations, statistics and lots of other information that he would recite from memory and without a single scrap of paper before him. Palkhivala could also do something which no other person has been able to do: Make a dry and boring subject like the annual Budget look interesting and exciting – even for the common man. Palhivala’s advocacy was unique in that, to use Vahanvati’s words, “when he addressed the Court, he communicated with the judge. He caught his eye. He caught his attention. And he dominated his brain”. Time management: Nani Palkhivala was a stickler for time discipline. In his mind, he would allot the time required for the various tasks that he had to accomplish and ensure that they were done within that time. This strict adherence to time management made it necessary for Palkhivala to focus and concentrate on the job in hand and his ability to focus and concentrate made it possible for him to adhere to his selfimposed time restrictions. Palkhivala hated to come to Court early and to have to just sit and wait for his matter to reach. He would walk into the courtroom just a few moments before his matter was expected to be called out. If the preceding matter took longer than expected, Palkhivala would get visibly annoyed and tense though he would not say anything. 14
If Palkhivala did have to sit in Court, he would busy himself with reading some other brief or case for opinion. He would also settle draft petitions and opinions in Court. After finishing his matter, Palkhivala would rush back to his Chambers for the next conference or to read up for the next matter. Single-pointed determination to succeed: This trait can be seen amongst all successful person whether they be in the field of sports, business or the profession. Such people are highly motivated and self-driven. They set goals for themselves and push themselves hard to achieve that. Nani Palkhivala was no exception to that rule. From childhood, he was a topper in everything that he did. Capacity for hard work: This was a natural corollary of Nani Palkhivala’s high levels of motivation and strong urge to succeed. Palkhivala welcomed legal problems and complications. He enjoyed solving these problems the way ordinary people enjoyed solving crossword puzzles. Palkhivala did not regard work as ‘work’ or as something that one had to do to earn a living while craving to do something else. For him, work was itself a source of pleasure; a tool of amusement and something that would refresh him. So, Palkhivala was ready, willing and able at any time of the day (or night) to tackle legal problem. The authors give examples of how Palhivala conducted a conference at 12.30 am with Bansi S. Mehta, an eminent Chartered Accountant, and another at 3.30 am with Ravinder Narain, the well known advocate. The secret of Palkhivala’s unending reservoir of energy was that he never regarded these assignments as ‘work’. Speed reading & continuous self-improvement: Palkhivala had mastered the art of speed-reading in which a person rapidly skims a page from top to bottom and assimilates all its important points. His masterful ability to focus and concentrate would have aided this trait of speed-reading. The other aspect of Nani Palkhivala was that he was very fond of reading ‘self-improvement’ books, especially those by Peter Drucker. It does sound odd that a person of such incredible intellectual ability should be interested in ‘self-improvement’ books but these books were probably just an enjoyable distraction for him. Courtesy: An article found in the web by CA. Vellalapatti Swaminathan Iyer.
AUDITOR • December 2013
Recent Judicial Decisions Reported Statute: Income Tax Act – Sec.2(15), 11(4A) – No profit motive Title : PHD Chamber of Commerce and Industry vs DIT Citation: 357 ITR 296
P.M. Veeramani, FCA Decision in favour of : Assessee Bench: Delhi HC
AO held that assesse was carrying on business of rendering services not only to its members but also non-members and there section 11(4A) was attracted. According to him the activities were not charitable in nature. It was not proper to characterize the activities of the assesse as amounting to business in the generally understood sense of the word, the most important feature of business being profit motive. It had not been suggested by the income tax authorities that activities were propelled by any profit motive. Therefore, provisions of section 11(4A) were not attracted. Statute: Income Tax Act – 2(22)(e) – Computation of accumulated profits Title: Kewalkumar Jain vs ACIT Citation: 144 ITD 672
Decision in favour of : Assessee Bench: ITAT Pune
In order to compute amount of deemed dividend taxable, loans/advances given to shareholders in past years, have to be reduced from the surplus while determining “accumulated profits” in hands of company during year under consideration. Further, while determining amount taxable, addition to be restricted to such percentage of accumulated profits as corresponds to assesse’s shareholding in company in question. Statute: Income Tax Act – Sec.4 – Sale of carbon credit Title : Ambika Cotton Mills Ltd vs DCIT Citation: 27 ITR Trib 44
Decision in favour of : Assessee Bench: ITAT Chennai
Realisation of carbon credit was to be considered as capital receipt and addition was to be deleted. Statute: Income Tax Act – Sec.10(23C)(vi) – Music Society Title : Delhi Music Society vs DGIT Citation: 357 ITR 265
Decision in favour of : Assessee Bench: Delhi HC
Assessee teaching western classical music and Indian and Western dancing. Regular classes conducted in a systematic manner. Assessee was an educational institution entitled for exemption. Statute: Income Tax Act – Sec.12AA(3) Registration cannot be cancelled Title :The Civil Services Society vs DIT Citation: 93 DTR Trib 314
Decision in favour of : Assessee Bench: ITAT Delhi
DIT could not cancel registration under 12A granted to the society running a school on the ground that it had not fulfilled the requirements of Directorate of Education as per which assesse was required to admit 25 percent students belonging to the EWS category, when the Directorate of Education has not taken any action against the assesse. Impugned order under section 12AA(3) set aside and registration under section 12A restored. Statute: Income Tax Act – Sec.28(iv) – Year of taxability Title : CIT vs Excel Industries Ltd Citation: 93 DTR 457
Decision in favour of : Assessee Bench: Supreme Court of India
There is no liability on the customs authorities to pass on the benefit of duty free imports to the assesse exporter under the advance licenses as well as the duty entitlement pass book until the goods are actually imported and made available for clearance; income does not accrue in the year of export but in the year in which the imports are made. Statute: Income Tax Act – Sec.40A(2) – Fair Market Value to be seen Title : ACIT vs Shirish Maganlal Ravani Citation: 91 DTR Trib 289 TM
Decision in favour of : Assessee Bench: ITAT Rajkot
For the purpose of disallowance , the guiding factor is whether the expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment was made. Provision cannot be invoked merely because assesse is liable to pay a lesser amount of tax by incurring legitimate and reasonable expenses. Statute: Income Tax Act – Sec.40(a)(ia) – Amendment retrospective Title : CIT vs Nareshkumar Citation: 94 DTR 48
Decision in favour of : Assessee
The provision can be and should be interpreted liberally and equitable so that an assessee should not suffer unintended and deleterious consequences beyond what the object and purpose of the provision mandates. Tribunal was therefore justified in holding that the amendment by FA 2010 should be given retrospective effect and should be applicable to AY 2008-09. Statute: Income Tax Act – Sec.41(1) – Not applicable if loss is unabsorbed Title : The Mula Pravara Electric Co-operative Society Ltd vs DCIT Citation: 91 DTR Trib 434
Decision in favour of : Assessee Bench: ITAT Pune
If the assesse claims deduction of certain expenditure and ultimately there is loss, and such loss cannot be set off under section 71, then 41(1) cannot be invoked in respect of remission or cessation of liability relating to such expenditure. Statute: Income Tax Act – Sec.45 – PMS transactions Title : Salil Shah Family Private Trust vs ACIT Citation: 144 ITD 390
Decision in favour of : Assessee Bench: ITAT Mumbai
Agreement with portfolio managers showed that intention to appoint those portfolio managers was to invest its corpus fund in shares and securities for wealth creation. All decisions regarding investment, timings were made by PMS provider and not by assessee per se, though resultant gain / loss was on assessee’s investment. Transactions had resulted into capital gains and not business income.
AUDITOR • December 2013
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