For Private Circulation Only • June 2012 • Vol 6 Issue 6
AUDITOR
S U B S TA N C E OV E R F O R M
Society of Auditors
Chennai Inside this Issue... •
From the Edit Pad
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Offbeat
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GN by GN for GN
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AS 22 or CATCH 22
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Elsewhere
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The Quintessential Chartered Accountant
10
•
An interesting correspondence
11
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Recent Judicial Decisions Reported
13
•
Letters to the Editor
14
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Puzzle
15
FROM THE EDIT PAD Satyameva Jayate is a very popular television show that is brilliantly anchored by the bollywood icon Amir Khan, who takes some of the social ills for analysis and makes mincemeat of the accused perpetrators. The issues that have so far been taken up by him include the female foeticide, dowry menace, healthcare maladies etc., the sheer poignancy of which make his audience moved, concerned and sometimes even indignant. Especially the stark naked facts that were rolled out on the sad state of affairs in the way in which healthcare in our country keeps challenging the societal tolerance levels and bordering to become a pure business which, by definition, is sans ethics in our country. The theme of the show was captured thus: “People trust medical practitioners, believing that they are equipped with the knowledge and skills to safeguard their health. But when this knowledge is misused to exploit this trust, medical care becomes a nightmare. The profession is riddled with unscrupulous doctors and hospitals out to make big bucks at the cost of patients, but there are still medical practitioners who stand up for the Hippocratic Oath, and those who want to clean up the profession”. Expectedly, the show received its share of brickbats from parts of the medical fraternity, some of whom were genuinely aggrieved by what they thought as an unfair portrayal of the profession and some were irate because their true colours came to be discussed in the open. Soon after, I found some facebook postings wondering what would happen if Amir Khan chooses our profession next. Like doctors who are supposed to safeguard the physical health of the people, CAs are expected to safeguard the financial health of people, business entities and the corporate world. Both the professions are expected to be within the confines of strict ethical standards (at least in theory) and both the professions are expected to toe the upanishadic verse “Ya esa supteshu jagriti”, ours by design (ICAI's motto) and theirs by default. But yet, fortunately for
AUDITOR
us, Amir Khan's glance might not be turned on us as we are not that significant in terms of our contribution or otherwise to the aam aadmi, especially in comparison with that of medical fraternity. However, it does not mean that we cannot do any introspection ourselves. Two disturbing things of the recent past that have triggered the lament of the editorial : (a) Recently there was a news item about how the ceiling on Tax Audits are being merrily flouted by CAs. Details such as 420 members (what a number, yaar?) had signed 3621 tax audit reports after their death (My good friend RG Rajan proudly proclaims that ours is a profession that serves the clientele even after death!) and 3 members have uploaded more than 1000 tax audits in their names are reportedly given to ICAI by CBDT. Even if a portion of it were true, it is truly shocking as much as it is disgusting; (b) Though, often, members of our profession are being targeted for aiding and abetting serious financial crimes like tax evasion and money laundering (and in many cases not unjustly though), the rubbing of salt on the wound came in the form of a “white paper” (actually, an apology of it) the FINMIN brought on the black money recently, where our profession (eventhough not specifically named) has been singled out for strident criticism. (The only defence we can justifiably have is that the politicians of the nation are least qualified to pontificate to us on this!). Besides these, bending backwards to oblige the clients with unqualified reports undeservedly, terrorising clients and making fast bucks by brokering between them and the revenue departments etc. are all not uncommon. The limits people go to making the CA education coaching are being helplessly watched by the ICAI and endured by the parents / students etc. Ethics has become alien to quite a few of us and it is indeed sad. As said, Amir Khan's Satyameva Jayate may not portray us and that is a relief. But will Satyam stop haunting us?
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
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CA B Ramana Kumar CA Mahesh Krishnan CA Subramania Sarma CA P Anand, President, Ex-officio Member CA R Sivakumar, Vice President, Ex-officio Member CA S Ramakrishnan, Vice President, Ex-officio Member CA B K Moorthy, Secretrary, Ex-officio Member
AUDITOR • June 2012
Offbeat
P.S. Prabhakar
This month's Off Beat column's hero is none other than the Beeshma Pitaamaha Sri GN. That he is one scintillating example of an Off Beat CA has been proved this month yet again when he became the first ever CA to pen an Autobiography aptly titled “Beyond Auditing”. In a memorable function on the evening of the th 16 June, attended by an unbelievably overflowing crowd (a large chunk of whom sweated it out on the car park area with an LCD projector beaming the live proceedings inside the hall), the book was released by Dr M.S. Swaminathan, a jewel of our nation which also saw doyens like Sri Era Sezhiyan, Sri B S Raghavan, Sri S Rajaratnam, Sri S Gurumurthy and Sri G V Raman felicitating the “Vizha Naayagan” (pun intended!) Well, many of us possibly know that from very simple beginnings at Kumbakonam, a small town in Tamilnadu, Shri GN grew to be a successful Chartered Accountant, an income tax expert, a Central Council Member of the ICAI and most importantly an iconic and distinguished member of the profession and would have probably expected no more than a fairly prosaic account of a life marked by a not so eventful journey from penury to prosperity, If it were so, how gross an under expectation it would have been? Actually, the memoirs of Shri GN chronicle the growth of the CA profession from the mid of this century till now. To quote Sri S. Gurumurthy's mail addressed to Sri GN and copy marked to a couple of close friends (the editor is perennially proud to be bracketed in this group!), “the book is a revealing experience for a cloistered profession” and should be regarded as a “text book for CAs who want to contribute to public life”. Well, knowing GN as we all do, one would expect his book to be witty, tongue in cheek, honest, lucid, original, generative and an interesting account of his life and times. It is this and much more. His accounts of a start-up practice, his clients (easy, difficult, submissive, AUDITOR • June 2012
authoritative, famous, successful and defeated) all offer valuable lessons for the new generation professional. His run-ins with the Income tax department, bodies connected with the CA profession and various other government organisations is as relevant, if not more appropriate in the modern day context. Admittedly, the author has been more biased to personalities in his life rather than his life itself. Perhaps that in his humility and his inimitable style of self-deprecating humour, he credits God, serendipity, mentors, friends and his professional influences more for his successes that his undisputed merit deservedly earned him. (He would even say that this argument is not sustainable as such merit was also God given!) That he was one of the persons instrumental in the formation of SIRC and more specifically in acquiring the sprawling campus of premises of SIRC is an awesome piece of information for which the present generation of CAs and the (continued on next page)
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posterity of the profession must ever be grateful to this self effacing icon. To a discerning reader, a few powerful messages emerge: • For those of us who whinge and whine at the work we do vis-à-vis the time we have, Shri GN's life is a must read. He has handled a multitude of roles including running for a local assembly election with consummate ease. In this day of the Internet, Google, Wikipedia, smart phones, tablet gadgets, expensive cars and low cost airlines surely we can all do much more. And more, at least complain less! • Shri GN is not your dull, drab colourless accountant. He is outspoken, commanding, and demonstrates a quest for knowledge and learning that is indefatigable. He writing embodies a certain sense of Confidence and Charisma that can only come from someone who is well read and highly informed. Let more of us emulate him in this new age when Knowledge is not just power but sustenance! • He seems to have tailored classic Investment Banking deals and pioneered New Age practice lines in FEMA without describing them to be so (the jargons perhaps did not exist then). Let us, like him, evolve new, interesting and break out ideas to succeed in our profession ! • At a time when the profession is beleaguered, Shri GN's story serves to inspire confidence. If this book can motivate a handful of us to speak up and offer constructive support to the rehabilitation of this profession, then this book would have accomplished its purpose and thus warm the cockles of Shri GN's heart. Let us emerge from our shadows and do it now! This book is a set of embedded narratives, that are bound to interest and add value to a large cross section of readers. The old, the socially active, the experienced, the new generation all groups would have relevant, interesting take aways. We would have to be eternally grateful to Shri GN for this account and a bit of the insider details without which we would have 4
completely lost any form of knowledge on the events that have decisively shaped this profession. Lord Krishna once asked Duryodhana if he could identify one good person to which he replied there was none. When Yudhishtra was asked if there was one bad person, he also replied that there was none. The Lord interprets that we all look at the world around us the way we exist embodying Yudhishtra or his wicked cousin. This folly of human judgement is mostly (if not completely) absent in Shri GN's work which presents a fairly balanced view of the events of his life and his profession. CA.Srikanth wrote in his mail to the editor “It is a veritable chronicle of our times and a vital document that historians in future times will rely on to get a better understanding of the events described by GN from first-hand experience”. A man for whom simplicity is a fashion and humility is a passion, GN has always been a picture of smile and support. Many times, many of us would have had the benefit of his wisdom, counsel and experience. He is never frugal when he had to praise someone and he is never even a shade impolite when he has to make a counter point. For some unfathomable reason he feels I would have made a better journalist than a CA (!) and always addresses me as “Asiriyare!” (editor) right from the time I began editing the Society's journal way back in 2006. Whenever any of my article gets published in any magazine, he would invariably be the first to call me and offer his comments (both on the content and on the language). I would forever cherish his cryptic noting “with all my admiration for the journalistic CA Prabhakar” as his autograph in my copy of his book. That we are able to personally benefit from this great beacon light is indeed a blessing to all of us. Sri GN is the embodiment of the succinct Tirukkural “Perumai udaiyavar aatruvaar aatrin arumai udaiya seyal”, meaning that man endowed with greatness only will be able to accomplish difficult tasks. (with inputs from some CAs) AUDITOR • June 2012
GN by GN for GN This to affirm that I have gone through and read in full, the book “Beyond Auditing”, the a u t o b i o g r a p h y o f S r i . G N a r a y a n a s w a m y, Chartered Accountant. The said book spreading over to 32 Chapters has been written by the A u t h o r i n h i s i n d i v i d u a l c a p a c i t y. I h a v e volunteered myself to express my observations of the said book without any responsibility whatsoever.
R Sivakumar 3.
The Author has gracefully accepted his failures in many circumstances, but has chosen that to highlight the success ultimately.
4.
The Author has written the positive side of all individuals, and has been subtle enough in bringing out the negative perspectives only from a behavioral angle.
5.
The Author has upheld the Hindu tradition and custom by referring many incidents in his family.
6.
The Author has clearly brought out that only c on ti n u ou s h a rd w ork a n d u p d a ti on of knowledge will aid a professional in the long term.
7.
The Author, by giving credit to his mother has shown the way for the respect for women.
I read the book in accordance with the normal standards concerning an autobiography. Those normal standards require that a book in the nature of autobiography should highlight the various stages in the life of the author along with the experiences, his perception about the various aspects of life and any special and/or specific significant events. Author being a Chartered Accountant, the standards extend to his experience in the profession & beyond without any material misstatements. My observations are predominantly on the basis of a faith which does not need calling for any evidences. However, they are also based on some information reasonable enough for me to come to any judgment.
8.
The Author, clearly brings out the equation between charity & God and has explained lucidly that allevery act of mankind is an offshoot of God's ways.
9.
In reading the said book I have confined myself to aspects such as Culture, Professionalism, Human aspect, Charity, Presence of Mind, Values, Ethics, Hindu Traditions and Customs, Selfrespect & Patriotism.
The Author in not accepting a foreign opportunity has been clearly patriotic.
10. The Author by not forgetting to mention his office and staff has clearly proved that leadership is one of cooperation and not of discord.
Further to the above, I wish to state as follows 1.
The Author has clearly brought out that only values and ethics but not money which are essentially the hallmarks for the success of the Profession.
2.
The Author has been bold enough in facing all challenges and onslaughts without compromising the self-esteem.
On the basis of the above and on the basis of my own information and further on the basis of the explanations, I wish to state to the best of my knowledge and conscience, “Beyond Auditing” the autobiography of GN is a perfect GN (Guidance Note) for the GN (GenNext) as it reflects the essence of Dharma in all the Chapters.
BB NAIDU STUDY CIRCLE MEETING ANNOUNCEMENT Topic
: Challenges faced by Internal Auditor in a Manufacturing Environment
Speaker
: CA Kailasanath, DGM, TI Group, along with one of his colleagues
Date & Time : Friday, the 20th July, 2012. 6 p.m (preceded by High Tea) AUDITOR • June 2012
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AS 22 or CATCH 22 AS-22 (Accounting for taxes on income) is one that poses a lot of practical problems. The stated objective of this standard is to prescribe accounting treatment for taxes on income. Taxes on income is one of the significant items in the statement of profit and loss of an enterprise. In accordance with the matching concept, taxes on income are accrued in the same period as the revenue and expenses to which they relate. Matching of such taxes against revenue for a period poses special problems arising fromthe fact that in a number of cases, taxable income may be significantly different from the accounting income. This divergence between taxable income and accounting income arises due to two main reasons. Firstly, there are differences between items of revenue and expenses as appearing in the statement of profit and loss and the items which are considered as revenue, expenses or deductions for tax p u r p o s e s . S e c o n d l y, t h e r e a r e differences between the amount in respect of a particular item of revenue or expense as recognised in the statement of profit and loss and the corresponding amount, which is recognised for the computation of taxable income. So, if no difference exists between the taxable income and accounting income, then there is no n e e d f o r t h e S t a n d a r d . H o w e v e r, f r o m a fundamental perspective, this is one Standard which is impractical and one that would be found very difficult to reconcile in any Balance Sheet as to how the figures have been arrived at. Anyone will agree that there is no concept of tax saving as such. One can equate on the same parlance, the expenditure that is allowed under the Income Tax Act and also the Carry forward loss. The simple arithmetic in this is that the tax saving arises on the allowance of the expenditure itself, otherwise there would be tax on the entire income. In simpler terms a loss arises because of the insufficiency of the Income as against the expenditure. Hence this insufficiency when adjusted and allowed against future income results in tax saving. From a practical perspective such tax savings do not get realized in full, since there could be the ups and down of the business cycle. 6
T.C. Vijay The prescription of the Standard was to bring in the matching concept and to balance the divergence between the taxable income and the accounting income. However in practice there is no concept of tax on accounting income with the sole exception of Minimum Alternate Tax. Hence the impracticality. This also defeats the very purpose of accrual concept, if analysed indepth. Some accountants used to argue that the so called concept of Deferred Tax aids in the proper computation of EPS. Given the impracticalities of Deferred Tax Asset, one can visualize computation of EPS is only notional. Also there is a discretion of using the prudence yardstick (while recognising the DTA discussed below- which in itself is a challenge to the so called matching concept, however 'prudent' it may appear. Let us look at the impracticalities from the Income Tax Act. Essentially the Deferred Tax Asset or Liability is created on the timing differences. As per the Standard, the timing differences are the one which originate in one period and are capable of reversal in one or more subsequent periods. One is not sure whether such timing differences would become a permanent difference after the completion of the assessment. In such a situation one is forced to r e - c o m p u t e t h e D e f e r r e d Ta x . Ye t a n o t h e r impracticality is the situation with the deduction during the holiday period. All the computations under this category is purely academic and not finite. The most difficult part of the Standard is the creation of the Deferred Tax Asset. This arises due to the losses incurred by the Entity. A creation of such Deferred Tax Asset depends upon Virtual Certainty. To quote the standard: 17. Where an enterprise has unabsorbed depreciation or carry forwardof losses under tax laws, deferred tax assets should be recognised only tothe extent that there is virtual certainty supported by convincing evidencethat sufficient future taxable income will be available against whichsuch deferred tax assets can be realised. (continued on next page)
AUDITOR • June 2012
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Explanation:
entity creates a Deferred Tax Asset, the writing down of such asset arises only when there is taxable income. The Standard does not recognize the business plan as such prepared by an entity. This leads to the difficulty of the assessment of Vi rtu a l C e rta i n ty i tse l f. W h e n a n e n ti ty i s prevented from the usage of scientific forecast, it limits the very purpose of the standard itself. One is not able to understand as to how the Banks, the financial institutions accepts the so called forecast of a project, certified by a Chartered Accountant. Perhaps, the project preparation is in total contrast to AS-22.
1. Determination of virtual certainty that s u ff i c i e n t f u t u r e t a x a b l e i n c o m e w i l l b e available is a matter of judgement based on convincing evid ence and will have to b e evaluated on a case to case basis. Virtual certainty refers to the extent of certainty, which, for all practical purposes, can be considered certain. Virtual certainty cannot be based merely on forecasts of performance such as business plans. Virtual certainty is not a matter of perception and is to be supported by convincingevidence. Evidence is a matter of fact. To be convincing, the evidenceshould be available at the reporting date in a concrete form, forexample, a profitable binding export order, cancellation of which willresult in payment of heavy damages by the defaulting party. On theother hand, a projection of the future profits made by an enterprisebased on the future capital expenditures or future restructuring etc.,submitted even to an outside agency, e.g., to a credit agency forobtaining loans and accepted by that agency cannot, in isolation, beconsidered as convincing evidence.
The very fact that much emphasis is given to Virtual Certainty itself would lead to greater uncertainties in terms of the Deferred Tax Asset, which need to be re-assessed and reviewed. To cite an example projects which are likely to take off after say 5 10 years will not clearly reflect the Deferred Tax Asset. On the whole it would have been prudent if the Standard specifies that DTA should not be provided on Carry forward losses and Depreciation. In fine, AS- 22, which is mandatory in nature but not practical in concept becomes Catch-22 for the accountants and professionals like us.
From a practical perspective, Virtual Certainty arises only after the happening of the event. If an
THE SOCIETY OF AUDITORS (Regd.) Shop No.33, TNHB Shopping Complex, 4/180, Luz Church Road, Mylapore, Chennai 600 004
&
THE CHARTERED ACCOUNTANTS STUDY CIRCLE (Regd.) 2-L, Rear Block, 22-A, Cathedral Road, Chennai 600 006
&
ASSOCIATION OF CHARTERED ACCOUNTANTS, CHENNAI (Regd.) Old # 79, Govindappa Naicken Street, Chennai 600 001
jointly organising a One day Workshop on
“HOW TO USE TALLY AS AN AUDIT TOOL” on Saturday, the 14th July, 2012 Timing
:
9.30 a.m to 5.00 p.m.
Venue
:
Quality Inn Sabari, Tirumalai Road, T.Nagar, Chennai 600017
Speakers
:
From Tally Team
Investment : AUDITOR • June 2012
Rs. 1000/- (Cheque to be drawn in the name of “Society of Auditors” 7
Elsewhere Excerpts from the address of Hans Hoogervorst, Chairman of the International Accounting Standards Board to the International Association for Accounting Education & Research conference in Amsterdam on the challenges of setting a ccoun tin g pol icy. M a k es a n in terestin g reading:
The Imprecise World of Accounting Accounting should be the most straightforward of topics for policymakers to deal with. It is mainly about describing the pastto reflect faithfully what has already happened. This should be dull business, better left to “beancounters.” Surely counting beans cannot cause too many problems? Yet, over the years, many securities regulators have told me of their surprise upon finding out that accounting policy is one of the most difficult and controversial topics to deal with. It is the same around the world. Just ask the Japanese Financial Services Agency, the U.S. Securities and Exchange Commission, or the European Commission. Why is it that accounting is the source of such heated debates? There are many reasons why this is the case. Sir David Tweedie, my predecessor as chairman of the IASB, used to say that it was the job of accounting to keep capitalism honest. It is no wonder that accounting standard setters come under so much pressure! Some business models can thrive off a lack of transparency. Just think of the pre-crisis Special Purpose Vehicles in the banking industry. There is second reason why accounting can be so controversial: the inescapable judgment and subjectivity of accounting methods. Put simply, there is a lot to disagree about. When I became chairman of the IASB in July last year, I knew enough about accounting to know that I was not entering a world governed by the iron rules of science. I knew that accounting has the same problems as its sibling 8
Economics: you need math to exercise it, but you should not count on outcomes with mathematical precision. In short, I did not have naive expectations of accounting. Or so I thought. One year later, however, now that I am well ahead on a steep learning curve, I must admit that I may have been a bit naïve after all. Let me give you a couple of examples that served to open my eyes. First of all, I was struck by the multitude of measurement techniques that both international financial reporting standards (IFRS) and U.S. GAAP prescribe, from historic cost, through value-in-use, to fair value, and many shades in between. In all, our standards employ about 20 variants based on historic cost or current value. Because the differences between these techniques are often small, the significance of this apparently large number should not be over dramatized. Still, the multitude of measurement techniques indicates that accounting standard-setters often struggle to find a clear answer to the question of how an asset or liability should be valued. It is also remarkable that our standards can cause one and the same asset to have two different measurement outcomes, depending on the business model according to which it is held. For example, a debt security has to be measured at market value when it is held for trading purposes, but it is reported at historic cost if it is held to maturity. In that case, the business model approach certainly provides a plausible answer. Still, some may find it counterintuitive that a government bond held to maturity would be valued at a higher price than the same bond held in a trading portfolio, where it may be subject to a discount. In the exact sciences, such a dual outcome would certainly not be acceptable. One of the biggest measurement dilemmas (continued on next page)
AUDITOR • June 2012
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relates to intangible assets. We know that they are there. While the value of Facebook's tangible assets is relatively limited, its business concept is immensely valuable (although 25% less immense than a month ago). Likewise, the money-making potential of pharmaceutical patents is often quite substantial. However, both types of intangible asset go unrecorded (or under-recorded) on the balance sheet. Under strict conditions, IAS 38 Intangible Assets allows for limited capitalization of development expenditures. But we know the standard is rudimentary because it is based on historical cost, which may not reflect the true value of the intangible asset. The fact is that it is simply very difficult to identify or measure intangible assets. High market-to-book ratios may provide indications of their existence and value. However, after the excesses of the dot.com bubble, there is understandable reluctance to record them on the balance sheet. Although our accounting standards do not permit the recognition of internally generated goodwill, our standards do require companies to record the premium they pay in a business acquisition as goodwill. This goodwill is a mix of many things, including the internally generated goodwill of the acquired company and the synergy expected from the business combination. Most elements of goodwill are highly uncertain and subjective, and often turn out to be illusory. The acquired goodwill is later subject to an annual impairment test. In practice, those impairment tests do not always seem to be done with sufficient rigor. Often, share prices reflect the impairment before the company records it on the balance sheet. In other words, the impairment test late. All in all, it might be a good took another look at goodwill in the the post-implementation review Business Combinations.
AUDITOR • June 2012
comes too idea if we context of of IFRS 3
What is Income? It is not only the balance sheet that is fraught with imprecision and uncertainty. We also have a problem defining what income is and how to measure it. We report three main components of income: the traditional profit or loss or net income, other comprehensive income, and total comprehensive income. Total comprehensive income is the easy part: it is simply the sum of net income and other comprehensive income, or (OCI). Not too many people seem to be paying attention to it, even if they should. The distinction between net income and OCI, however, lacks a well-defined foundation. While the P&L is the traditional performance indicator on which many pay and dividend schemes are based, the meaning of OCI is unclear. It started as a vehicle to keep certain effects of foreign currency translation outside net income and gradually developed into a parking space for “unwanted� fluctuations in the balance sheet. There is a vague notion that OCI serves for recording unrealized gains or losses, but a clear definition of its purpose and meaning is lacking. But that does not make OCI meaningless. Especially for financial institutions with large balance sheets, OCI can contain very important information. It can give indications of the quality of the balance sheet. It is very important for investors to know what gains or losses are 'sitting' in the balance sheet, even if they have not been realized. During the upcoming revision of the Conceptual Framework [IASB's joint standard-setting agreement with the U.S. Financial Accounting Standards Board, we will look at the distinction between net income and OCI. All of our constituents have asked us to provide a firm theoretical underpinning for the meaning of OCI and we will try to do so. For now, while we may not always know how important OCI exactly is, we can be sure that net income is not a very precise performance indicator either. Both need to be used with judgment, especially in the financial industry. 9
The Quintessential Chartered Accountant IPL-2012 is finally over and we can get back to some academics and work. For a whole two months, it has been IPL at every twist and turn except for some of us who got stuck with the the annual closing. IPL is entertainment at its best combine local flavour, great costumes, glamour, fancy names for teams to Cricket and what you have is an awesome business proposition. And yes this edition had to be cricket and IPL at that. I have attempted to compare the IPL Cricket match with the Auditing profession and here it goes: The contest is between the two teams whom we shall call Audit and Time. Audit is the process based on which the attest function is to be performed. Time is the limit within which the audit needs to be completed. It is the battle between the two that the Auditor is expected to umpire in his Attest function. The spectators are the stake holders viz., share holders, bankers, tax authorities, government and the society at large. The cheer leaders are invariably the half baked analysts and the jumpy markets themselves! IPL by design had phases of power play, consolidation and the slog with time outs. Similarly, the audit process starts off with Power Play of high intensity calls from client CEO's to commence and the rapid partner response to mobilise resources for engagement commencement. The consolidation phase is the time when we actually have a breather (power play for another demanding client has just started with the limited resources we had). The slog happens when we work at a frenzied pace
Ms. Sripriya Kumar
to meet deadlines of managements ever eager to be the first to release results. Time Outs are those endless cups of tea, cookies, samosas and late night dinners to motivate us to work more. What does the umpire do in all this? The auditor needs to ensure true and fair play. He does this by attempting to do justice to the Audit within the assigned Time without compromising on either. Just like the umpires who are expected to master the rule book, auditors today are expected to be aware of a plethora of standards, guidelines, laws and regulations. We need to review complex paradigms worse than even the Duckworth and Lewis model. Like in an IPL game, decisions are made on the fly and there is very little time to refer and revert. Both the umpire in IPL and the auditor in a professional context are challenged by possibilities of tampering, appeals, arguments and match fixing through Special Purpose Vehicles. References to the third umpire are not uncommon with auditors consulting peers and audit committees. Thank God, there is no more Vaseline in cricket (remember Bedi?) but window dressing is a significant event to reckon with in audit. The game of Audit is over. Cricket, Players, Client, Spectators, Markets, Stakeholders all go home to retire. The umpire moves to his next game. The awards are announced. Accolades, appreciation and bonuses doled out. Was there a thumping ovation when someone said “And the Fair Play award goes to the Auditor� ? Or, was there no such award at all?
80th Anniversary Celebrations The Society of Auditors is bracing itself for the grand celebrations of its 80th Anniversary on the 24th and 25th August, 2012. The committees are working out the modalities to make this as a memorable function. You will get to know the finer details in the next issue of AUDITOR. Every one of you is requested to pitch in with your support and contributions. Please remember that ours is the oldest Accountants' body in the nation and we are poised to gain greater heights in the near future. This is our family function and hence, join us in the celebrations wholeheartedly and with gusto! 10
AUDITOR • June 2012
A reply from CEO of J.P. Morgan to a pretty girl seeking a rich husband A young and pretty lady posted this on a popular forum: Title: What should I do to marry a rich guy? I'm going to be honest of what I'm going to say here. I'm 25 this year. I'm very pretty, have style and good taste. I wish to marry a guy with $500k annual salary or above. You might say that I'm greedy, but an annual salary of $1M is considered only as middle class in New York. My requirement is not high. Is there anyone in this forum who has an income of $500k annual salary? Are you all married? I wanted to ask: what should I do to marry rich persons like you? Among those I've dated, the richest is $250k annual income, and it seems that this is my upper limit. If someone is going to move into high cost residential area on the west of New York City Garden(?), $250k annual income is not enough. I'm here humbly to ask a few questions: 1) Where do most rich bachelors hang out? (Please list down the names and addresses of bars, restaurant, gym) 2) Which age group should I target? 3) Why most wives of the riches are only average-looking? I've met a few girls who don't have looks and are not interesting, but they are able to marry rich guys. 4) How do you decide who can be your wife, and who can only be your girlfriend? (my target now is to get married) - Ms. Pretty A p h i l o s o p h i c a l r e p l y f r o m C E O o f J . P. Morgan: Dear Ms. Pretty, I have read your post with great interest. Guess there are lots of girls out there who have similar questions like yours. Please allow me to analyse your situation as a professional investor. My annual income is more than $500k, which meets your requirement, so I hope everyone AUDITOR • June 2012
believes that I'm not wasting time here. From the standpoint of a business person, it is a bad decision to marry you. The answer is very simple, so let me explain. Put the details aside, what you're trying to do is an exchange of “beauty” and “money” : Person A provides beauty, and Person B pays for it, fair and square. However, there's a deadly problem here, your beauty will fade, but my money will not be gone without any good reason. The fact is, my income might increase from year to year, but you can't be prettier year after year. Hence from the viewpoint of economics, I am an appreciation asset, and you are a depreciation asset. It's not just normal depreciation, but exponential depreciation. If that is your only asset, your value will be much worse 10 years later. By the terms we use in Wall Street, every trading has a position, dating with you is also a “trading position”. If the trade value dropped we will sell it and it is not a good idea to keep it for long term same goes with the marriage that you wanted. It might be cruel to say this, but in order to make a wiser decision any assets with great depreciation value will be sold or “leased”. Anyone with over $500k annual income is not a fool; we would only date you, but will not marry you. I would advice that you forget looking for any clues to marry a rich guy. And by the way, you could make yourself to become a rich person with $500k annual income.This has better chance than finding a rich fool. Hope this reply helps. - J.P. Morgan CEO *There has been no concrete proof on whether or not this indeed took place…. but it's a nice story nevertheless. Moral of the story: Never mess with a finance guy!
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Recent Judicial Decisions Reported Statute: Income Tax Act 1961 – Section 9(1)(vi) – Right to use is royalty Title : Citrix Systems Asia Pacific PTY Limited in Re Citation: 343 ITR 1
P.M. Veeramani, FCA
Decision in favour of : Revenue Bench: Authority of Advance Rulings
Payments received by applicant from the distributor for sales of software products were in the nature of royalty within the meaning of section 9(1)(vi). Such payments would be fall within Article 12 of DTAA between India and Australia. Subscription for the updates would also be payment towards grant of right to use the copyright embedded in the subscription and it would be royalty. Even if the applicant did not have a PE in India, the amount was liable for tax under article 12(2) of DTAA. Withholding tax @10% would be applicable on the gross amount of royalty. Statute: Income Tax Act 1961 – Section 10(10D), 37(1) – Keyman insurance policy Decision in favour of : Assessee Title : CIT vs Rajan Nanda Citation: 69 DTR 250 Bench: Delhi HC Premium paid by company on keyman insurance policy is allowable as deduction; argument that taking such keyman policy every year and thereafter assigning the same to beneficiary is a colourable device is not sustainable; On assignment of keyman policy by company to employee director against receipt of surrender value from the director, difference between premia paid by the company and surrender value paid by director cannot be taxed as “profit in lieu of salary” in the hands of director; Amount received by employee director on maturity of insurance policy, which was taken in the first instance by the employer as keyman and thereafter assigned to him, is exempt under 10(10D) in the hands of director. Statute: Income Tax Act 1961 – Section 32 – Books are capital expense entitled for depreciation Title : Brilliant Study Centre vs ACIT Citation: 135 ITD 351
Decision in favour of : Revenue Bench: ITAT Cochin
Expenditure on books incurred by a tutorial institution , preparing students for professional entrance examination, is a capital expenditure, entitled to depreciation under section 32(1) and not a revenue expenditure under section 37(1). Since article being used is same (boks) and purpose for which it is used is also the same, it does not matter whether coaching classes and tutorials is profession or a business. Statute: Income Tax Act 1961 – Section 50B – Negative Networth to be added Title : DCIT vs Summit Securities Ltd Citation: 15 ITR Trib 1 SB; 135 ITD 99
Decision in favour of : Revenue Bench: ITAT Mumbai Special Bench
Under a scheme of arrangement approved by Mumbai HC, whole of undertaking of power transmission business was transferred for a consideration of Rs.143 crores. Since the networth of the undertaking was quantified at a negative sum of 157 crores, the entire sale consideration of 143 consideration was offered as long term capital gains as a slump sale under section 50B. Held, if the value of liabilities is more than the assets, then the net worth should be restricted to zero ran contrary to the arguments that the words “as reduced by “can never mean that the value of liabilities will be more than the aggregate value of the assets. The negative net worth of 157 crores should be added to the sale consideration of Rs.143 crores and Rs.300 crores would be the amount chargeable to capital gains. Statute: Income Tax Act 1961 – Section 56(2) – Certain rent is income from other sources Title : JMD Realtors Private Ltd vs DCIT Citation: 135 ITD 337
Decision in favour of : Revenue Bench: ITAT Delhi
Income in the form of signage rent, parking rent , terrace rent for erecting towers and license fee was to be taxed as income from other sources and not as income from house property. Statute: Income Tax Act 1961 – Section 68, 41(1) – not applicable to sundry creditors Title : DCIT vs Eastern Medikit Ltd Citation: 135 ITD 461
Decision in favour of : Assessee Bench: ITAT New Delhi
AO noticing sundry creditors outstanding for more than one year, made addition of the same invoking section 68. Since the liabilities were old and no credit had been made in the books during the assessment year in question, section 68 was not applicable. Further since the liabilities were not written back, section 41(1) was also not applicable. (continued on next page)
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AUDITOR • June 2012
(continued from previous page)
Statute: Income Tax Act 1961 – Section 80 IB(10) – Deduction allowable even if not the owner of land Title : CIT vs Radhe Developers Citation: 69 DTR 185
Decision in favour of : Assessee Bench: Gujarat HC
Terms and conditions of development agreements showed that assessee had taken full responsibility for execution of the projects and the resultant profit /loss belonged to the assessee and all other conditions of section 80IB(10) stood satisfied, deduction could not be disallowed on the ground that land under development project was not owned by assessee and in some cases development permission was granted in the name of land owners. Statute: Income Tax Act 1961 – Section 115BBC – Anonymous donation Title : Hans Raj Smarak Society vs ADIT Citation: 69 DTR Trib 123
Decision in favour of : Assessee Bench: ITAT Delhi
As per section 115BBC (3) receiver of donation had to maintain identity including name and address of the donor. No addition could be made as anonymous donation on the ground that confirmation from donor was not filed. Statute: : Income Tax Act 1961 – Section 115JB – Prior period expenses Title : Shivshahi Punarvasan Prakalp Ltd vs ITO Citation: 69 DTR Trib 1
Decision in favour of : Asssessee Bench: ITAT Mumbai
No addition can be made on account of prior period expenses while computing book profits when the claim of the same is debited to profit and loss account prepared under the Companies Act. Statute: Income Tax Act 1961 – Section 147 – Notice after 4 years Title : Sun Investment Private Ltd vs ACIT Citation: 69 DTR 11
Decision in favour of : Assessee Bench: Delhi HC
It was not for the assessee to inform the AO that on these facts that legal inference to be drawn is that the provision should be disallowed and added back to book profits. There was sufficient disclosure in the notes on accounts and hence there was no failure on the part of the assessee to make a full and true disclosure and reopening was not valid. Statute: Income Tax Act 1961 – Section 194 C – Supply of labour attracts TDS Title : DCIT vs Kamal Mukerjee and Co Shipping Private Ltd Citation: 69 DTR Trib 75
Decision in favour of : Revenue Bench: ITAT Kolkatta
Payment by assessee to Calcutta Dock Labour Board towards stevedoring charges is in the nature of supply of labour, it can be assumed that there was a contract for supply of labour between assessee and CDLB and therefore, provision of section 194 C was clearly attracted even thought the labour hired by assessee through CDLB is considered to be in assessee’s employment. Statute: Income Tax Act 1961 – Section 263 – Doctrine of Merger and period of limitation Title : CIT vs ICICI Bank Ltd Citation: 343 ITR 74
Decision in favour of : Assessee Bench: Bombay HC
The order of the CIT under section 263 had not been passed with reference any issues decided in the first reassessment or second reassessment, but the first order of assessment passed under section 143(3). Such order did not merge with orders of reassessment in respect of issues which did not form the subject matter of reassessment. Consequently explanation 3 to section 147 would not alter the position and will not obviate the bar of limitation under section 263(2).
HUMOUR OF THE MONTH We have been criticised that we do not have a humour column in our journal. We will strive to bring some live humour henceforth (with ICAI elections approaching, we are sure we will not have any supply side problem!). This month’s quota: A Council Member has anointed himself as the official “Voice of CA” and has (yes, actually!) changed his name to include “Voice of CA” officially and in the Official Gazette. You can check out in ICAI website that his name has been changed in ICAI records also. So, any one of us can also go ahead and insert such funny middle names, like “Noise of CA” (english, english!), “Vice of CA”, “Wise CA”, “Nice CA”, “Wily CA”, “Brilliant CA”, “Best CA” etc. ICAI will not object and even welcome! Enna Kodumai Sir, Ithu? AUDITOR • June 2012
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LETTERS TO THE EDITOR Lot of times, I have felt the magazines and newsletters from non-ICAI organisations like BCAS, CA Study Circle, Society of Auditors, etc., are much more readable and useful to the members of the profession than the regular magazine of the ICAI. Surely this edition of the AUDITOR is one such work and is highly commendable for its focus on the traditional areas of CA practice such as Audit, taxation, etc. Of course, the editorial has its share of comments about ICAI, which reflects the minds of a lot of members. As a member trying to focus on management consulting, investment banking and newer areas of the profession, I feel that the professional magazines can also have columns dedicated to these potential areas where the members can have a good career. There are a quite a lot of CA's who have done well in their entrepreneurial ventures as well as performed well as CEO's of many organisations. Without doubt, these people have made our profession proud much more than many past presidents of the ICAI, who are proud of their achievements for taking the profession and students to “Greater Heights” and who provide platforms for lot of young professionals. By doing the above, I feel much more 'inclusiveness' will come into the focus and activity of the professional organisations. S. Krishnan | Partner, Krishnan & Natarajan, CAs
I chanced to glance at the auditor magazine of the society of auditors at a friends place. It was extremely refreshing to find something so off beat and so quintessentially delightful. Initially I kept this magazine aside thinking that it would be another boring monologue on taxes, IFRS and so on. But, later when I read it, I really liked this group for doing something different and yes I am proud to be a CA. S. Vijay, Chartered Accountant
Dear Mr. Prabhakar, The 'take' on Sivakumar sir is too good. It is also nice to see the article on domestic transfer pricing which will have HUGE implications in the near future. Kudos!! Mahesh Krishnan
Dear CA Prabhakar, Received Auditor in its usual form. The Article by CA Rajan is quite interesting and humorous. What all said about CA R. Sivakumar is quite true. May the Almighty Architect grant him good health and peace 14
of mind to continue his useful service to our profession particularly Students community. But for his sincerity and devotion we would not have acquired our own premises for the Society to save our prestige before the I T department. Hats off to him. CA K. Ananthachari Dear Prabhakarji, There could be no other "Best" Article on Sivakumar, than the one presented by you in "Auditor". It reflects the minds of our entire fraternity. As you have rightly mentioned, he is the best human being with compassionate thinking and volunatarily helpful. The reason for repeating your words is Iam one such beneficiary from him. Many would say that he is terror, but on reading your article everyone would know his best qualities. B.K. Murthy Dear Editor, I am Nikhil Raina, a Chartered Accountant aspirant from Shimla, Himachal Pradesh. I was browsing through various online Journals pertaining to our profession. I was recommended your website and Journal by a friend (KP Srivallabhan) from Chennai. I fond the articles with respect to March,2012 quite interesting. However I have difficulty in reading and saving the same in Portable Document Format (PDF). Could you please change the format or improve the visibility of your Journal in its online form. Yours sincerely, Nikhil Raina
Dear Sir, Sub: “Budget Special” issue dated March 2012 1. I read your “Budget Special” containing comments on the “Budget” by eminent persons All persons have written critical and unsupportive view on the budget and there is no article setting out “good points” in the Budget. I request you to see that atleast one article be published on “plus points” in the Budget. Further, the “News letter” is for readership of auditors who are more eager to understand the tax implications of the Finance Bill 2012 rather than mere expression of antipathy to all proposals in the Budget. The “News letter” and the articles therein should represent expression of “balanced views” and not mere expression of “anger” “disgust” or “merciless criticism”. 2. All the same, views expressed are interesting but may not be acceptable to every member of the society of Auditors. Yours sincerely, V. Jagadisan AUDITOR • June 2012
PUZZLE TAX HAVENS OF THE WORLD ! Fill up the blank spaces and you will see what is in store in the vertical sentence of the covered boxes!
United Kingdom - Richard Branson ? Famous for the canal and a brand of cigarettes Meditteranean island - named from a tree Eastern Carribean tourist spot
The most popular tax haven that every man knows Cuba and Florida another Banana ?
Princiaplity on the French Riveira , also a biscuit Spain and/or France ? The Alps and more alps , best chocolates and watches Principality in the Alps Oesling and Gutland, beauty soap for the stars United Kingdom - shorts and triangle ? One in UAE
AUDITOR • June 2012
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