For Private Circulation Only • May 2013 • Vol 7 Issue 5
Society of Auditors
Chennai Inside this Issue... •
From the Edit Pad
2
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The Quintessential Chartered Accountant Can we copy the Corn Farmer?
3
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Domestic Transfer Pricing – A brief background
4
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Know your Council member Series: INTERVIEW WITH CA G. SEKAR
6
SA 705 : Modifications to the Opinion in the Independent Auditor's Report
9
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Does ICAI follow Accounting Standards in its financials? Does it have to? 12
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Recent Judicial Decisions Reported
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FROM THE EDIT PAD
P.S. Prabhakar
This is a record of sorts. I am referring to the number of resolutions received for 'consideration' at the ensuing Annual General Meeting of SIRC slated for 7th June, 2013. In spite of the Executive Committee's decisions to do away with a few of the resolutions something that the EC does not have the power under the CA Regulations the 'remaining' resolutions number a score. The resolutions are about wide ranging issues from examination system to code of conduct of elected representatives to GMCS classes to Branch infrastructure augmentation to office administration issues at ICAI / Regional Councils to professional opportunities exploration to appointment and evaluation of faculty etc. From the tone and tenor of many resolutions and the profundity of the some as also the associated issues, the AGM is likely to be a stormy event. Yes, possibly a stormy event - in spite of the apparent stoic, nonchalant and indifferent posturing that is normally the style of the office bearers in such meetings. Till recently, the Annual General Meetings at SIRC used to be a prosaic affair, with no more than 20 members attending and 2 or 3 raising some questions of no great importance on accounts for which the office bearers in the dais would happily oblige with irrelevant replies, ‘managing’ the formality impressively. Not anymore. Things are changing. The people who are at the helm can no longer feign ignorance of the growing activism. In January, 2013, when the last AGM was held, a few spirited members proved beyond doubt that the then office bearers were either unaware of the Regulations or did not care about them. It had to be repeatedly told to them that SIRC is, by itself a sovereign body that did not need advisory from central office for every little decision making and not definitely on those on which Regulations were clear. In spite of a very clear spelling out in Regulation 150 that a member is entitled to move any resolution for consideration at the meeting of the members, with the only condition that the draft of the resolution is
to be sent before 28 days, it is unfathomable as to how the Executive Council of SIRC can assume the power of consideration of the resolution and to delete some of the resolutions received for consideration by members in AGM. One of the resolutions that was omitted was given by the Editor and all it asked was - the Chairman of the Regional Council should do his job as enshrined by Reg. 137(2) -which has designated him as the Chief Executive Authority and to ensure that the Executive Committee and all elected representatives act in the interest of the profession. Is the mere demand of asking for acting in the interest of the profession is so much of an antithesis to the Council and the Chairman? I was told that the Chairman took the resolution so personally and was fretting and fuming. Strange! Resolutions apart - the other major business of 'receiving' the accounts of the RC is also likely to stir the hornet's nest. Already a few members of the RC seem to have expressed their dissent to the accounts on a particular issue, the details of which do not seem to add credit (used as an English term and not as an accounting term) to the Regional Council. Even the Central Council member, whose interview is published elsewhere in this issue, has made a reference about this. Even at the central level, the financial statements of ICAI not conforming to the accounting standards issued by ICAI itself is being questioned by many. (There is a separate write-up on this in the current issue). It is strange as well as sad that the accounts of the accounting regulator have become questionable. The AGM is the only forum available for members to do introspection about the affairs and activities of our institution. And this forum also is available only at the regional level. In the current scheme of things, the regulations do not provide for an All India general body meeting of members and thus the actions of the Central Council remain undebated and
AUDITOR
Editorial Board
A periodical from Society of Auditors Chennai
CA P S Prabhakar, Editor
Society of Auditors “Platinum Chambers” 33, TNHB Complex, 4, Luz Church Road, Mylapore, Chennai - 600 004. Phone : 044-2498 6979 E-mail : society.auditor@gmail.com editor@societyofauditors.in Website URL: www.societyofauditors.in
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Adv B Ramana Kumar CA P Anand, President, Ex-officio Member CA R Sivakumar, Vice President, Ex-officio Member CA S Ramakrishnan, Vice President, Ex-officio Member CA B K Moorthy, Secretrary, Ex-officio Member
The Quintessential Chartered Accountant Can we copy the Corn Farmer? Automobile companies have set up Supplier Parks to make parts and accessories for other manufacturers including their own competitors. Telecom Companies have transformed themselves into sleek operators and unlocked tremendous valuations by hiving off their passive infrastructure to create large tower companies. Entities today outsource their operations to entity and business agnostic yet process specific BPO's. Why do entities do this kind of strategic sharing that was hitherto unheard of? These decisive changes are prompted or perhaps even compelled by a driving need to grow and stay competitive and they chose to do this by staying customer and quality focused. Nothing else mattered and hence operations, manufacturing, accounting, taxation are all considered peripheral while marketing and quality are deemed core to growth and success in the market place and hence central to an entity's heart, soul and stomach. Elsewhere in the world, there is an oft repeated prize winning story on a corn farmer that goes as follows. An American Corn Farmer who supplied his neighbours with the best quality seeds was asked as to why he was creating competition that would kill his business. His reply was "Why sir," said the farmer, "didn't you know? The wind picks up pollen from the ripening corn and swirls it from field to field. If my neighbours grow inferior corn, cross-pollination will steadily degrade the quality of my corn. If I am to grow good corn, I must help my neighbours grow good corn." And this perhaps leads us to an exquisite mystery on what the connection of the above paragraphs is to this edition's QCA. I have attempted to articulate a few of my thoughts on how Shared Knowledge and Practice repositories can be the first step to the Aggregation of CA firms, a much needed proposition critical to the survival of the Practicing CA community Much is spoken and written about the Big Four. The time has come to move out of the realm of opposition and perhaps look at Affirmative Action. This means actions for prioritising local firms over the MAF's operating in India. My merely suggesting this abstraction does not mean it can be operationalized for there are likely to be many differing views. But it is well worth trying. However one of the key challenges to implementing this and promoting alternatives to the Big Four is the (continued from previous page)
unquestioned. This seems so convenient for the powers that be and hence they do not recommend any change in the method of governance. If more ordinary members raise questions, then better sense may begin to prevail. And for that, we should at least utilise the AUDITOR • May 2013
Sripriya Kumar
way we SMPs work. As of date, there are few firms which can match the Big Four in terms of our practice tools, work methodologies, data management practices, information repositories, research teams and training systems. Whilst our Big brethren have perfected this over the decades of their existence and show case this brilliantly, we are perhaps even yet to identify the total landscape that we need to understand and possess to compete with the Goliath's. All we know is when our clients become bigger, our practices can smaller. The present alternatives available are one, stay as is small or medium, two - networks or three - mergers. The first is a no brainer and a potential Ground Zero, the second is sub optimal while the last option is often scary. Surely there must be options between the tuft and the tonsure. One such option is to create a League of Firms(5 10 firms) that will do nothing else but share practice infrastructure comprising the following. These firms will compete on the strength of their capabilities to market and based on their delivery excellence and will be enabled by access to the below mentioned essentials on a cost sharing basis. • • • •
Pitch Kits and Knowledge repositories Training Methodologies Data Management Research Teams
An initiative such as this would result in the emergence of a new category that would actually rock the market place (much like an FMCG launching a slew of soaps rather than one standalone). Should the leagues prove good, these would lead to end state mergers. Cross referrals across firms for conflicting engagements would add buoyancy to the model. What does all this entail? This infant idea needs Three Tiny Things: Money, Mindset and a Mentor. Should some firms be willing to think on these lines and commit small investments, the Mahayana or the Great Vehicle is ready to emerge. Was is a Buddhist proverb that says, “When the student is ready, the teacher will appear” and is a mentor reading this ?
opportunity of the AGM to initiate healthy discussions that pertain to our profession. Those members who can but still do not attend such AGMs lose any moral right to demand anything from the Alma Mater. So, please attend the AGM and enlighten the members and be enlightened as well! 3
Domestic Transfer Pricing – A brief background Taking cue from the ruling of the Hon'ble Supreme Court in CIT v. Glaxo Smitkline Asia Private Limited [2010] 195 Taxman 35 (SC), the Central Government extended the provisions relating to Transfer Pricing which where otherwise applicable to transactions with associated enterprises situated in a foreign jurisdiction, to certain specified domestic transactions with related parties located in India as well as to inter unit transaction within the entity when one of them is claiming tax holiday (deduction under Chapter VI-A or claiming exemption under section 10A/ 10AA of the Income Tax Act). The provisions have now been operation for one whole year and the exercise of examination of whether the transactions are at Arms’ Length would start shortly. Though the recommendation made by the Hon’ble Supreme Court in the above referred judgment was restricted to shifting of profits to units claiming tax holiday, the Parliament has gone a step further to extend the provisions to transactions between related parties specified in section 40A(2)(b) of the Act. While Nane Palkiwala in his book ‘The Law and Practice of Income Tax' had criticized the insertion of section 40A(2)(b) as ‘unfair, both to the conscious assessing officer and honest tax payer’, amending the provision to make it more stringent by requiring the tax payer to establish on a case to case basis that the transaction were at Arms Length is highly unreasonable. Be that as it may, now that the provisions have been made part of the statute book, it would be wiser to have into re-look into our armory to cover the tax payer from unwarranted harassments. This article flags off certain transactions which the Courts have held not be covered in the provisions of the section, though to a common mans mind, they seem to be covered transactions. a. Salary paid to partner of a firm Before 4
CA S. Sriram
examining the legal provision, I would like to provide an hear say anecdote. Last year, the Delhi Government had, with the objective of encouraging people to use public transport, introduced a separate lane for Public Transport Busses in the highly congested Delhi road. Roads became narrower, slowing down movement of cars significantly. A few residents filed a petition before the Hon’ble Delhi High Court seeking a direction to scrap the scheme, as it was practically resulting in a curse than a boon. I understand from a lawyer friend of mine who was present during the hearing that, the judges agreed not to stay the Governmental Plan only after the Government counsel assured that no such system would be introduced around the High Court. All certain done, ‘thanaku pin than dhanam’. So before advising the clients, practicing Chartered Accountants would have to know what would happen to the salary drawn by them from their firm. Gracefully, the Hon’ble Gujrat High Court in CIT v. Yoganand Textiles [1993] 202 ITR 869 (Guj) held that, payment of salary to partners being covered under section 40(b) would not again be covered under section 40A(2)(b). Similar view has been taken in NM Anniah & Co. v CIT [1975] 101 ITR 348 (Kar) and Ganesh Factory v CIT [1989) 180 ITR 416 (P&H). Thus, salary and interest payments to partners by firms would not be covered within the ambit of section 40A(2)(b). b. Section to cover only expenditure and not income As is evident from section 40A(2)(a), it is only ‘expenditure’ that is covered under the provisions of the section and not income. For example, (continued on next page)
AUDITOR • May 2013
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where a loan has been granted to a sister concern, the section will not apply to the entity giving he loan in so far as it is only entitled to receive income. When it was claimed by tax payers that sale of goods to sister concerns is only an expenditure and so the provisions of this section should not apply to sale of goods even if they were below market price, the Assessing Officer held that the difference between the fair market price and actual selling price is to be construed as 'discount' which is an expenditure. This contention of the Assessing Officer was however negated in CIT v. AK Subbaraya Chetty and Sons [1979] 123 ITR 592 (Mad). c.
Statutory expenses and expenses approved by statutory authorities In CIT v. Shriram Pistons And Rings Limited [1989] 181 ITR 230 (Del), the Delhi High Court observed that directors remuneration approved by the Company Law Board shall be accepted as reasonable under section 40A(2)(b).
d. Trade discounts As an expenditure envisages actual payment, allowing discount would not attract the provisions of section 40(A)(2)(b) as held by the Hon'ble Delhi High Court in United Exports v. CIT [2009] 28 DTR 315 (Del). e. Loans and advances In the context of section 40A(3), the Central Board of Direct Taxes vide Press Noted dated 02.05.19a69 had clarified that advancement of loans and its repayments
does not constitute ‘expenditure’ deductible in computing taxable income and hence would not governed by the provisions of section 40A(2). However, payment of interest would attract the provisions of the section. f.
Depreciation on assets purchased from a related entity For the reason mentioned in the above paragraph, purchase of assets would not be governed by the provision of section 40A(2). The next question would be as to whether depreciation is covered by the section? Definition of 'specified domestic transaction in Section 92BA covers only ‘expenditure’. As held by the Hon'ble Supreme Court in Nectar Beverages Pvt Ltd. v. DCIT [2009] 314 ITR 314 (SC), depreciation is not an ‘expenditure’ within the meaning of the Income Tax Act, but a deduction allowed by the sta tu te . Th e re fore , d e d u c ti on for depreciation claimed on assets purchased from related parties would not be covered within the purview of section 40A(2)(b).
With the onus shifting on the tax payers to establish that transactions with Associated Enterprise were at Arm’s Length price, there is evidently a tuff time ahead for tax payers, primarily due to lack of evidences to substantiate their claim. The consolidated threshold of INR 5 Crores is provided in the statute would not provide great respite to many business groups. The real trouble behind the new provision will come to light only a couple of years, when the returns are taken.
BB NAIDU STUDY CIRCLE MEETING - JUNE 2013 “Compliance on Financial Reporting Requirements”
Topic
:
Speaker
: CA Mahesh Krishnan, FCA, Partner, RGN Price & Co., Chartered Accountants
Date & Time : Friday, the 21st June 2013 at 6.00 p.m. (High Tea: 5.30 p.m.) AUDITOR • May 2013
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Know your Council member Series: Q: In the recently concluded elections, you won impressively almost hitting the quota upsetting a Chennai candidate. To what you would attribute this success? A: Primarily it is my Guru His Holiness Paramacharya's blessings and then the faith of the members on me and on my own faith on my hard work. I met so many people and from different places. Q: Will meetings only get votes? You are already popular as a teacher, book writer or even a crusader for students. Do you say that people voted for you not for these things alone but more for meeting them? A: Meeting voters is important. Their knowing me is one thing but knowing about me is more crucial.
Q: So, you think the vote is a positive vote for you and not a negative vote against some one, wherein you were a collateral beneficiary. A: I have been seeing that in our Region, in the last 8 or 9 elections, voters have been electing at least 1 or 2 new comers. May be there is an inner desire for them to try out new people. Q: During the election run-up, during one of our discussions, you said that you were not happy about the way in which the Institute was being run and administered and wanted to try cleaning up the mess. Tell me, three months down the line, how have you started the cleaning process? A: I originally thought cleaning process was necessary but I realized that there has to be a mindset change process is necessary to meet the challenges. Ours is a statutorily recognized body like IITs and IIMs. Those institutions are able to voice their opinions on public causes but we always concentrate in appeasing various Government departments. First, our mindset should change from that we are helped by Government to we are only helping the Government. Q: I agree but what are you doing about this? Are you talking these things where it matters? A: At every possible occasion. Even in the recent Direct Taxes Committee, I spoke about the Tax Audit needs for companies vis-Ă -vis others. 6
INTERVIEW WITH CA G. SEKAR Members feel that the Council should take care of the profession but Council feels that it is only a regulatory body. While attendance-marked but not attended CPE programmes are conducted, the reason is more because the members do not feel that they add value to them. On its part, the Institute has not been utilizing so many good resource persons available. Even in the matter of charging fees to the clients, our members do not do proper selfvaluation. Institute can do better in many areas. I travel extensively and I am talking to members. As I said, there has to be a mindset change for both members and the Institute. I am trying with members and will do so with Institute as well. Q: You are a very popular teacher and have been running fairly successfully a coaching institution but you are also aware that SIRC's coaching classes have not been popular at all. Is this because of the fact that SIRC is not getting good faculty or because they do not know how to do this business? A: I have found that there are some issues with the way SIRC conducts classes. For example, they make about six changes in faculty for a subject. This gives continuity problem to a first time learner. Any coaching has to done be in a logical manner. Only those who think SIRC's classes are at affordable cost, choose SIRC. SIRC cannot take them lightly. Secondly, Institute pays very low remuneration for teachers. Any teacher has to prepare for two hours for taking a class for one hour and including travel time, he invests four hours for a class. If he is given a very small honorarium, why would experienced teachers evince interest? Q: So, you are telling me that they are not doing a good job of it. A: I am only saying that they can do better. Q: Recently, a member has written a mail wherein he has blamed that the private coaching centres have made the whole course simply examination-oriented and not knowledge-based. That they are simply profit oriented. What is your answer? A: Blaming coaching institutes may not be correct entirely. Look at it this way. If coaching (continued on next page)
AUDITOR • May 2013
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what are your solutions?
institutions were not there, how would the students, residing in various areas in a city or in various towns get coaching? ICAI does not have the infrastructure in all the upcountry branches. Again, students who go to IIT coaching centres are all paying enormous amounts of money. The parents or students do not seem to complain. No one is compelling them to join. Secondly, the objective of Coaching Institution is to give knowledge within limited hours of 100 to 120 per subject to face Examination Challenge of 3 hours. Any education institution imparting nonscience curriculum will give good theoretical knowledge. It is the responsibility of the users to take it for practical purposes.
A: I am bringing such issues to the fore with the members whenever I get opportunity to interact and this I am able to do as a Council member who gets platforms to speak in various places. I will articulate all of my ideas in the Council also and will do my best to bring out the best.
Q: I agree with you. If ICAI is a non-profit organisation but can still make huge surplus on students' activities, I do not see why private coaching centre which exist for profits, should not charge what the students or their parents willing to pay. What about the profession's future? What are your views and plans, as a Council member on this?
A: The extent of interest shown by any individual CC member is their personal preference. I am taking interest in certain areas but if you ask my personal opinion, I would say that every centre even a branch should be an independent, identifiable centre of the profession for the organisation to grow with only a little interference.
A: Whenever I go to upcountry places, I have heard many times that there is not much scope and that revenues are very less compared to practitioners of big towns and cities. This looks strange to me. I do not know why should there be a differential fee for the same activity between a city Chartered Accountant and a mofussil one. When other services and products are priced the same all over, why our people should charge less just because they are practising in smaller towns? Our members should know to value their knowledge and time and do an activity based charging. Also, our profession seems to be the only one charging an annual retainer in spite of any number of visits of clients and any amount of work. This should change. On scope also, every practising member should consider him as the CFO of his client and accordingly give value added advices on all matters of finance instead of confining to the annual ritual of return filing and thus increase his scope within.
Q: The financial control is so much centred in Delhi and all the membership fees and student fees go to the Central kitty and ICAI gives insignificant shares to RCs and Branches and even expect the branches to be self sufficient on most aspects, except perhaps real estate purchases. Do you think this augurs well?
Q: Sir, even the Institute's own recommended scale of fees gives differential pricing pattern depending upon the population of the place of practice. A: Even if it is a decision of an earlier council, I am not in agreement of that. Q: You talk of problems. As a council member, AUDITOR • May 2013
Q: Let us talk about CC members' involvement in SIRC. There are 7 CC members acting as exofficio in SIRC. Some of them are taking too much interest, even almost running SIRC. Some do not step in at all. Some make guest appearances. To what extent do you think there should be interference, intervention or meddling in to SIRC affairs by the CC members?
A: You take any organisation financing activity is always centralised no problem about that but here there is a difference. Take any branch of a bank or an insurance company or any large business undertaking. You will have two accounts for collection and disbursement. The collections that are made will flow up to the Central office and for expenses, Central office would transfer funds. In our case, as you say the membership fees and students fees directly go to the central kitty with the RCs and branches having no control or even information about. In my view, the Membership and students fees should flow to central kitty through branches. If branches are given this responsibility, first there will be a better networking among the members and students within the branches. There will be a much better connect for a member with his /her branch. A branch, today, does not know how many members are there in its jurisdiction or how many students register from their place. If every branch is made independent, equipped with an Executive Officer, some staff with same (continued on next page)
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salary structure etc. modelled like a branch of a nationalised bank, even the bonding for a member to ICAI through the branches will be better. The brand building for ICAI is not done at Delhi but should start from branches. The branch empowerent is the need of the day. We are not even aware to what extent even ordinary members from branches can do brand building. For your info, one ordinary member from a branch made the MP of his place to talk in Parlaiment for 10 minutes about Chartered Accountants. (He later mentioned that it is Hon'ble MP Mr Semmalai, who talked about a Govt sponsored welfare fund for CAs). Q: Ok, can we take all these as a part of your agenda during your tenure as CCM? A: Yes, I am going to put my best efforts. Q: Sir, it is rumoured widely that in the recently approved SIRC's accounts for FY 12-13, you raised some serious issues. Can we know about that? A: The SIRC accounts were circulated just about a week before the meeting in which it was to be approved. When I saw the accounts, I asked for the details in 6 or 7 issues like in HQ grant receipt and utilisation and on details on the Bangalore Conference expenses which accounted for about 50% of the receipts. No information was furnished. I even raised certain questions to the Statutory Auditors who openly admitted that they were not aware of ICAI's regulations etc. When the RC wanted to pass the accounts with a majority vote, I insisted them to record my dissent. Q: So, when you raised such hue and cry in SIRC's accounts, can we expect you to raise your voice when ICAI accounts are passed at Delhi? We are told that our Institute which sets standards on accounting for the entire nation, follows none in our own accounts and that normally the accounts are passed in a matter of a few minutes. A: This will be the first time for me in the Council when accounts come for approval. I have made my homework of analysing the accounts of the ICAI for the past 6 or 7 years and will definitely act appropriately at the relevant time. Q: Recently, I heard that those 11 newly elected council members, of which you are one, in spite of tall promises on cleaning up, have in fact, 'fallen in line' in the Council, which is often referred to as a 32 member cosy club, where the President has the ultimate and even monopolistic authority. After all, he is the one to decide which committee to give, who to nominate to 8
international fora, who to be sent abroad etc. What do you have to say about this? A: There are some things that are set for over 63 years and called as convention. To change anything, what we need is members' unity. 1 or 2 members, acting independently cannot make any change. For example, take the convention of the VP becoming President or in a Regional Council, the Vice Chairman becoming Chairman. Especially a VP or VC of the third year in a Council term who seeks re-election tries to leverage this aspect saying that he is the incoming President or Chairman and this distorts level playing field. When every 3 years the management changes, there is no reason why should old practices termed as conventions c on t in ue . M a y b e t h e re is n o p rob l e m in following conventions but this stifles new ideas. In my opinion, every council has to act independently. It has to elect its President and Vice President every year. Q: But, then there is no need for a Vice President at all. In the present method, a VP has to be a second in command and learn the nuances for one year. A: We had the system of one President and one VP when we had only a few thousands of m e m b e r s . N o w, w e a r e a l m o s t t w o l a k h members and now, in my opinion, we should have at least 4 VPs one representing each region leaving aside the region where the President comes from. In the following year, the election to the President has to happen among these four VPs only. The individual VP representing a region has to oversee that Region in an advisory capacity. Q: What you are proposing is a basic structural change. Tell me, in this term we will see 4 CCMs exiting from the scene in our Region and if reelected, you will emerge as a senior Council member and also will have a good chance of becoming VP and then President. Do you know that you are putting your own Presidency possibility at peril by this suggestion? A: I am concerned more about the Institute and my members and students than about my personal ambitions. Look at it this way. Every person has a maximum of three terms and that is 9 years. Every Council member can become a Vice President before they complete their three terms. Yeah, nice idea. After 9 years, everyone can be called as Ex-VP. Anyway, thanks, Mr Sekar, for your time and answers. AUDITOR • May 2013
SA 705 : Modifications to the Opinion in the Independent Auditor's Report Introduction: The Auditor's primary duty is to report whether the financial statements including the accompanying notes present a true and fair view. If there is any departure from the Compliance framework or Fair Presentation framework the Auditor is bound to express his view with certain riders. SA 705 deals with issues wherein the Auditor is in disagreement with the recognition, measurement, presentation and disclosure of some or all the elements of the financial statements and it warrants communication to the body appointing him as auditor. The opinion is presented in the audit report to report whether the financial statements are in line with the Compliance / Fair Presentation Framework, Accounting Standards etc., Factors to be considered while forming an opinion: Audit Evidence: The professional judgment and the wisdom of the
CA. S. Aditya Kumar
Auditor play a key role in assessing the quality of the audit evidence. Materiality: The risk of misstatement is inherent in an audit of financial statement. Therefore, through his professional approach an auditor should decide on the tolerance level of any ledger having an incorrect balance, either by error or a fraud. Knowledge of business of the Client: In case of old client's whom the Auditor has served before, it is essential to update the Client's profile including any changes in accounting policy, changes in business plans, any business restructuring process, change in product line and overall economic / industrial outlook. This would enable the auditor to suitably modify the audit plan. In case of new clients, to understand the business environment, applicability of accounting standards and relevant compliance issues have to be analyzed and documented. Modifications in the Audit Report: The Standard prescribes three types of modifications viz.,
Qualified Opinion
Adverse Opinion
Disclaimer of Opinion
Where an auditor concludes that yes, there are certain misstatements (detected) which are material and also does not have / does have sufficient audit evidence; the report should be qualified opinion. The auditor also has to clearly outline the non-availability of evidence clearly in his responsibility statement.
Where an auditor concludes that yes, there are certain misstatements (both detected and undetected), which are material and also does have sufficient audit evidence; the report should be adverse opinion.
Where an auditor concludes that yes, there are certain undetected misstatements which are material and also does not have sufficient audit evidence; the report should be disclaimer of opinion.
Apart from the expression of opinion as above, the Auditor is also required to give the basis of opinion. This paragraph acts as a pre-cursor to the expression of opinion i.e., sets the background of the subject by drawing attention to the requirement of compliance with a law or accounting standard, which the entity has not complied with. Pervasiveness: Let's understand the concept of Pervasiveness. As we know audit is done on a sample basis and there is always inherent risk of something getting unnoticed or undetected. What if there are AUDITOR • May 2013
undetected errors, which could lead to material misstatement of the financial statements? Or sufficient and appropriate audit evidence is not available? So, there are two things to be considered: First, do we have sufficient audit evidence for transactions that are misstated? If it is available, it could be concluded that the financials are materially misstated. Secondly, having got the sufficient audit evidence; if there are limitation posed by the Management or there are situations beyond entity's control wherein the audit (continued on next page)
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evidence may be inadequate, it is for the Auditor to modify the report accordingly. However, if there are undetected errors due to non-availability of the audit evidence what could be the impact on the financial statement is what is called as pervasive effect. The pervasive e ffe ct is a lso in flu e n ce d by th e Au ditor's judgement. The Auditor's judgement is again Nature of Issue Non-Compliance with Compliance / Fair Reporting Framework. Insufficient audit evidence
Impact
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Requirement of the Standard
Qualified Opinion where Where there is question a d e q u a t e e v i d e n c e i s of pervasiveness - Adverse a v a i l a b l e o n m a t e r i a l opinion is to be given. misstatement. A Disclaimer of opinion A Qualified opinion would w o u l d h a v e t o b e No Audit Opinion can be have to be rendered, in r e n d e r e d , i n c a s e t h e f o r m e d i n a b s e n c e o f c a s e t h e e l e m e n t t h a t element that could not be could not be audited for a u d i t e d f o r l a c k o f adequate evidence. l a c k o f e v i d e n c e , i s evidence is material and material i.e., where errors p e r v a s i v e i . e . , w h e r e are detected and the e r r o r s m a y n o t b e impact is quantifiable. possible to be fully detected, but the impact is not quantifiable.
What if the Management, for deliberate and malafide intentions do not provide audit evidence and poses limitation on the scope? a.
Therefore, the modification of the report would happen only on 2 counts viz., when the financial statements are misstated or in absence of sufficient and appropriate audit evidence.
Inappropriate / Inadequate / Incorrect presentation and disclosure of financial information.
Other Aspects: 1.
depending on what type of transactions are materially / potentially misstated, could those be isolated in the financial statement, how material it is to the total value of business and the quality of disclosures.
It should also be clearly communicated to the Management and those charged with the Governance the consequences of reporting that there was a limitation on the scope of work.
b.
The Auditor should also communicate with those charged with governance whether alternative procedures may be performed to obtain sufficient appropriate audit evidence. If there is a circumstance where the Auditor's request to lift the limitation and also for the alternative procedures is not entertained the auditor may resort a modified report (which include Qualification, Adverse or Disclaimer of Opinion); based on the circumstances of each case.
c.
Auditor may also choose to resign, as a last resort. However, before resigning the auditor shall communicate to those charged with governance his observations which would have resulted
in either a qualified, adverse or disclaimer of opinion in his report. However, it should also be noted that the Auditor's resignation would entail other statutory requirements under Company Law and ICAI Guidelines to be complied with. Normally, a draft audit report is issued to the Client. Where there are issues relating to modification in the report raised by the Client; the Auditor needs to explain the basis and professional commitments. The Client at times may then provide the additional information, which the Auditor may consider. Since, any modification in the report will have to be explained by the Directors in their responsibility report and also would be a matter of attention for the government agencies; it is in the professional interest of the member to discuss such modifications with those charged with governance / management. The Client may at times provide additional information / document which may satisfy the standard's requirement to have sufficient and appropriate audit evidence before concluding the audit. Where the Auditor having discussed the issues with the Management / those charged with (continued on next page)
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Governance and also is in receipt of additional information still concludes that the audit evidence is insufficient; he may chose to give a modified report. 2.
Can there be a scenario where the auditor can modify the report by having a combination of qualification, adverse and disclaimer of opinion in the financial statements?
The Auditor has to express an opinion on true and fairness of the financial statements as a whole and not in parts. Even if there are parts, which warrant adverse comments or disclaimer of opinion; then the auditor has to evaluate overall impact on the financial statements and give a suitable view. 3.
If the previous audit report is modified, does it really impact the current year's report? Since, the financial statements also include previous year's figures, which were actually audited, and the present auditor concluded to issue a modified audit report.
The answer lies in Para 10 and 11 of SA 710. The financial statements contain the current year's
figures as well as the prior period's figures. Where the previous period's audit report was modified and it remains unresolved; the current auditor should also modify the opinion on the current period's financial statements. In the Basis for Modification paragraph, the auditor shall refer to both the period's figures and describe the modification. The auditor shall also indicate the impact of the modification on the current period's financials, if it is material. 4.
What if the previous period was unaudited and the figures may be misstated?
In Other Matter paragraph the Auditor can mention that the corresponding figures are unaudited. However, he should note that the Opening Balances are not materially misstated else the current period's financial statements would also be materially misstated. Therefore, the Auditor needs to obtain sufficient audit evidence to ensure the correctness of the opening balance. In the next edition, we would discuss the elements of financial statements that are referred by the Auditor in his report, which would require reader's attention would be discussed; though the report may not be modified.
Lord Anjaneya's pre-audit predicament After the war, Hanumanji submitted his Travel Allowance Bill for his official tour for collecting Sanjeevani Booti to Ayodhya administration. The Auditor in Bill section raised 3 objections: (1) Hanumanji did not take prior permission of the appropriate authority (Bharat), the King of Ayodhya, during the relevant time for his travel; (2) Hanumanji being Grade-D officer was not entitled to air travel; (3) Hanumanji was asked to bring Sanjeevani Booti, just a single plant, but he carried a whole mountain (unauthorized excess baggage). The Auditor returned the bill. King Ram could do nothing except mark it down for re-examination. A worried Laxman approached the Auditor and offered a bribe of 10% of the T.A. Bill amount. The Auditor now wrote on the Bill: Re-examined: 1.
Even during the relevant time, Ram was the de-jure king through his Paduka.
2.
Further in an emergency, non-entitled officers can be authorized ex-post facto to fly.
3.
Also excess baggage is justified as bringing a wrong plant would have entailed multiple journeys with extra cost; hence bill may be paid.
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Does ICAI follow Accounting Standards in its financials? Does it have to? Among mammals of the land, the longest gestation period is for African elephants spanning a period of 22 months. An Accounting Standard to get promulgated by ICAI, the only standard setter in the nation (yes, NFRA not yet a reality!), undergoes a longer process of gestation before attaining a finished product status. First, an international standard is taken (and then taken apart) days and days of discussions take place in ASB, preliminary draft prepared, circulated among several stakeholders and stake non-holders (trade bodies), exposure draft gets finalised, put on public domain, the very few reactions are analysed (we have lost one gentleman who was diligently reacting Shri LV has left for heavenly abode) and if need be factored, final format is prepared and finally the Council puts its stamp of approval on it and a Standard is finally born. (For the sake of brevity, I have condensed the process so it is like condensed milk put in a feeding bottle!) The ICAI also prescribes for whom the standard is mandatory, for whom it is recommendatory, what is the crieteria for classification of entities (Level I,II & III) etc. However, ICAI does not seem to aggressively follow the standards it sets for others, when it comes to its own financials. A few questions and facebook postings have started appearing on this issue. When I called up the senior Central Council member Sri Santhanakrishnan to ask about this, he was categorical in proclaiming that he has been raising this issue for long and said whether it was a legal necessity or not, as a standard setter, ICAI is bound to follow all the accounting standards diligently and without diluting. “Standards are, after all, best practices and here the issue of Level I or II does not even matter�- he averred. 12
P.S. Prabhakar
There was another Council member who indeed confirmed to me that Mr SK did indeed raise this issue of accounting standards once or twice but also said that the Accounts of ICAI are always approved in Council meetings, without any record of dissent and that in a matter of minutes! I called up one popular faculty who is widely known to have expert knowledge in accounting standards and in his opinion, the standards are applicable for any entity that has any kind of commercial activity and according to the level classification, the same would have to be applied. I thought I would have a word with the Pan India expert on AS, Mr Dolphy D'souza on this and he was also of the opinion that as ICAI's activities certainly include those of commercial nature and in as much as their receipts are in hundreds of crores, there should be no doubt on the applicability of accounting standards to them. Well, ICAI's financials do mention about Accounting Standards in a few places but such references are mundane. They are worthy enough to be classified as form over substance. The Auditors Report says that the financials are in conformity with the Accounting Principles generally accepted in India. No mention of accounting standards at all. (A member has given a resolution on this issue to be considered in the AGM and we hope that it will be taken for consideration on the right earnest.) Let us see something specific. In spite of the fact that there are two different streams of revenue namely members and students, the financials proclaim, rather smugly, that ICAI operates in a single segment called furtherence of the profession (continued on next page)
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questions I shall tell you no lies”.
of chartered accountancy. A clever but not a creditable way of not acknowledging that ICAI runs on students' money.
There are admitted issues of disputes with tax authorities, on the very exemption claimed under Sec. 10(23C) of Income Tax Act and the matters are pending in various levels including Hon'ble Supreme Court but no tax provision has been made and deferred tax asset / liability also not created. It is not known whether the Claims against the ICAI not acknowledged as debt, amounting to Rs. 26.33 crores as on 31.3.2012 shown in Notes under Contingency liability includes any amount related to it.
On a rough demarcation of the incomes of ICAI for the FY 2011-12, out of the fee income shown as Rs. 407.47 crores, Rs. 351.55 crores is attributable to students and Rs. 55.91 crores only to members. Out of the other income of Rs. 95.58 crores, we possibly can take a third for students. That is Rs. 31.86 crores. Out of the total expenses incurred (Rs. 320.46 crores) even if we assume a liberal 50% is towards students, we arrive at a surplus of about Rs.223 crores on account of students alone. Since the net surplus is Rs. 182 crores, it follows that on account of members, the ICAI has ended with a deficit of Rs. 41 crores. We seem to be living off our childrens' money and we do not seem to be having any compunction about it. I really would like to know whether any council member has analysed such numbers before routinely increasing the fees for students. Recent example is the 37.5% increase in the GMCS course, which by itself is a waste according to many students. So much for AS-17. On Related Party Disclosures, eventhough the relevant Standard defines “Key management personnel” as those persons who have the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise, no disclosure of any sort is given about the expenses incurred on various activities that are associated with council members / their relatives. Well, for example ICAI could be using extensively the travel services provided by a council member's family member or it could be using a printer, who is related to another, for getting the materials printed. If, conveniently AS is not followed, no disclosures are necessary. “Ask me no AUDITOR • May 2013
We can go standard by standard. However, thre is hardly any use. Kathopanishad's “Ya Esa Spteshu Jagriti” the motto of ICAI talks about those who need to ba awake among those who sleep. It does not speak about those who pretend to sleep among those who pretend to be awake. Forget the legality of it what about the morality? Is preaching something that we do not practise is morality? Has it become a part of our ethics. And, while on ethics, let me just quote what the President, ICAI has communicated in his President's page in the latest issue of Chartered Accountant and close. “Ethics is all about our becoming and feeling responsible about everything that is around us. We are responsible only when we appreciate everything that is ethical and denounce all that is not ethical around us. I would like our membership to ensure that they always go for the stricter interpretation, foregoing the liberal one wherever and whenever they realise a presence of two interpretations on a matter of professional interest, despite both being legal. Such a courageous display of moral conduct will inspire not only generations of our professionals, but also those from other walks of life” (emphasis supplied). Pontificating is easy. Practising is difficult. I rest my case. 13
Recent Judicial Decisions Reported
P.M. Veeramani, FCA
Statute: Income Tax Act - Sec .4 - Sale of trees by agriculturist Decision in favour of : Assessee Title : CIT vs Mahendra Karma Citation: 83 DTR 153 Bench: Chattisgarh HC Agriculturist assessee having cut and sold trees to the Forest Department in such a manner that they would not regenerate in near future as they do not belong to a specie which has spontaneous growth, the receipt from the said transaction was in the nature of capital receipt. Statute: Income Tax Act - Sec. 9(1)(vii) - Providing website for e-sale is not tech fee Decision in favour of: Assessee Title: eBay International AG vs ADIT Citation: 82 DTR Trib 89 Bench: ITAT Mumbai Fee received from seller for providing a platform for doing business through website cannot be designated as a consideration for rendering managerial, technical or consultancy service but same is in the nature of business profits. Statute: Income Tax Act - Sec 17(3)(ii) Dearness Relief is profit in lieu of salary Decision in favour of: Revenue Title : Justice G K Mathur (retd) vs CIT Citation: 83 DTR 178 Bench: Allahabad HC Dearness relief received by retired High Court judges constitutes profits in lieu of salary under section 17(3)(ii). Dearness Relief is included in pension as defined in section 2(gg) of the High Court Judges (Salaries and Conditions of Service) Act, 1969 and is not exempt from income tax. Statute: Income Tax Act - Sec 14 A - No disallowance if own funds are invested Decision in favour of: Assessee Title: ACIT vs Mohan Exports Pvt Ltd. Citation: 82 DTR Trib 110 Bench: ITAT Delhi In view of the specific finding of CIT(A) that investments in shares and units were made out interest free funds available and interest paid is not directly related to receipts of dividends, Rule 8D(2)(ii) is not applicable and no disallowance can be made under section 14A. Statute: Income Tax Act - Sec 36(1)(iii) No diversion when profit is > advance Decision in favour of: Assessee Title: S.P.Jaiswal Estates Pvt Ltd vs ACIT Citation: 140 ITD 19 TM Bench: ITAT Kolkatta When an assessee gives an interest free advance to a 100% owned subsidiary for its business purposes, it cannot be ordinarily be said to be commercial expedient. However it was found that profit before depreciation earned by assessee was far more than the total advance. In view of the above fact, it cannot be said that interest free advance were given out of interest bearing funds and therefore, there was no room for any disallowance. Statute: Income Tax Act - Sec. 40(b)(iv) - Interest to partner Decision in favour of: Assessee Title: Sri Venkiteswara Photo Studio vs ACIT Citation: 81 DTR 448 Bench: Madras HC When there is no specific reference to book profit as a basis on which interest has to be paid to partner, unlike in the case of salary, the Revenue cannot insist on deduction of depreciation before crediting any interest on the capital for the purposes of deduction under 40(b)(iv). Statute: Income Tax Act - Sec 40A(2) - Cannot be applied for salary to working partner Decision in favour of: Assessee Title : CIT vs Great City Manufacturing Co Citation: 83 DTR 13 Bench: Allahabad HC If remuneration paid by the firm to its working partners terms and conditions of which is provided in the partnership deed and remuneration is within the limits prescribed under section 40(b)(v), no part of remuneration can be disallowed under section 40A(2) on the ground that it is excessive. Statute: Income Tax Act - Sec.90 - DTAA with Germany Decision in favour of: Assessee Title: DIT (IT) vs Chiron Bearing GMBh Citation: 83 DTR 1 Bench: Bombay HC Assessee, a limited partnership, paying trade tax in Germany is considered as a taxable unit under the taxation laws of Germany as evident from the Tax Resident Certificate issued by Germany authorities, and the trade tax being one of the taxes to which Indo German DTAA applies, the benefit of double taxation cannot be denied to the assessee. Statute: Income Tax Act - Sec 154 - Clerical error in e-return to rectified by AO Decision in favour of : Assessee Title : Shrikant Real Estates Pvt Ltd vs ITO Citation: 140 ITD 155 Bench: ITAT Mumbai Assessee having shown short term capital gain at special rate at item 3(aiii) under Sch SI though inadvertently omitted to show the same figure against item 7 under sch CG in the return, short term capital gains are to be taxed at special rate as per section 111A by rectifying the intimation under section 143(1). Statute: Income Tax Act - Sec 158B(b) - Advance Tax / TDS not cover for undisclosed income Decision in favour of: Revenue Title: ACIT vs A.R. Enterprises Citation: 82 DTR 97 SC; 350 ITR 489 Bench: Supreme Court of India Payment of advance tax and TDS is based on an estimation of the total income and not on total income which ultimately be declared in the return. Therefore, payment of advance advance and TDS per se does not tantamount to disclosure of total income when a return is not filed for the relevant year. Income discovered during search or requisition to be treated as undisclosed income under section 158B(b).
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(continued from previous page) Statute: Income Tax Act - Sec.179 - Director liable only for tax and not interest Decision in favour of: Assessee Title: Mganbhai Hansrajbhai Patel vs ACIT Citation: 82 DTR 259 Bench: Gujarat HC Section uses the words “tax due” and it would therefore, not be possible to stretch the language to include interest and penalty also in the said expression. Statute: Income Tax Act - Sec. 194 H - Credit card commission does not attract TDS Decision in favour of: Assessee Title: Tata Tele Services Ltd vs DCIT Citation: 140 ITD 451 Bench: ITAT Bangalore Commission paid to the credit card companies cannot be considered as falling within the purview of S.194H. In the case of commission retained by the credit card companies , it cannot be said that the bank acts on behalf of the merchant establishment or that even the merchant establishment conducts the transaction for the bank. The commission retained by the credit card company is therefore in the nature of normal bank charges and not in the nature of commission/brokerage for acting on behalf of the merchant establishment. Payments to banks on account of utilization of credit card facilities would be in the nature of bank charge and not in the nature of commission within the meaning of sec.194H of the Act. Statute: Income Tax Act - sec.194 J - Satellite broadcasting rights is royalty Decision in favour of: Revenue Title: ACIT vs Shree Balaji Communications Citation: 140 ITD 687 Bench: ITAT Chennai Assessee in the business of purchase and sale of satellite broadcasting rights for movies and programs claimed amount paid for purchase of rights as expenditure. AO disallowed the same since no TDS was made and payment amounted to royalty. Since assessee did not purchase cinematographic firms as such rather it had only received right for satellite broadcasting, hence, the amount paid for acquiring said right would fall within the definition of royalty in view of explanation 2 to section 9(1)(vi) and TDS was attracted. Statute: Income Tax Act - Sec 271 B - Charitable trust having no business income Decision in favour of: Assessee Title: Urban Improved Trust vs CIT Citation: 83 DTR Trib 282 Bench: ITAT Jodhpur Income of the trust was considered as business income only for the reason that it was not having registration under 12A. However, the tribunal having held that the assessee is entitled for registration under section 12A, levy of penalty is remanded for reconsideration.
STOP PRESS: E-Filing of IT Return mandatory for Individuals having Total Income of more than Rs.5 Lakhs & E-filing of Tax Audit Reports The Central Board of Direct Taxes, through Notification dated 34/2013 dated 01.05.2013 has made e-filing of IT returns mandatory for individuals, including salaried taxpayers, earning more than Rs 5 lakh taxable income during thefinancial year ended March 31, 2013. Earlier the limit was (for Individuals having salaried Income) Rs.10 Lakhs. CBDT's earlier notification that salaried Individual having Income less than 5 Lakhs need not to file Income tax returns continues to be in force. Therefore salaried Individual earning less than Rs 5 lakh and whose saving bank interest income is less than Rs 10,000 in a year will need not to file Income Tax returns, subject to the exception of those who switch jobs during the financial year, as the employers might not have deducted any tax due to lower tax calculations at their end. Through the same notification, the CBDT has also introduced e-filing of tax audit reports, transfer pricing (TP) reports and Minimum Alternate Tax (MAT) certificates. Thus, where an assessee is required to furnish a report of audit under section 44AB, 92E or 115JB, he shall furnish the same electronically on or before the due date for furnishing the return of income under subsection (1) of section 139. With effect from 01 .04.2013, the scope of Transfer Pricing provisions has been extended to“Specified Domestic Transactions” also, so every person who has entered into an International Transaction or Specified Domestic Transactions during the F Y 2012-13 shall be required to furnish a report in Form 3CEB. However form 3CEB has not been amended to cover the specified domestic transactions. However, there is no clarity on whether these reports are to be uploaded on the website on the income tax department under digital signatures or without digital signatures. Format of files i.e. html files ,xml files etc. for furnishing the audit reports electronically is yet to be prescribed. The huge question is the augmentation of infrastructure in the Income Tax Department. There are about 18 lacs of individuals who file return between 5 lakhs to 10 lakhs and the resultant traffic jam may create chaos. With so many places reeling under power outages, chasing deadlines is going to be exasparating for the assessees and representatives. AUDITOR • May 2013
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