For Private Circulation Only • December 2014 • Vol 8 Issue 12
Society of Auditors
Chennai Inside this Issue... •
From the Edit Pad
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President’s Message!
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CROWDFUNDING - Types, benefits and risks
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Sri Arun Jaitley on ‘Corporate Terrorism’ !
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GST Uniting India
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CA – aka – Cultural Ambassadors
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Old Madras Road
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Courts Castigate Revenue Officials!
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Indirect Tax Snippets
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Recent Judicial Decisions Reported
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Seminar Announcement
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FROM THE EDIT PAD 10th Dec, 2014 - It was a sad day for most of us. Our professional colleague and a long-time activist as a committee member of SOA, Sri C.R. Sundarrajan of R.K. Kumar & Co passed away suddenly and what made his demise so shocking was that he was barely 56 years old and was showing no signs of any kind of ill-health even a few days before when most of us met him at a wedding of a son of another colleague. This gives us another warning bell to all of us, professionals, who not only take most of the pressures of our clientele on to our heads (and hearts), knowingly or unknowingly but also resolutely not taking any preventive healthcare measures. We are known for our sedentary life styles and realize little that we could be nurturing a ticking time bomb, without any outwardly sign. We have similarly lost CA V.J. Ramachandran and CA. Krishnan in the past couple of years and now CA Sundarrajan has also left us. I would implore every one of you to take proper care on health fronts and learn to lead a stress-free life, as I tender this advice to myself too. We owe it our families, friends and to ourselves. CAG, in a recent report had made some scathing observations on the profession, with respect to the Tax Audit reports, while doing the performance audit that covered assessments from FYs 2011-12 to 2012-13. Some of them were: (a)We found cases where the CAs failed to report full and correct information in 367 cases leading to short levy of taxes of Rs 2,813.11 crore and where the Assessment Officers failed to utilise the information available in 102 reports or certificates submitted to them leading to short levy of taxes of Rs 1,310.05 crore; and (b) We also found in another 616 cases where CAs committed mistakes viz in allowance of exemption or deductions, charging of tax on book profit under Section 115JB, adoption of arm's length price and
AUDITOR A periodical from Society of Auditors, Chennai Society of Auditors “Platinum Chambers”, 33, TNHB Complex, 4, Luz Church Road, Mylapore, Chennai - 600 004. Phone : 044-2498 6979 E-mail : society.auditor@gmail.com editor@societyofauditors.in Website URL: www.societyofauditors.in
P.S. Prabhakar reporting on cash payments exceeding Rs 20,000 per day. Assuming the above observations are correct, it still points to a situation where only an insignificant percentage (less than a few hundreds among 65000) of the tax auditors have ‘made mistakes’. Which again means that the overwhelming majority have done a commendable job! CAG’s pervious reporting pattern is not new. The constitutional ‘last-laugh’ status afforded to CAG is forever making them overbearing. They are never capable of doing any original work and like trained rag pickers all the time keep looking for garbage and then to make small matters look huge. Even on settled matters, they take positions that border on nonsense and tax officials, who also prefer taking the easier option, simply re-open the assessments and keep harassing the assessees. If and when we have finality in 2G and Coalgate scams, the nation will come to know the enormity of their stupidity of putting up mind-boggling figures just to attract media attention. If some Chartered Accountants were to be assigned the job of doing a performance audit of CAG reports and also given the luxury of its wide reportage, we can also take sweet revenge on them. Alas, the system is never fair! That said, the report that certain CAs have signed significantly more number of Tax Audit Reports than what is permissible is a cause of concern. ICAI has to seriously look in to this and take disciplinary action suomoto. Chennai, where the SOA is head quartered, is culturally very busy at this time of the year. Music, dance, spiritual discourses etc. everywhere. Among our own fraternity, we have a few who excel in the cultural space. We have compiled a short write-up about them. AUDITOR and SOA wish all of you and your families a happy, glorious, prosperous and healthy 2015.
Editorial Board CA P S Prabhakar, Editor Adv B Ramana Kumar CA R Sivakumar, President, Ex-officio Member CA Mahesh Krishnan CA Karthik A Bhatt
President's Message Dear Members, I am glad to inform you that I have received favourable responses from some senior members of the profession on the message I wrote in the last month’s issue. Though I did say that I didn’t believe in writing often, I felt it was necessary to touch upon the topic of students and exams. Being a teacher myself, this subject has always been foremost in my mind. I had the opportunity to meet Sri.P B Vijayaraghavan, a doyen of the professionfrom whom and from Sri.KAnanthachari, o u r Pa s t Pr e s i d e n t , I r e c e i v e d e n c o u r a g i n g ideas.Surprisingly Chartered Accountants in many firms also expressed concern about the enormity of the failure in the CA Exams. Hence I am writing this to kindle some interest amongall of us. Till 1980, there was not muchof an issue, as students did not face the difficulty of understanding English as well as the subject. During 1980 – 2000, difficulties started in a slow measure. However, the introduction of CPT has resulted in much chaos. The quality of the students entering the profession has been declining in the past decade and it is becoming increasingly difficult for one to come to a conclusion with their high marks in the plus-two stage. Quite significantly, the maturity level is also a factor to reckon with. There could be debates on this issue and many of us may feel that it is upto the student to take it or leave it. However I would like to request all the members to introspect since it is our bounden duty to see that the articled student is given the proper training and ensure that he passes the exam. As compared to yester years when there was not much of a distraction in the form of cellphones, Television, etc., today the student community is highly tech savvy with enormous amount of information, literally at their fingertips.A sea change in the culture is also noticed. But there is no seriousness in terms of obtaining knowledge. This gap has widened to such a great extent and today no student has the inclination to refer text books or other reference books. Ironically it is the bazaar guides which arecausinghavoc. The student is not even prepared to go through the excellent study materials of the Institute. The reason is obvious. The understanding of English has become very poor. Till 80’s students compulsorily wrote the papers of the Coaching Board which enabled the student to attain the requisite speed in the exam. Today this has been one of the major difficulties. I could gather from the current examination that most of the students were unable to complete the paper. This should be a serious concern for all of us as members. It is essential that each firm should ensure that the student is forced to write for half-an-hour daily. There is no other solution for this. Adding fuel to the fire, the last 3 or 4 examinations, students have been terribly disappointed with the marks they have obtained. Some of them have paid
AUDITOR • December 2014
R. Sivakumar Rs.500/- per paper to get their valued answer scriptsonly to be aghast to find the valuation terribly p e r f u n c t o r y. I t i s m o r e disgusting to note that nothing can be done beyond obtaining the papers. It is here that we suggest to the ICAI for a change in the system of Exam. It should be of interest to members that some cases are pending before the High Courts on this matter. The ICAI regulations say that, on a student applying for retotaling if it is found that there has been an omission to mark, the same will be valued. The moot point is the word omission. In one of the Editorials as early as 1995 the then President Mr.Kale wrote that the Head Examiner goes through the variations in the valuations by the examiner for each and every answer written by the student. This clearly indicates that under the ICAI system there are stepwise marks for every question and for every subject. If this is true it is the foremost duty of the ICAI to ensure that such variations are arrested. One may accept if marks are awarded for inadequate or wrong answers but there should never be a situation where marks are not being awarded for a correct answer. I would like to request all the members to spend a few hours on the academics of the students apart from the practical knowledge. There are methods by which this could be achieved without compromising the work ethics. I am glad to inform you that our past president Sri.KAnanthachari has time and again insisted to conduct the examinations for the students and also a special counseling session. I should frankly admit that the Society conducted the same between 1987 – 1995 and most of the students came out successful. This was due to commitment from Sri.SRajaratnam and a few members. Unfortunately due to reasons which are best not stated, we had to close down. Many members and those students who were beneficiaries of this model exam have requested me to conduct the same again. I am now forced to commit the said scheme atleast to prove that the results from our region is enhanced and earnestly request for the cooperation from all of you. We have to design a special scheme for this purpose and ensure that students writing the May 2015 exam are benefitted. In any case, one of the objectives of the Society of Auditors is to educate the students, both in theory and practice. The Society has plans for conducting special seminars, details of which will be sent to you. Let us also be proud of our members who have been contributing to various forms of Arts, especially Music. The editor is penning a write up on this. Perhaps it is time that we also relax with the splendor of music. Wishing you all a Happy and Prosperous 2015.
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B. Ramana Kumar
CROWDFUNDING - Types, benefits and risks We have discussed what crowd funding is in the earlier article. The various types of crowd funding are described here along with the benefits and risks. It would be pertinent to observe that almost all the types of crowd funding are prevalent in India in some form or the other. In fact, the back bone of the Indian economy in the pre British era was on the form of crowd funding. Be it the “Mahamai” system in Sivakasi or the various Chit fund system or the temple renovations done in lakhs, crowd funding was a main mode of economic activity which ensured equality, wealth distribution and value generation in ancient and medieval India. Types of Crowdfunding: Crowdfunding can be divided into four categories: donation crowdfunding, reward crowdfunding, peer-to-peer lending and equity crowdfunding. Donation Crowdfunding: Under this system, funds are acquired without the exchange of anything of tangible value. It may be acquired for any project. Kick-starting a new venture, idea, concept etc. Donation based Crowdfunding, relies on the contributions of the investors. The producers do not exchange anything of value to the investors. This is mainly applicable to charities, or to create an online community that will help people to donate to such a charity. Most established charities have their own sites, but this method can be very useful to quickly raise funds for individual charities or causes. Parallel can be drawn to the various temple projects, right from Kumbabishekam to the renovation to the creation of Chatarams, Chavadis and other institutions. Reward Crowdfunding: Under this system, funds are acquired by the producers by providing investors with existing or future rewards as consideration for their contributions. Rewards may include a current product or future consumer products or even a membership reward scheme. The methods applicable to Donation Crowdfunding a r e a l s o u s u a l l y a p p l i c a b l e t o Re w a r d Crowdfunding. A more popular method is to reward investors with a preview version of the product or even allow the investors to be the first recipients of the product once it is completed.
Advocate, Chennai
In reward crowdfunding, parallels can be drawn to the various charity schools created and the Mahamai system in Sivakasi. Under the Mahamai system, each sale or economic activity attracts a .1% levy for community development. This collection raised from each and every invoice, bill, note, transaction in the region is used to build temples, roads, and other public utilities, used by all in the region/community as the reward. Peer-to-Peer Lending: Peer-to-Peer lending also known as Debt Crowdfunding is utilised by using an online platform to match investors or lenders with borrowers for the purpose of unsecured loans, with the interest rate set by the online platform. It allows a group of lenders to lend funds to individuals or businesses in return for interest payment on top of capital repayments. Some Peer-to-Peer platforms help by facilitating loans between individuals, while other platforms use alternative means. Lending Club, Prosper, Funding Circle etc. are some examples of platforms that facilitate Peer to Peer lending. The chit fund system in India is a classic example of the peer-to-peer crowd funding. Equity Based Crowdfunding: Equity-based crowdfunding is the collective effort of individuals to support efforts initiated by other people or organizations through the provision of finance in the form of equity. It refers to fund raised by a business, in particular early-stage funding, through offering equity interests in the business to investors online. Businesses seeking to raise capital through this mode typically advertise online through a crowdfunding platform website, which serves as an intermediary between investors and the start-up companies. Benefits of Crowdfunding: Crowdfunding provided an alternate mode of acquiring funds and financial aid for start-ups and SME sector and increases flows of credit to SMEs and other users in the real economy. It provides alternatives for raising funds without relying on banks. A common trend is that banks have become increasingly constrained in their ability to lend money to the ventures or start-ups which may have high risk element. Hence, there (continued on next page)
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is a need for funding for Small and medium Enterprises (SME) through alternative sources of which Crowdfunding is one. Another advantage is that SMEs are able to avoid any monotonous and time consuming procedures while raising funds at lower costs under this method. This method also provides people with new and alternative investment options and helps to diversify the products currently available in the market. Risks of Crowdfunding: There are multiple risks in Crowdfunding that apply to both the investors as well as the product managers. The various risks faced by them can be classified as follows: Risk taking: The risks of Crowdfunding are usually taken by the investors. Normally, crowdfunding platforms try to spread out the investments into smaller sums to be collected from a large number of investors. Due to this, it may involve investors who may not be able to understand the risks involved or their tolerance for taking risks may be very low. This becomes a problem as due to the risky nature of crowdfunding, failures may lead to the investors deciding to withdraw any further participation in the future thus leading to a reduction in the number of investors.
Risk of Reputation: The reputation of the producer can take a huge hit if they fail to meet the stated goals in the Crowdfunding campaign. Further, their reputation can also be damaged by failing to generate interest at the starting by not attracting enough investors or generating enough public support. Intellectual Property Protection: The risk of plagiarism is a valid concern and this causes many producers to be reluctant to disclose any information about the project. This lowers the public interest in the project and as a result, causes fewer investors to get involved in the project. Another problem is that the Crowdfunding platforms offer very little, if any, security for intellectual property. The other jurisdictions of the world are waking up to the huge potential of crowd funding. Almost all the countries are enacting laws to regulate the same which would be discussed in the forthcoming articles in the series. We would also explore how the Modern India is looking at this type of parallel financing and how the Indians abroad have effectively used this to create social assets, useful the their respective communities and others.
*** The author is a practicing advocate and can be reached at ramanaechambers@gmail.com
H CO UM RN OU ER R
Risk of Default: There is no legal recourse for investors against the producer in cases of default or fraud. As the funds are not being directly solicited by the platform, it also cannot be held responsible. Further to the above, the producer
also offers no collateral for Crowdfunding. This is because Crowdfunding is a method of generating funds on the basis of future possibilities. Success depends on many variables and is thus not guaranteed. This is furthered by the fact that the participants may not actually have the skills and/or experience needed to assess the risks involved.
YEAR END CLEARANCE SALE OF CPE CREDITS ONLY AT SIRC! AT NEVER BEFORE PRICE OF JUST RE.1/- PER MINUTE! 360 DEGREES EARNING OF CREDITS! INSPIRING EXCELLENCE ! (and not Expiring Insolence!)
Bonus : Stale humour, smiley glances & sumptuous food Note: Credits only for listening to at least the intro speeches of council members. AUDITOR • December 2014
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Sri Arun Jaitley on ‘Corporate Terrorism’ ! We reproduce the text of speech made by Sri ArunJaitley, Hon'ble Minister of Finance and Corporate Affairs in LokSabha on 17.12.2014, which in our opinion is the most sensible in a long time by any FM in the country. Appalling it may sound, the Companies Act as passed in the dying days of UPA regime had, actually, a provision that would make businessmen of this nation worse criminals than terrorists! And our Chambers of Commerce and other trade bodies which should have protested vehemently did not even whimper before that regime. Shuddering! - Editor
There are clearly two kinds of opinion which have been expressed by ShriKiritSomaiya, ShriPinakiMisra, and several others, who were in support of this Bill. They have contended that in fact there are many more changes which are required to be made because with a Bill of this kind, doing business in India may become difficult. There is another view which has been expressed. Why should we have a Bill which makes it easy for companies? What does the Government gain out of it? I have no hesitation in admitting that I agree with the former opinion. It is companies which create jobs………….. Therefore, if the economy of this country is to revive, we cannot make it impossible to do business in this country. People represented to the Government even when the UPA was in power that it is perhaps better to create a proprietorship or a limited liability partnership and do businesses rather than having such a restrictive regime. But then raising public finance, getting loans, getting institutional finance becomes difficult. So people have to corporatise their structure and do it. I will just give an illustration. There are four kinds of changes which we are making. One is with an intention of `ease of doing business'; the other is, drafting errors; the third is oversight; and the fourth is some provisions which are ex-facie oppressive to an environment to do business. Let me start with the fourth category. Removal of Provision of No Bail for offences Under Companies Act, 2013 I would request any hon. Member, if he has a copy, to pick up section 212(6) of this Act. I am referring to an extraneous fact when in 2004 the UPA came to power, there was a law which the NDA had enacted called the Prevention of Terrorism Act (POTA). The UPA's main criticism of POTA was that some of the provisions are very repressive and so they repealed POTA. When they repealed the antiterrorism law, they incorporated most of the 6
provisions under the Unlawful Activities Prevention Act. But one provision the UPA said that they would not agree to put in the Unlawful Activities Prevention Act was regarding a harsh bail provision. The POTA said that any person arrested for terrorism will not get bail till either the Public Prosecutor consents to the bail or the court gives a finding that the person is innocent on the face of it. Now finding of innocence is not possible till the trial is held. So, the UPA's own case was that this is not a provision we can agree with and, therefore, they removed that provision from the antiterrorism law. Having removed it from there, they brought in the POTA bail provision under Section 212 (6) of the Companies Act, which says: “Notwithstanding anything contained in the Code of Criminal Procedure… .the following offences which attract the punishment for fraud as provided in….to a person accused of those offences…no person shall be released on bail unless the prosecutor has been given notice where the prosecutor opposes it, the court is satisfied that reasonable grounds for believing that the person is not guilty of the offences.” Verbatim, full stop for full stop, comma for comma, they incorporated the POTA provision into the bail provision of this Act. Now this language exists in the narcotics law. When we invite the rest of the world to come to India, form a company, do business and invest in India, are we trying to say that in case you commit any of these offences you will never get bail or you will indefinitely never get bail? Therefore, most companies said that it is safer for them to switch over to a limited liability partnership than continue to do business. Extremely harsh offences will be before a Special Court and the rest will be before the normal courts Now, if you look at the other provisions of the Act, all offences under grievous laws relating to (continued on next page)
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terrorism, narcotics, sedition, prevention of corruption etc., they say that ordinary courts will not try these cases and there will be special courts. So, all offences against a company will go to a Special Court. The ordinary Magistrate's jurisdiction is taken away. Are we trying to induce investors to come and invest in India or are we trying to scare them away from the country? We have, therefore, brought in an amendment that extremely harsh offences will be before a Special Court and the rest will be before the normal courts of the land…………….. Terrorist can get bail but not the businessman Then, in bail provisions we have said: “Except in heinous offences under the Companies Act, which is related to fraud under Section 447, for all others the normal bail provisions will apply. Only for this extreme offence, an extreme bail provision which was put in into this Act, will
GST Uniting India States taken care of, Madam(s) silenced, major parties who matter in the Parliament supporting, the process to introduce the biggest indirect tax reform in India, the GST has begun. Bill No. 192 of 2014, The Constitution (one hundred and twenty second amendment) Bill, 2014 seeks to insert the following articles 246A, 269A and 279A in The Constitution apart from making certain amendments to already existing articles. These amendments will pave way for introduction of a dual structure Goods and Services Tax. Article 246A is introduced in Part XI Chapter 1 titled “Legislative Relations”. This article empowers the legislature of every state to make laws with respect to goods and services tax imposed by the Union or by the State. The fear of the States that they will lose the power to legislate on tax related matter is thus allayed. However, with respect to goods and services tax where the supply of goods or services or both takes place in the course of inter-state trade or commerce the power to legislate is retained by the Parliament. Part XII Chapter 1 titled “Finance” will be a place for the new article 269A which will address the issue of distribution of revenue between the Union and the States. The goods and services tax supplied in the course of inter-state will be AUDITOR • December 2014
apply. There is a Special Court and a two-Judge Bench instead of a three-Judge Bench to hear the winding up of these cases. Sir, none of the amendments has any ulterior motive. Therefore, nobody needs to claim that there is a high moral ground in opposing such an objection. With some of these provisions, doing business in India would become extremely difficult. There are some provisions which we are easing. There are some which were oversight. There are some which were left out. And there are some which came in but came in as a part of this thinking that we must make doing business extremely difficult. So if somebody is arrested and he belongs to a company, a terrorist can get bail but he should never get bail. Now, this kind of thinking, I am afraid, we do not subscribe to. I, therefore, commend to this hon. House that these amendments be accepted.
CA Rajendra Kumar P levied and collected by the Government of India. The proportion of sharing of such tax between the Union and the States will be decided by the Parliament by a law on the recommendation of the Goods and Services Tax Council. Through this article the Parliament is also empowered to formulate the principles for determining the place of supply and when a supply of goods or services or both takes place in the course of inter-state trade or commerce. Article 279A is being inserted in Part XII. It is significant to note that through this article a new authority called the “GST Council” will be constituted. The article requires the President to constitute the GST Council within 60 days from the date the amendments contained in the bill are notified. The fate of indirect taxation will vest will the GST Council and suo moto the States will not able to decide on the rate, cesses and surcharge. Though the GST Council has only recommendatory powers yet it will have the final say in matters relating to GST. Professionals will have an important role to play in the smooth implementation as the GST law will replace number of indirect taxes, remove cascading effect and above all provide for a common national market for goods and services. The stage is thus set for a united India at least in taxation, are we ready for the Change? 7
CA – aka – Cultural Ambassadors Sanjay Subramanian
Vishaka Hari
One of the most sought after prime time musicians, Sanjay has been reigning supreme in the Carnatic music field and humbly states that he belongs to a family of Carnatic music rasikas, as ‘starting from members of my grandparents’ generation we have been passionate lovers of this beautiful art form’. Learning from his grand aunt who was also his first formal Guru – Mrs Rukmini Rajagopalan and then from Calcutta Krishnamurthy, Sanjay constantly honed his skills and has become what he is today. A top graded artist of AIR, Sanjay has bagged innumerable awards and titles – too big a list to be published – and has toured almost the entire world, as a proud brand ambassador of the rich cultural heritage of South India viz., the pristine Carnatic music. Apart from music, Sanjay is an avid cricket fan and his tweets are more on cricket than on any other topic including music. Winner of Lifetime achievement award, Sanjay is a Chartered Accountant and also a rank-holding Cost Accountant.
She is a bundle of wonders. She passed Chartered Accountancy with a rank and scored the all India first in the Final taxation paper. However, decided to literally throw the tax book to the dustbin, went to pursue her passion as a prominent Carnatic music vocalist and an established exponent of Harikatha. She learnt Carnatic music under the legendary Carnatic v i o l i n i s t , Pa d m a V i b h u s h a n S r i L a l g u d i Jayaraman. Her spiritual guru and father-in-law is Sri Sri Krishna Premi Swamigal. She learnt the art of Harikatha by her husband, Sri Hariji, himself an experienced Harikatha exponent who delivers discourses in Tamil, English and Hindi. Vishaka Hari began performing in several sabhas during the Chennai Music Season in 2006 and from the day one, has been an amazing crowd puller. An "A" Grade artist of All India Radio, she has also given discourses and concerts abroad. She has also received many prizes and awards for her contributions to the Harikatha and Carnatic music field. She is also an accomplished dancer, having learnt the art of Bharatha Natyam from Prof. Sudharani Raghupati.
Trichur Brothers Srikrishna Mohan and Ramkumar Mohan are young Carnatic Vo c a l i s t s , p o p u l a r l y k n o w n a s Tr i c h u r Brothers. They are sons of Senior Mridanga Vidwan Shri Trichur R Mohan and belong to the 'Sitaram Group', a traditional business family based in Trichur, Kerala.Titled 'Trichur Brothers' by none other than His Holiness, Jagadguru Shankaracharya Shri Jayendra Saraswathi Swamigal of Shri Kanchi Kamakoti Matam, the brothers have been performing in several concert stages across the nation and have also toured the world for performances besides performing in the divine presence of several seers. They are noted for their strict adherence to Patanthara and uncompromising attitude towards Bhavam. Both Srikrishna and Ramkumar are Chartered Accountants and employed in multi national companies. 8
Alleppey Venkatesan A senior practicing CA, a certified Information Systems Auditor and an acknowledged expert in FEMA matters, A l l e p p e y Ve n k a t e s a n i s a renowned Carnatic musician too – one who has consistently been hailed as one of the best exponents of the Ariyakudi school of Music. He was a protégé of the peerless Ariyakudi RamanujaIyengar, and his last disciple. While his concerts are noted for their technical excellence, his lec-dems are known for their in-depth research and brilliant presentations. He began his musical odyssey at the age of 5 and received early lessons from Shri K.V. Ramachandra Bhagavathar and later, learnt from his father, Shri K. Parthasarathy, who was himself a multifaceted man- one of the most senior disciples of (continued on next page)
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Ariyakudi RamanujaIyengar, a connoisseur of music, a leader of the Kerala Bar, a munificent philanthropist, and a generous host to most musicians of his time. Over the years, Venkatesan has performed concerts and lecture demonstrations at all the important fora in India & abroad, in the company of the leading lights among accompanists. He served as a Member of the Board of Studies in Music, Annamalai University for 3 years. Velukkudi Krishnan Reverentially known as Sri U. Ve. Velukkudi Krishnan Swami or simply as Velukkudi, Sri Krishnan is a prominent religious figure and an exponent of Vaishnavism. Krishnan delivers lectures in person, distributes them on compact disc and MP3 and broadcasts them on several TV channels. He operates the Kinchitkaram Trust, which translates, publishes, and distributes religious materials, conducts classes, and locates and maintains temples and other religious and historic sites. He takes hundreds and thousands of his disciples and followers on long trips spanning a couple of months some times to various places of religious-cum-historical relevance. His administrative skill seems just amazing. For all this, Sri Krishnan is amazingly a simple personality. Sri Krishnan has completed both C.A. and ICWA courses and joined the top rung of an MNC. With his father-inspired passion in religious discourses, he found it difficult to strike a balance between his job and lifestyle. Long hauls on business meetings outside Chennai were coming in the way of his nitya karma. Rushing to the Upanyasam stage from corporate meetings well after dusk added to the stress and the decision had to be taken. It was then he quit his lucrative job “to dedicate myself to Upanyasam and related activities.” He is at ease with Sanskrit, Tamil and English and can quote effortlessly from a thousand and odd scriptures and literary works. The
crowds that throng to his discourses are so huge that it is to be seen to be believed. It is no wonder that he is one of the major star attractions in the cultural scene. Srividya Srividya, is an accomplished classical vocalist and a Chartered Accountant by qualification and currently works as a Director, in Standard Chartered Bank. She has led her team Parthi Sai Bhajan Mandali to the finals of the Bhajan Samrat – season 3 in 2014; a show on sampradaya bhajans conducted by Sri Sankara TV. When not crunching numbers on the office desk, she has a penchant for dabbling between vocal & visual expressions of art. As a hobby - artist, she has painted a number of Tanjore, oil & mural paintings and as a handicrafts person she has tried her hand at many different works of craft. A. Narayanan A. Narayanan is a classical vocalist learning carnatic music for the past 22 years. He has been performing in various avenues in and outside India and havebeen g i v i n g t e l e v i s i o n p e r f o rm a n c e s f o r J a y a T V, Podhigai, Raj TV etc. Also an "A" graded artiste from the All India Radio, Chennai. Narayanan has been winning several awards and recognitions from various sabhas, critics and connoisseurs and also adjudged as one of the prize-winners in Tanishq Swarna Sangeetham, that was telecast by Raj TV. Having had extensive training under Sri.S.P.Ramh and advanced guidance under Lalgudi Sri Jayaraman has honed the skills of Narayanan in the music field. He has performed in Singapore and Dubai, besides several places in India. He is a practicing Chartered Accountant too.
BB NAIDU STUDY CIRCLE MEETING – JANUARY 2015 Topic
: “Deeming
Fictions and Tax Laws”
Inauguration by : CA. P.R. Venkatachalam, One of the Seniormost Members of the Profession Speaker : CA. T. Banusekar Date & Time : Friday, the 23rd January 2015 (6.00 p.m.) (High Tea: 5.40 p.m.) AUDITOR • December 2014
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Old Madras Road
CA Karthik A. Bhatt
K. Chellaram:
T. Stanes and Co.:
This establishment was first founded in 1915 in Ooty by Kishinchand Chellaram Daryanani, who hailed from a prominent Sindhi family in Madras.
One of the oldest business establishments in South India, this Coimbatore based company, which is today part of the Amalgamations group was founded in 1861 by Robert Stanes. Starting off with the Stanes Coffee Curing Works, the company went on to acquire massive estates across the Nilgiris and diversified into areas such as fertilizers mixing, automobile dealerships etc.
Initially into the silk textiles trade, the business seems to have expanded to include a wide variety of departments such as furniture, silverware and footwear. The establishment grew big enough to open an overseas office in Yokohama as early as 1918. The group established itself across Africa in the succeeding decades, with a Nigerian branch being opened in Lagos in 1923. They also slowly moved from retailing into wholesaling and manufacturing. The Gambia branch was opened in 1958. A shipping business was formed in 1979 in Hong Kong. The establishment however hasn't forgotten its roots, with the departmental store in Ooty still functioning. 10
The Stanes story is an integral part of the development of Coimbatore, with Robert Stanes being appointed the first Chairman of the Coimbatore Municipal Council in 1864. He was also one of the founders of the Coimbatore Spinning and Weaving Mills, which kick started the industrialisation of the region. Robert Stanes lived upto the ripe old age of 95, dying in 1936 in Coimbatore. The business was bought over by S.Anantharamakrishnan, the takeover baron of South India in 1961. The schools started by Robert Stanes and his family in Coimbatore and Coonoor remain popular institutions in the region. AUDITOR • December 2014
Courts Castigate Revenue Officials! If someone does what we want to but unable to do, we feel satisfied, right? Of late, I have been seeing some High Courts passing strictures on the high handed nature of actions – whether in assessment proceedings or in re-opening assessments, not bothering about judicial decisions, filing frivolous appeals mechanically etc. This sort of attitude perhaps prompted the coinage of the phrase “Tax Terrorism’ by the NDA in its election run-up campaign. An instance that has been recently reported is brought to the attention of the readers. There are some minor signs of possible respites by way of CBDT circulars – in the matters of refunds, advisory to avoid long questionnaires and to restrict the scrutiny in AIR cases etc. Certainly not enough is being done. Tax officials continue to act slimily or brazenly or both. Instead of inflicting almost third degree methods on the assessees who file returns (at least), if they can go out and do survey and bring to tax net those teeming millions who earn but nose-thumb the revenue officials, targets can be better achieved. For that to happen, sensitivity should be included as a subject in in-house training sessions of tax offices. And that will be too much to aspire for. - Editor
Under the Income Tax Act, in a landmark judgm e n t i n I n c o m e Ta x A p p e a l N o . 1 6 2 / 2 0 1 3 Commissioner of IncomeTax v. Intezar Ali decided by the division bench of the Hon’ble Allahabad High Court on 26.7.2013, the Court not only reprimanded the erring officer but also directed for an enquiry for the ‘conduct & motive’ of the erring officer. In this case, without assigning any cogent reasons, the assessing officer added a hefty amount of Rs.97,80,000/- as ‘income from undisclosed sources’. The High Court said that harassment of assessees is intolerable and held thus: “13. Before parting with the case we may observe here that from the facts and circumstances on the record that in the present case the Income Tax Officer did not act in bonafide manner. The assessee led substantial evidence to establish that the amount treated to be undisclosed income by the A.O. was the sale consideration of sale of his agricultural land, which he had deposited in the bank and had voluntarily filed return disclosing his income. Overwhelming evidence led by him was discarded without giving any reasons at all. The assessment was framed only on the ipse dixit of the A.O., which gives us reason to believe that he had exceeded his authority with some ill will or with ulterior motive. 14. We, therefore, find it appropriate to direct the Registrar General of the Court to forward a copy of this judgment to the Chairman of the Central Board of Direct Taxes to cause an enquiry into the conduct and motives of Shri Yaduvansh Yadav, Income Tax Officer, Ward-1, Hapur in framing the assessment and raising demand of income tax against the petitioner.” (Emphasis Supplied).
In another decision, this time, of Hon’ble ITAT (Delhi), in the case of Bharti Airtel Ltd. Vs. ACIT in I.T.A. No.: 5816/Del/2012 decided on March 11, 2014, the Tribunal hauled up the Assessing Officer and Dispute Resolution Panel (DRP) for ‘Blatantly frivolous & unsustainable’ additions and suggested accountability mechanism to put check on the Assessing Officers and also questioned the existence of ‘ineffective Dispute Resolution Panel’. The facts of the case are that the AO made an arbitrary & illegal addition of Rs. 5,739 Crores to the income of the assessee, without any basis. The ITAT while allowing the Appeal passed strictures against the AO & the DRP and held thus: “… if an action of the AO is so blatantly unreasonable that such seasoned senior officers well versed with functioning of judicial forums, as the learned DRs are, cannot even go through the convincing motions of defending the same before us, such unreasonable conduct of the AO deserves to be scrutinized seriously. At a time when evolving societal pressures demand greater degree of accountability in the governance also, it does no good to the judicial institutions to watch such situations as helpless spectators. If it is indeed a case of frivolous addition, someone should be accountable for the resultant undue hardship to the taxpayer -rather than being allowed to walk away with a subtle, though easily discernable, admission to the effect that yes it was a frivolous addition, and, if it is not a frivolous addition, there has to be reasonable defence, before us, for such an addition. … Whichever way one looks at these entries, the inescapable conclusion is that the addition made by the AO is wholly erroneous and devoid of any legally sustainable merits.
(continued on page 13)
AUDITOR • December 2014
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Indirect Tax Snippets SERVICE TAX Cenvat credit on outdoor catering services received in factory for employees is eligible even post April 1, 2011. The definition of input service excludes services meant ‘primarily for personal use or consumption of any employee’. Outdoor catering service does not fall under this category since this service is used in relation to the business of manufacture of excisable goods and is used by all employees in general. Hence, Cenvat credit is eligible even after April 1, 2011. CCE vs Hindustan Coca Cola Beverages Private Limited [Final Order A/1479 – 1480/14/SMB/CIV of November 21, 2014 CESTAT Mumbai] Commission income of money transfer agents in India; non-taxable
CA Debasis Nayak & CA Satish Sarada Southern Properties and Promoters vs CCE (ST) [2014-TIOL-2568-CESTAT-MAD] Input credit distribution of Rule 6(5) services of CCR services for dutiable & exempted goods is allowed in full. There is no bar to avail credit on services covered under Rule 6(5) of the Cenvat Credit Rules, 2004 (“Cenvat Rules”) by a unit who is engaged in the activity of manufacturing of both dutiable as well as exempted goods or rendering taxable and exempted services. However, no credit attributable to trading would be available since trading at that time, was neither covered under excise nor exempted service. Commissioner of Central Excise, Belapurvs Elder Pharmaceuticals Ltd (Appeal No. E/86490, 86863, 88794/13) (CESTAT, Mumbai) Nexus between the input and input service and the output and output serv ice for availment of CENVAT credit
The taxpayer, an agent was in business of money transfer from abroad to persons situated in India and received commission in convertible foreign exchange from their principal located outside India. Revenue disputed the ‘no tax position’ taken by the taxpayer on the ground the beneficiary of the services were in India. The Tribunal held that such services undertaken by taxpayer for its principal located abroad and is amounted to export of service and hence, not taxable in India.
The basic principle for Cenvat credit is that there has to be a nexus between the input and input service and the output and output service. Rule 3 of Cenvat Credit Rules, 2004 stipulates that credit can be taken only in respect of input and input service that have gone into manufacture of output or which are used in or in relation to rendering of output service.
Wall Street Finance Ltd &Weizman Forex Ltd vs Commissioner of Service Tax, Mumbai [Appeal No. ST/289/09 CESTAT, Mumbai]
Dai IchiKarkaria Ltd. vs Commissioner of Central Excise, Pune I (Appeal No. ST/87439/14) (CESTAT, Mumbai)
Valuation of flats for land owners under Joint Development Agreement to be at comparable market price
Statutory backing for departmental audit under Rule 5A(2) of the Service Tax Rules, 1994 implemented; documents to be produced CAs/CWAs as well.
The issue before the Tribunal was whether the valuation for construction for the land owner’s share of flats under a Joint Development Agreement would be (1) value of land (as contended by the assessee) or (2) value of similar flats (as contended by Revenue). The Tribunal observed that as per Rule 3(a) of the Service Tax (Determination of Value) Rules, 2006, where the consideration is not wholly or partly consisting of money, the value shall be the value of such taxable service provided to similar customers. Hence, the Tribunal was of the prima facie view that value of similar flats sold to other customers should be considered for valuation. 12
Section 94(2)(k) of the Finance Act, 1994 has been amended with effect from August 6, 2014 to specifically give a statutory backing to new Rule 5(A)(2) for conducting audit by the Departmental officers for scrutiny of records as maintained by them under the notification. A service tax assessee would now be liable to produce specified documents even to a Chartered Accountant or Cost Accountant who has been nominated under Section 72A of the Finance Act, 1994. A Circular clarifying the changes have also been issued. (continued on next page)
AUDITOR • December 2014
(continued from previous page)
Notification no 23/2014-ST dated December 5, 2014 and Circular no. 181/7/2014 Ref. no F.No. 137/46/2014 dated December 10, 2014 VAT/ CST Tamil Nadu VAT Circular - comprehensive clarification on ‘works contract’ assessment under VAT law The Commercial Tax Department under Tamil Nadu Value Added Tax Act, 2006 (“TNVAT Act”) has issued a comprehensive circular for a clear understanding of procedures and provisions relating to ‘works contract’ in orderto prevent tax evasion as well as irregular assessment. The circular discusses, amongst others, the following aspects: (a) Legal Aspects and history relating to ‘works contract’ (b) Valuation/Compliance for ‘works contract’ under the TNVAT Act; (c) Intelligence and Scrutiny; and (d) Tax Deduction at Source.
Circular No.54/2014 D3/ 34875 / 2014 Ref. No. D3/34875/2014 dated November 14, 2014 Bonafide concessional purchase cannot attract penalty under section 10(b) of the Central Sales Tax Act, 1956 (“CST Act”) The issue before Allahabad HC was whether penalty under section 10(b) of CST Act could be imposed on purchase of goods not covered under Registration Certificateagainst Form C. Purchase of ‘Hut Material’ from outside State for bridge construction under bona fide belief that such goods fall under the expression "stores material, consumable etc." (as mentioned in registration certificate) cannot attract penalty under section 10(b) of CST Act. Further, HC, by referring to oxford dictionary noted that term "et cetera" means "and the rest, and so on", hence expression "stores material, consumable etc." would cover all articles required for bridge construction. HC also remarked that section 10(b) of the CST Actbeing a penal provision, dealer shall entitled to benefit of doubt and accordingly penalty cannot be levied. Hyundai Engineering & Construction Co. Ltd. v. Commissioner Trade Tax, UP [Source: Taxsutra.com]
(continued from page 11)
…. The fact that even such purely factual issues are not adequately dealt with by the DRPs raises a big question mark on the efficacy of the very institution of Dispute Resolution Panel. One can perhaps understand, even if not condone, such frivolous additions being made by the AOs, who are relatively younger officers with limited exposure and experience, but the Dispute Resolution Panels, manned by very distinguished and senior Commissioners of eminence, will lose all their relevance, if, irrespective of their heavy work load and demanding schedules, these forums do not rise to the occasion and do not deal with the objections raised before them in a comprehensive and effective manner. … While we delete the impugned addition of Rs 5739,60,05,089, we also place on record our dissatisfaction with the way and manner in which this issue has been handled at the assessment stage. Let us not forget that the majesty of law is as much damaged by not rendering justice to the conduct which cannot be faulted as much it is damaged by a wrongdoer going unpunished; not giving relief in AUDITOR • December 2014
deserving cases is as much of a disservice to the cause of justice and the cause of nation as much a disservice it is, to these causes, by granting undue reliefs. The time has come that a strong institutional check is put in place for dealing with such eventualities and deincentivizing this kind of a conduct.” The scathing observations made in these two decisions should make CBDT to ‘direct’ the assessing officers to act in accordance with the law as declared time & again by the Apex Court, Jurisdictional High Court and the Tribunals else they are bound to be reprimanded & penalized by the Courts at their own peril and risk. There is urgent need for fixing accountability of these erring Officers. Mere reprimanding these erring Assessing Officers alone will not serve the purpose. Fines, Warnings & Strictures are an effective means to check the erring officials but the million dollar question is when these exemplary measures would put an end to the undue harassment of the assessees by the revenue officials. Source: Tax Guru 13
Recent Judicial Decisions Reported Statute: Income Tax Act – Sec.11 – Source material for education Title : ITO vs Science Olympiad Foundation Citation: 33 ITR Trib 451
P.M. Veeramani, FCA Decision in favour of : Assessee Bench: ITAT Delhi
Assessee engaged in preparation of source material for science education to be imparted to students through schools to students is an educational institution entitled to exemption. Charging of fees for services is not a disqualification. Statute: Income Tax Act – Sec.36(1)(va) – Employee Contribution Title : Essae Teroka Private Ltd vs DCIT Citation: 366 ITR 408
Decision in favour of : Assessee Bench: Karnataka HC
The word ‘contribution’ used in section 43B(b) means the contribution of the employer and the employee. That being so, if the contribution is made on or before the due date under 139(1), the employer is entitled to deduction. Statute: Income Tax Act – Sec.36(1)(va) – Employee contribution to PF, ESI Title : CIT vs Udaipur Durgh Utpadak Sahakari Sangh Ltd Citation: 366 ITR 163
Decision in favour of : Assessee Bench: Rajasthan HC
Payment on account of contribution to PF and ESI, including employee contribution, are allowable if paid within the time allowed under section 139(1). Statute: Income Tax Act – Sec.37 - Capital vs Revenue Title : CIT vs IBM Global Services India Ltd Citation: 366 ITR 293 ; 107 DTR 372
Decision in favour of : Assessee Bench: Karnataka HC
Payment incurred for acquiring trained and skilled employees is a revenue expenditure though the benefit may be of enduring nature. Statute: Income Tax Act – Sec.40b – Net debit balance in partners accounts Title : Raja & Co vs DCIT Trichur Citation: 64 SOT 12
Decision in favour of : Revenue Bench: ITAT Cochin
Assessee paid interest to one partner having credit balance in capital account which the AO disallowed. The net balance in the accounts of all partners together in aggregate was a debit balance, disallowance of interest is justified. Statute: Income Tax Act – Sec.115 JB – Share income from AOP Title : ACIT vs B Seenaiah & Co Projects Ltd Citation: 150 ITD 189
Decision in favour of : Revenue Bench: ITAT Hyderabad
All amounts credited to profit and loss account of a company should be considered for the purpose of computing book profits under section 115JB unless specifically excluded by any of the explanations under the said section. Share of profits from AOP which may be exempt from taxation in hands of members by virtue of section 86, cannot be excluded while computing book profits of AOP. Statute: Income Tax Act – Sec.153 C – Recording of Satisfaction Title : CIT vs Gopi Apartment Citation: 107DTR 217
Decision in favour of : Assessee Bench: Allahabad HC
Even in a case, where AO of both persons is the same and assuming that no handing over of document is required, the recording of satisfaction is a must as that is the foundation upon which the subsequent proceedings against the order persons are initiated. Statute: Income Tax Act – Sec.194 H – Ceding of income, no disallowance Title : ITO vs Vikram Maheswari Citation: 149 ITD 437
Decision in favour of : Assessee Bench: ITAT Delhi
Where the assesse was only sharing part of commission received as remuneration from bank in order to attract customers to improve volume of business, payment made by assesse to customers by issuing cheques in the name of vehicle dealers could not be said to payment of commission and no disallowance is attracted. Statute: Income Tax Act – Sec.194 H – Discount is not commission Decision in favour of : Assessee Title : ACIT (TDS) vs Al Hind Tours and Travels Private Ltd Citation: 64 SOT 1 Bench: ITAT Cochin Since retail customers or group passengers were not providing any service to assesse and were only getting flight tickets at a concession from assesse, such customers could not be considered as ‘agent’ and hence amount of commission ceded by assesse partook character of ‘discount’ only and no disallowance is attracted.
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AUDITOR • December 2014
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