Auditor October 2012 by Pennathur Prabhakar

For Private Circulation Only • October 2012 • Vol 6 Issue 10

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

•

OECD – A primer

•

Election Code of Conduct

•

A 100 Crore Scam Allegation Rocking The ICAI

•

Whether work in progress forms part of Turnover?

•

Do I have it in me !

•

An Open Letter to The Auditor

•

Recent Judicial Decisions Reported

FROM THE EDIT PAD

P.S. Prabhakar

Way back in 2002, yes, a decade back, I spoke in a meeting organised by the Society of Auditors on the topic “A vision for the profession”. My co-speaker was CA Pattabhiram and the moderator was CA G.Subramanian. As I wanted to pick up a few threads from that for my edit pad this month, especially because we are in the throes of another election at our ICAI, I was sort of bemused as to how time has in fact stood still in all these 10 years and that those several things I had bitterly complained about haven't wee bit improved and if anything, only things have turned worse. All credits to the those honourable people who have been running the ICAI. I recapitualate some portions from what I spoke that day: CA profession is considered to be one of the very responsible and respected professions. As a c o m m u n i t y, w e a r e e x p e c t e d t o b e t h e conscience keepers of the nation in terms of finance and economy. But, as a body, have we made our presence felt in the nation? True, public finance of our nation is largely guided by politics rather than economics but is it any reason we should remain complacent? ………We are contented with the respectful submissions of routine Pre Budget Memorandums and Post Budget Memorandums, which sometimes border to be apology of documents. Apart from suggesting mundane and unexciting changes in Income Tax code like scrapping of a sub section here or insertion of a preposition there and almost begging for opportunities by suggesting auditor's attestations as pre-requisites for an exemption or two, these can hardly be

AUDITOR

perceived as documents of original or creative thinking. The Government hardly consults with our Institute in matters of public finance but even insults by cold-shouldering even the occasional good suggestions contained in the documents aforesaid. We accept such things meekly. The Minister of Law is always a lawyer but has ever a Chartered Accountant risen to the position of Finance Minister of our country? Has our Institute ever made even a casual suggestion to the Government on this? Unfortunately, we need influence even to get Ministers to inaugurate our conferences. Let me come to the elections. It is a matter of pride, of course, that our Institute's Council members are going through the democratic process in getting elected. In any democracy, the people elected by majority are empowered to discharge the duties expected of them but the people who lose out will be sitting in opposition to do the check function at all times. In our case, the members who lose elections shake hands with the winners and go about doing their jobs. None of the actions of the council or of any member is put on any litmus test at any point of time. There is always a hushed talk among many young members today that the office bearers spend a lot of time, effort and money to attain positions and that barring a few, many try and even succeed in leveraging such positions to further their personal professional interests. (continued on next page)

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

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

Any aspiring contestant is mentally prepared for a ‘budget’ and all of us ‘honestly believe’ that we have several such wonderful souls who will spend their hard earned money on ‘elections’ to serve the community, and get prepared to sacrifice their professional and personal spaces of their lives. I would like to disagree with my younger colleagues in the profession and believe that these become ‘council members’ not to use their official positions to develop them professionally. And it is not any such private intentions drive them to spend enormous amounts campaigning. But, alas, we, accountants, indeed become very familiar with ROI concept, even in our early student days! We shall come back to ethics part. Perhaps the best code of ethics for a community is only the one that exists for Chartered Accountants. We are not supposed to have a logo for a firm, even if is just the initials of the partners in a circle or square etc. We cannot have the name boards of our firms an inch larger than the size perceived to be reasonable by the Institute. If one small firm aspires for the audit of a small Branch of any PSU Bank, it is expected to fill in the all-encompassing, brilliantly designed Empanelment form which, short of asking for the physical measurements of the partners, asks for all and more details All in the name of selfregulation, ethics and highest standards of probity. When ordinary members are expected to follow such high standards of moral and ethical probity, should not the Institute make it mandatory for all the aspiring contestants of Council elections, seeking fresh term or renewal term, as the case may be to disclose the following? a. The composition, size of their firms and their personal financial standing both at the beginning and the end of their council tenures. b. The PSU audits they get during their council tenures. c. Any disciplinary cases of the past against them with their outcome and any such proceedings pending against them. d. Their budgets for “election expenditure” and a comprehensive audited statement of accounts. e. Their income tax returns’ copies for at least two past years. AUDITOR • October 2012

f. In case of members seeking re-election, details of their past contributions to the Council which they served. Like the disclosures to be made in Directors' Reports in case of companies, details like the number of meetings the members attended, specific achievements etc. should be disclosed too. In US, even for a Senatorial contestant, the antecedents are probed so deeply and small issues of the distant past are also placed before the voting public, analysed by media and are completely investigated. An elitist voting community appreciates such transparency. Our Regulations provide for General Meetings at Regional levels but there is no provision of any All India General Meeting at all. So, if you have any questions and doubts about the Annual Report or the Accounts, I am sorry, you can't voice it. It doesn't matter that the Institute is financed only by the members and students. No questions are entertained. You also cannot question why there is no segmental reporting, which as an AS, is recommendatory, in our Institute's accounts? A cursory glance at the figures would indicate that a significant majority of Institute's income is from the students and that it makes neat gain year after year from this segment itself but yet chooses to raise the fees periodically, without any convincing explanation has been given to the members. It is amazing that any improvements in the state of affairs has happened only by way of booth capturing, intrepreting amendments to the Chartered Accountants Act to one’s advantage to keep contesting in elections for eternity, vying with politicians of the country to indulge in scams, showing indifference to council members’ brazen personal aggrandizements be it is the contract for conducting GMCS classes or (mis)using directorial positions in corporates or banks to further election prospects or passing off some so-called professional opportunities enhancements as their personal achievements or conducting free seminars and doling out freebies all with the eyes on elections. Absolute decimation of values. To quote the immortal poet Bharathiar: neQ;R nghWf;Fjpy;iyNa ,e;j epiynfl;lkdpjiu epide;Jtpl;lhy;...

OECD – A primer All of us keep hearing about OECD, (the acronym for "The Organisation for Economic Co-operation and Development") in the wake of DTAA and Transfer Pricing taxation issues. What is this OECD? What is its connection to India? Why there is such a great influence of it on our economic and fiscal decisions? Let us see whether we can find answers. The precursor to OECD was OEEC -The Organisation for European Economic Cooperation, which was established in 1947 to run the USfinanced Marshall Plan for reconstruction of Europe ravaged by II world war. Intended to make individual governments to recognise the interdependence of their economies, it meant to pave the way for a new era of cooperation that was to change the face of Europe. Encouraged by its success and the prospect of carrying its work forward on a global stage, Canada and the US joined OEEC members in signing the new OECD Convention on 14 December 1960. The Organisation for Economic Co-operation and Development (OECD) was officially born on 30 September 1961, when the Convention entered into force. Other countries joined in, starting with Japan in 1 9 6 4 . To d a y, 3 4 O E C D m e m b e r c o u n t r i e s worldwide regularly turn to one another to identify problems, discuss and analyse them, and promote policies to solve them. Most of the countries that formed part of the former Soviet bloc have either joined the OECD or adopted its standards and principles to achieve common goals. Russia is negotiating to become a member of the OECD, and OECD now has close relations with Brazil, China, India, Indonesia and South Afri c a th rou gh a n "e n h a n c e d e n ga ge me n t" programme. Together with them, the OECD brings around its table 40 countries that account for 80% of world trade and investment, giving it a pivotal role in addressing the challenges facing the world economy. The OECD defines itself as a forum of countries committed to democracy and the market economy, providing a setting to compare policy experiences, seek answers to common problems, identify good practices, and co-ordinate domestic and international policies.Contrary to the common belief that OECD's role is only on the economic front, Its mandate covers environmental, and social issues as well. It acts 4

by peer pressure to improve policy and implement “soft law” - non-binding instruments that can occasionally lead to binding treaties. In this work, the OECD cooperates with businesses, trade unions and other representatives of civil society. The OECD is said to be promoting policies designed: • to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy; • to contribute to sound economic expansion in Member as well as nonmember countries in the process of economic development; and • to contribute to the expansion of world trade on a multilateral, nondiscriminatory basis in accordance with international obligations. Between 1995 and 1998, the OECD designed the Multilateral Agreement on Investment, which was abandoned because of a widespread criticism from civil society groups and developing countries. In 1976, the OECD adopted the Declaration on International Investment and Multinational Enterprises, which was rewritten and annexed by the OECD Guidelines for Multinational Enterprises in 2000. Among other areas, the OECD has taken a role in co-ordinating international action on corruption and bribery, creating the OECD Anti-Bribery Convention, which came into effect in February 1999. It has been ratified by thirty-eight countries.

The OECD has also constituted an anti-spam task force, which submitted a detailed report, with several background papers on spam problems in developing countries, best practices for ISPs, email marketers, etc., appended. It works on the information economy[16] and the future of the Internet economy. More than just increasing its internal structure, OECD progressively created agencies: the OECD Development Centre (1961), International Energy Agency (IEA, 1974), and Financial Action Task Force on Money Laundering. To differentiate itself from the organizations of the United Nations system, OECD uses the (continued on next page)

AUDITOR • October 2012

spelling “organisation” with an “s” in its name and desisits from the American style of using “z”. In May 2007, OECD countries agreed to invite Chile, Estonia, Israel, Russia and Slovenia to open discussions for membership of the Organisation and offered a programme of "enhanced engagement" to Brazil, China, India, Indonesia and South Africa. The accession procedure is complex and can be long, as it involves a series of examinations to assess a country's ability to meet OECD standards in a wide range of policy areas. This makes it difficult to bring on board more than a small number of new members at the same time. To achieve accession, a nation has to really put in enormous efforts. In the words of Richard Boucher, the Dy. Secretary General of OECD "Each of the OECD's 20-odd major committees goes through the practices of the country in its particular area of expertise. The tax people go through tax practices, bribery people go through what steps they take on bribery. And in areas where they think the country ought to do more to come up to standards - for example, passing intellectual property legislation, as has happened in one or two of the present accession candidates - they say, "Look, we'll give you a positive recommendation if you do this." The speed of accession is governed by the speed with which they are able to come through on those things. So just the process of accession has led to upgrading the quality of law and implementation. OECD doesn't just say "You've got to pass these laws," but "You've got to show us you can implement them, too." A lot of really important social issues come through it as well. Enhanced engagement is more with a view to possible membership. We would love those countries to come in, but they're going to come in when they're ready. And what we need to do in the meantime is, as I said, make it meaningful for us and make it meaningful for them, meaning that when we have policy discussions we benefit from their experience, and when they face policy choices they get the benefit of our experience and our expertise. If you go back 30, 40 years, the OECD was at least 80 percent, if not more, of the word's GDP. If we're going to be the world's premiere economic management organization, we've got to have that relationship with the countries that now constitute a significant portion of the world's GDP". AUDITOR • October 2012

International organisations OECD has official relations with other international organisations and bodies, such as the International Labour Organization, Food and Agriculture Organization, International Monetary Fund, World Bank, International Atomic Energy Agency, and many other United Nations bodies. OECD also co-ordinates with the International Transport Forum, an independent body linked to OECD that deals with issues of improvement of all forms of transport. The annual OECD Forum, held in conjunction with the annual ministerial meeting, enables leaders from business, labour and non-governmental organisations to discuss key issues on the ministerial agenda with government ministers and senior officials of international organisations. Criticism to OECD The OECD has been criticised by several civil society groups and developing countries. The main criticism has been the narrowness of the OECD because of its limited membership to a select few rich nations. In 1997-1998, the draft Multilateral Agreement on Investment was heavily criticized by several non-governmental organisations and developing countries. Many critics argued that the agreement would threaten protection of human rights, labor and environmental standards, and the least developed countries. A particular concern was that the MAI would result in a 'race to the bottom' among countries willing to lower their labor and environmental standards to attract foreign investment. Also the OECD's actions against harmful tax practices has raised criticism. The primary objection is the sanctity of tax policy as a matter of sovereign entitlement. In the second part that will follow in the next issue, we will see how OECD, without having any official status such as UNO or UNESCO or WTO or G-20 has come to influence the economies and taxation policies of various nations. We will also see some interesting numbers pertaining to OECD member nations. Also how our country's taxation policies are 'guided' by OECD and what our own bureaucracy feels about it and more importantly, how ridiculous the concept of benchmarking works in respect of policies and programmes that impact various nations. To understand such politics of economics, this primer is necessary. (To be continued....) 5

Election Code of Conduct We do not really think that the Election Code of Conduct of the ICAI would be the subject matter of an article in any publication, let alone The Auditor. But the ICAI is acquiring several firsts as we speak now. The gentleman at the helm of affairs, the President for the first time ever, is presently under scrutiny for building a Centre of Excellence at Nagpur for Rs 90 Crs. For such a sum, one wonders if capex decisions are indeed evaluated as objectively as we expect our clients to. Why would we need to spend Rs 90 Crores where the membership is rumoured to be in the range of 1500+. Chennai contractors can rejoice, when we would also be offered (and remember we did not ask, the council decides) a Bandra Kurla style complex in the making and the budget by proration would have to be atleastRs 500 crores( Chennai has about 12000 members) If the members from the South can be accused of some moderate face book posting, some freebies, endless mails and repeated SMS's, the WIRC seems to have completely disrobed this profession of any form of elegance. Quite categorically, we have perhaps reached its lowest ebb ever when one encounters a face book post that reads Quote Pooja Vote Pooja. There has been one lone voice of dissent a member from the South who had made an elegant appeal not to spoil the fun of face book. Is the BCAS of rich and hoary heritage watching? All issues on the Code of Conduct and its violations begin where ideally would and should. The ICAI of course. The Code of Conduct document which presently occupies a pride of place in the ICAI website is delightfully vague. It must have taken a considerable bit of effort and amnesia to ignore something as rampant as facebook. Perhaps by design as a few sitting council members even have the cover photo of an ICAI award function. Even a first year article trainee would have written some thing better The publication of a clarificatory document on the Code of Conduct is some saving grace but why this partiality to face book and its omission 6

again, one does not understand. Also we are given to understand from reliable sources that the ICAI has no powers to restrain any candidate suomoto. At best, such candidates can be referred to the disciplinary council after the elections a classic case of shutting the stables after the horses have bolted. All possible violations have been committed by the time the clarification is published (namely photo visiting cards distributed, mails sent). Let's talk of the money spent on elections. There are three scenarios one spend your own money, two spend ICAI money and three spend money of corporates that you are associated with. And we have ample illustrations of all three. It is disgusting when we are often tutored on spirit over letter and substance over form. Should not the leaders of this profession practice what they preach. And all we hear is that they are there to serve the profession. And how can they serve the profession is even the start is flawed. Badly begun can end only badly if not very badly This is hegemony at its worst and the ICAI had better buck up. We identify stray incidents of small time Chartered Accountants who have erred in an act or two while we let the seniors and the leaders of this profession go scott free The older would mean wiser. But it is not the case. While it can be expected that the new comers and the Regional Council contestants would be the errant school kids, it is shocking that the most unbecoming code of conduct violations actually stem from Central Council aspirants. But maybe we are saying this too soon, after all can the chips be any different from the old blocks. They may well better the seniors. Out gut feel is that they are watching to emulate like a kitten looks up to learn tricks from the mama cat Someone said power corrupts and absolute power corrupts absolutely. It appears that anticipation of power is the source of all corruption. AUDITOR â&#x20AC;˘ October 2012

A 100 Crore Scam Allegation Rocking The ICAI Partners in nation building or partnering in nation's buildings? Little did Sri Abdul Kalam, former President of India would have imagined that his compliment made to the Chartered Accountants fraternity as Partners in nation building would be (mis)construed by some people that they could indulge in Real Estate scams! These are the days of scams. In our nation, not a day ends without a scam breaking. Can ICAI l a g b e h i n d ? We h a v e h e a r d r u m o u r s o f

allegations about smaller level scams in the matter of coaching classes at Mumbai a few years back, GMCS contract for a Central Council member, reported 'deal' in purchase of IT books and materials for students etc., but as usual, every one of them has got buried in the mire of “council dharma”. Not this one. Even by our 'standards'! A land deal that was reportedly made by the personal involvement (so personal that majority of the Council members were having zero idea about it till such time a Nagpur daily broke this news) at Nagpur ostensibly for a Centre of Excellence AUDITOR • October 2012

for over Rs. 100 crores (land cost and building construction cost) smells plain fraud. The said land is from a township in the outskirts of Nagpur developed by a private builder, who had, till then, done only zero sale in this place and the price agreed by ICAI (viz., President) for the land was about 12 to 15 times the official guidline value. (No market value could be determined, as there was no market at all!). That while the hefty price agreed itself stinks

of scam, the fact that things were done so stealthily, surreptitiously and clandestinely (only with a couple of council members' knowledge - no, don't ask for names!), with no approval from Council (and remember that the figure involved is almost one-seventh of the ICAI's Balance Sheet size!) and with no information whatsoever to the Nagpur Branch or to WIRC smacks of total callousness that can only match the politicians of these days of 2G and Coalgate. Fortunately the local press at Nagpur got whiff of such mega wrong doings (see news clippings) and e-mails also began to circulate about this. 7

With this background, when the Council met on the 15th of this month, in a marathon sitting that lasted till about 10 p.m, most of the council members shred the President's action to pieces and even the feeble defences that he and a couple of his council colleagues (who possibly also were 'involved') reportedly got deluged in the barrage of well meaning q u e s t i o n s b y s e v e r a l m e m b e r s . Po i n t e d questions about the need to have such a centre of excellence at such a phenomenal cost at Nagpur, the procedures adopted, the secrecy adopted, past similar cases have all been raised in the meeting. Apparently taken aback completely by the kind of unexpected backlash, it appears that the President had to concede

for a “re-look” on this for which a special committee has been formed. While there are so much of info on this splashed all over the net, FB and twitter among our North and Western India colleagues, it is surprising that in South, our members are blissfully unaware of this. A few questions for which answers are needed: Are there no norms in the ICAI for capex decisions? What is the role of the Finance Committee? Are concepts like Financial Due Diligence and Corporate Governance only for pontification to others? As the Council has reportedly found out a plethora of procedural

and financial irregularities in this 'deal', if the special committee ultimately finds out that this deal was with a mala fide intention, what kind of regulations we have to punish the guilty of commission and omission? What is the guarantee that such things would not happen in future too? What will happen to the advance of Rs. 10 crores that has been already paid off? Questions that may not be answered by anyone. After all, auditors are like Dharumi of Thiruvilayadal fame. They know only to ask questions. The sad bottomline is that there is no semblance of responsibility and accountability by any one in ICAI. Is the institution that should stand for highest

standards of propriety and probity becoming a potential candidate for a possible criminal investigation? And God forbid, if such a thing happens, the powers that be who would be the reasons for bringing such a kind of disrepute and loss of credibility to the entire clan, will have unqualified eligibility of all the possible curses of 1.9 lakh Chartered Accountants and the students of the course numbering more than double that figure. PS: Though the ‘information’ contained in the above write up have adequate sources, the Editor is indeed fervently praying that all of this is just a nightmare! AUDITOR • October 2012

Whether work in progress forms part of Turnover?

CA Krishnan S

INTRODUCTION

assessee would form part of the turnover.

Sometimes the income-tax department stretches the definition of certain terms found in the Income-tax Act (the Act) in order to bring such items within their ambit to tax them. One such instance which arose before the Income-tax Tribunal in one case was “Whether value of work-in-progress representing current assets including cost of material, labour and other direct overheads incurred by assessee, ownership of which remained vested with assessee, did not constitute 'turnover' as used in section 44AB of the Act?”

In reply to the above-reliance placed on the dictionary meaning by the departmental representative the Tribunal observed at para.8 of its order as under:

From the decision of the ITAT Bench in the case of Asstt. CIT v. B.K. Jhala and Associates 69-ITD-141(Pune) The Revenue filed an appeal before the Tribunal as the Commissioner (Appeals) deleted the penalty, holding that cost of unconsumed materials and unsold flats had to be reduced and the figure so arrived at came within the ceiling and, therefore, it was not liable to get its accounts audited under section 44AB. The following arguments were put forth on behalf of the Income-tax Department. The Income-tax Department relied on the definition of “Turnover” given in Strouds' Dictionary, 5th Edn. page 2843: “Turnover (1) Semble, a “business turnover” is the aggregate amount of sales effected, or work done, by a business during a stated period Miller v. Oliver & Boyd 43 Sc. L.R. 270, See also Dowling v. Methuen, Sons & Co. [1921] SC 948. (2) A plaintiff was to be paid commission “on turnover” of the company’s annual business”; this included all sums received and receivable in the year, whether normal or abnormal, and therefore included lump sum settlements and payments under Government contracts - Aris-Bainbridge v. Turner Mfg. Co. [1951] 1 K.B. 563.” T h e Re v e n u e a l s o p l a c e d r e l i a n c e o n t h e definition of “Turnover” given in Webster's Third New International Dictionary, Vol. Ill at page 246 "to handle in business: do business to the amount of ....; the amount of material on which some process has been performed.” Relying upon the above definitions of “Turnover”, the Revenue submitted that the value of work-in-progress and the value of flats which had not been sold by the AUDITOR • October 2012

“As regards the reliance placed by the learned departmental representative on the dictionary meaning of “Turnover” (quoted supra), we are of the opinion that words in a section are not to be interpreted by having those words in one hand and the dictionary in the other hand. In spelling out the meaning of the words in a section, one must take into consideration the setting in which those terms are used and the purpose they are intended to serve. The two rules of most general application in construing the meaning of a provision of a statute are first, that it shall, if possible, be so interpreted - QUT RES MAGIS VALEAT UAM PERFAT. The word of statute should be given a sensible meaning so as to make them effective. And secondly, that such a meaning shall be given to it as may carry out and effectuate to the fullest extent the intention of the Legislature. It is to be seen that nebulous concept of the legislative intent be not used to curtail the explicit provisions in a statute. It is of paramount importance that streams of justice be kept clear and pure”. The following observations made by the Tribunal at para. 7 of its order are worth noticing The words “Sales”, “Turnover”, “Gross Receipts” are commercial terms and they should be construed in the commercial sense and in accordance with the normal rules of accountancy. Accordingly, in our considered opinion, “Turnover” and “Gross Receipts” mean gross in-flow of cash receivables and other considerations arising in the course of ordinary activities of an enterprise from the sale of goods of from the rendering of services to the buyer or client. In case of work-in-progress, there is no buyer and accordingly, work-in-progress, cannot be considered as turnover. It only represents the current assets and it includes the cost of material, labour and other direct overheads incurred by the assessee. It is the cost of incomplete and unfinished work and hence, it i s q u i t e s i m i l a r t o s t o c k - i n - t ra d e , t h e ownership of which remains vested with the (continued on next page)

assessee. "Turnover" and "Sales" precisely and essentially require the transfer of title of the goods to the purchaser. The assessee could be said to have effected sales only in respect of those flats/shops construction of which is complete and the possession of which is given to the purchaser. The “Sale” or “Turnover” requires two parties to a contract, namely, a seller and a buyer. In this case, in relation to work-inprogress, the assessee is the seller, but there is no buyer and hence again work-in-progress done cannot be considered as sale. The Tribunal, speaking through the Accountant Member, also made the following observationsIt is well-settled that the task of interpretation of a statutory enactment is not a mechanical task. Here we would like to quote the following observations of the Hon'ble Supreme Court in the case of K. P. Varghese v. ITO [1981] 131 ITR 597. Their Lordships observed as under on page 604: "The task of interpretation of a statutory enactment is not a mechanical task. It is more than a mere reading of mathematical formulae because few words possess the precision of mathematical symbols. It is an attempt to discover the intent of the Legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and, as pointed out by Lord Denning, it would be ideal to expect every statutory provision to be "drafted with divine prescience and perfect clarity". We can do no better than repeat the famous words of Judge Learned Hand when he said: '. . . it is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of any writing; be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning.' It is also well-settled that one should opt for purposive approach to the statutory interpretation which was adopted and advocated by Lord Diplock in Reg. v. Nat. Ins. Commissioner [1972] AC 944. Lord Diplock observed: "Meticulous linguistic analysis of words and 10

phrases used in different contexts in particular sections of the Act should be subordinate to this purposive approach. It should not distant your Lordships from it." The Tribunal finally concluded“In the light of above discussion, we hold that the value of work-in-progress does not constitute "Turnover" as used in section 44AB of the Income-tax Act. Accordingly, we uphold the finding of the learned CIT (A)”. Inventories include work-in-progressAccounting Standard of ICAI The Institute of Chartered Accountants of India in ACCOUNTING STANDARDS-(AS2)-Revised in 1999-Valuation of Inventories has defined the term” inventories” as followsInventories are assets: a. held for sale in the ordinary course of business; b. in the process of production for such sale; or c. in the form of materials or supplies to be consumed in the production process or in the rendering of services Clause 4 of AS-2 reads as underInventories encompass goods purchased and held for resale, for example, merchandise purchased by a retailer and held for resale, computer software held for resale, or land and other property held for resale. Inventories also encompass finished goods produced, or work in progress being produced, by the enterprise and include materials, maintenance supplies, consumables and loose tools awaiting use in the production process. Concluding remarks As this issue is likely to arise in respect of small businessmen being works contractors it is better that this concept of work-in-progress not forming part of turnover is understood. Therefore it is clear that as work-in-progress forms part of inventories it is outside the purview of “turnover” not forming part of turnover.Hence, it appears that neither the revised Schedule VI nor the guidance note thereon are following the so called principle based approach, but they are still clinging on to the rule based approach in the matter of disclosure. AUDITOR • October 2012

Do I have it in me ! Take this quiz to find out if you can be a CA council member Always

Sometimes

Never

1. You do not have great subject matter expertise but can speak on any aspect of the CA profession without feeling the least bit stressed about it. 2. Yo u r e m e m b e r M e m b e r s b i r t h d a y s , w e d d i n g anniversaries and make it a point to send them messages unfailingly. 3. You aspire, dream, live, walk and talk directorships of companies and see the ICAI as a step to further personal aggrandisement. 4. Whenever the words Code of Conduct are mentioned, you look the other way and pretend to look at the member next to you or better still the contestant next to you. 5. You can maintain a scorecard of number of photographs of yours in the SIRC newsletter and aim to better the score month after month and can reach the targeted number of exposures by the next election. 6. You are very consistent in your answers . For example, a member says IFRS is bad, you say - Yes !, Yes ! and another member or the same member says IFRS is good and you again say Yes! Yes! 7. You are tenacious and can ping, ping and ping SMS and send e-mails regardless of whether the recipient wants it or not. 8. You are incapable of original ideas and can forward anyone else's content to a thousand hapless recipients to gain their mind share. 9. You are not capable of an extempore speech , but your pride will not allow you to prepare a speech either. But you would want to occupy centre stage and drone endlessly. 10. You believe you are the best and will never give up. Result: H

Mostly Always - You are a born Central Council Member - go for the kill

Mostly Sometimes - With a little bit of effort you can contest next time. But you may well make it to the Regional council - a tiger in the making

Mostly Never - Go back to office and start signing 44AB reports.

AUDITOR â&#x20AC;˘ October 2012

An Open Letter to The Auditor Dear Editor, If there is one distinguishing feature that separates the “Auditor” from other similar publications, including that of the ICAI, it is the manner in which contemporary issues concerning the Profession are addressed in the Edit Pad. Concerns over rapid decline in professional standards, instances of the profession coming under cloud for financial crimes, professionals turning brokers are but some of the matters that have been covered in your page. While one cannot be quite sure of its impact on 'seasoned' professionals, I am sure there are still professionals who share the same sentiments and who derive some satisfaction that after all they are not alone! For evoking such feelings, I must congratulate the Editor. But honestly, more remains to be done. Let us get to the real point! The Society has just clocked 80 years of useful service to the fraternity and in all probability, will survive for another 80 years if not more. But what does the Profession at large want from the Society apart from the regular dose of meetings, seminars, joint seminars, felicitations et al? What should be the role of the Society in the future? Does it see a larger role in the context of the declining

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G. Srikanth standards surrounding the Profession? Can the Edit Page rise about the usual satire to influencing public opinion on major matters facing the profession? Can we, for starters expect the Society to act as a disciplining force in the matter of ICAI elections? Can the Edit Page devote more space, at least till the impending elections, on what were the major milestones reached by the ICAI under its present Council? And to what extent they have benefitted the fraternity? No, the intention is not to merely raise a volley of questions, but to see how the Auditor can play a more meaningful role in Pr o f e s s i o n - b u i l d i n g . L e t u s t a k e t h e increasing responsibilities cast on Corporates by way of disclosure requirementsCorporate Governance Initiatives, Corporate Social Responsibilities, etc. While it is another matter that scams continue to happen despite all this, let us introspect whether the CA Profession that is expected to evaluate compliance of the Corporate Sector to these requirements, is measuring up to these minimum benchmarks? It beats me to know that a Contestant to the ICAI elections is expected to state in terms of his accomplishments - nothing more than his Qualification and Awards received; and when it comes to disclosures details of statutory Present form

Recommended standard

Professional Qualifications

Yes

Merit Awards of any University

Yes

Any national level accomplishments School, college, post qualification

Yes

Leadership positions in accredited institutions excluding Social Clubs

Yes

Statutory Audit of ICAI / branch

Yes

Found Guilty of misconduct

Yes

Any criminal cases pending

Yes (continued on next page)

AUDITOR • October 2012

(continued from the previous page)

Important Information

Directorships (Listed and unlisted)

Before Term

Term I

Term 2

Term 3

Term 1

Term 2

Term 3

< Rs. 20 Crs Rs. 20 - 50 Crs Rs. 50 - 100 Crs Rs. 100 - 500 Crs > Rs. 500 Crs b

< Rs. 20 Crs Rs. 20 - 50 Crs Rs. 50 - 100 Crs > Rs. 500 Crs

Wealth Data (as for parliament) Returned Income Assets Liabilities

Meetings attended Requirement Attendance Percentage Compliance

audit of ICAI/its branches and whether he was held guilty of misconduct.

benchmark and eliminate undesirable contestants at the threshold level.

Surely, Members would need a far better quality as well as quantum of information on the contestants. The Society can help here. Let us do a quick comparison of the Present form of disclosure with what could perhaps be the recommended Standard of disclosure:

The elections 2012 are very close and such a proposal will not see the light of the day before that. In any case, it would be good if a sitting council member discloses all this information voluntarily and not just selectively on areas they would stand out well. These disclosures, not to say the least would be most beneficial to the Council members themselves as this would prevent them from being battered by all and sundry. As a first step, the Society can surely encourage its Member-Contestants to set an example.

Now, there is bound to be some initial resistance to this recommendation. Why should one disclose details of his private practise, or directorship, or even his Wealth? Let us realise that we are today in extraordinary times where Values have no place. Extraordinary measures are required in such extraordinary times. The Profession needs only people of unimpeachable integrity and Class. Hate to repeat the clichĂŠ, but 'Ceaser's wife should be above suspicion'. If the Professional wants persons of integrity and excellence to lead, there is no alternative but to agree to a much higher AUDITOR â&#x20AC;˘ October 2012

If the Society could play a catalytic role to introduce such minimum dose of electoral reforms, it will augur well for the profession. If the Society succeeds in this, it will be one more feather in its cap. Is the Editor listening?! 13

Recent Judicial Decisions Reported Statute: Income Tax Act - Section 2(15) Club is advancing general public utility Title : DIT vs Chembur Gymkhana Citation: 346 ITR 86

P.M. Veeramani, FCA

Decision in favour of : Assessee Bench: Bombay HC

Assessee providing sports facility as part of its activities consisting of badminton, table tennis, billiards, cricket and skating among others. The fact that assessee provided service to its members did not detract from the position that it advanced a general public utility. The advancement of any object of benefit to the public or a section of the public as distinguished from a benefit to a group of individuals would be a charitable purpose. The assessee fulfilled the definition of expression charitable organization in section 2(15). Statute: Income Tax Act - Section 12AA Mutual association not entitled Decision in favour of : Revenue Title : Madhavrao Scindia Enclave Resident Welfare Society vs CIT Citation: 52 SOT 125 ; 23 taxmann.com 33 Bench: Agra Trib Where a society was a mutual concern of members who formed it and whole idea of forming society was that particular members should be benefitted out of their own contribution, said society could not be said to be formed for charity and its application for registration as charitable trust was to be rejected. Statute: Income Tax Act - Section 37 - FC swap not allowable on unmatured contracts Title : Siam Commercial Bank PCL vs DDIT Citation: 17 ITR Trib 599

Decision in favour of : Revenue Bench: Mumbai Trib

Loss in foreign currency on account of exchange rate swap not allowable as expenditure in respect of forward contracts which had not matured during the year. Statute: Income Tax Act - Section 37 Software expenses is revenue Title : CIT vs OK Play India Ltd Citation: 346 ITR 57

Decision in favour of : Assessee Bench: Punjab & Haryana HC

It would be unrealistic to ignore rapid advances in research and to attribute a degree of endurability and permanence to the technical know how at any particular stage in fast changing area of science. Thus, expenses incurred by assessee on purchase of computer software were revenue expenditure. Statute: Income Tax Act - Section 40(a)(ia) Not applicable to reimbursements Title : Bayer Material Science Private Ltd vs ACIT Citation: 75 DTR Trib 119

Decision in favour of : Assessee Bench: Mumbai Trib

Reimbursement of cost by assessee to its AE without any profit motive did not involve any element of income , hence AO not justified in disallowing expenditure for the reason that assessee did not deduct tax at source on such payment. Statute: Income Tax Act - Section 40(a)(ia) Not applicable to best judgments Title : ITO vs Sahadev Pradhan Citation: 18 ITR Trib 180

Decision in favour of : Assessee Bench: Cuttack Trib

AO having rejected the book results and estimated income as percentage of turnover, AO cannot go back to those very books of accounts which indicated non deduction tax at source and disallow the same. Statute: Income Tax Act - Section 54 Sale of two flats can be invested in one house Title : DCIT vs Ranjit Vithaldas Citation: 137 ITD 267

Decision in favour of : Assessee Bench: Mumbai Trib

There is an inbuilt restriction that capital gain arising from sale of one residential house cannot be invested in more than one residential house; however there is no restriction vice-versa. Therefore, where two flats were sold in two different assessment years and capital gain arising from sale of both flats invested in one residential house, exemption would be available. Statute: Income Tax Act - Section 54EC Consideration received in installments Title : Mahesh Nimchandra vs ITO Citation: 17 ITR Trib 116

Decision in favour of : Assessee Bench: Pune Trib

Assessee could not make investments within six months from date of transfer because consideration was received later. The investments made within six months from the receipt of such consideration entitled for exemption from capital gains. Statute: Income Tax Act - Section 54F - Proviso not attracted for joint ownership Title : Dr.P.K.Vasanthy Rangarajan vs CIT Citation: 75 DTR 56

Decision in favour of : Assessee Bench: Madras HC

Unless assessee is exlcusive owner of another residential property, proviso to section 54F cannot be applied; joint ownership of another property does not stand in the way of claiming exemption under 54F.

(continued on next page)

AUDITOR â&#x20AC;˘ October 2012

(continued from the previous page) Statute: Income Tax Act - Section 54F - Impossibility of performance Decision in favour of : Assessee Title : V.A.Tharabai vs DCIT Citation: 75 DTR Trib 113 Bench: Chennai Trib Assessee having invested entire amount of capital gains from sale of old property towards purchase of plot for construction of residential house within one month of sale of old property was entitled to exemption nothwithstanding the fact that she could not construct residential house within three years due to restraint order by competent Court. Statute: Income Tax Act - Section 64 - Only net income to be clubbed Decision in favour of : Assessee Title : DCIT vs Rajeev Goyal Citation: 52 SOT 335 Bench: Kolkatta Trib Minor is an assessable entity even though his income is clubbed in the hands of parents. Where income of assessee minor is clubbed with that of parent, minor was eligible for deduction under 54EC on investment in REC Capital Gains Bonds on account of minors income from long term capital gains separately. Statute: Income Tax Act - Section - 153A, 153 C Materials other than in search Title : Gopal lal Bhadruka vs DCIT Citation: 346 ITR 106

Decision in favour of : Revenue Bench: Andhra Pradesh HC

For the purposes of sections 153 A and 153 C , the AO can take into consideration materials other than what was available during search and seizure operation for making an assessment of undisclosed income. Statute: Income Tax Act - Section 153 C Provision different from 158 BD Title : SSP Aviation Ltd vs DCIT Citation: 346 ITR 177

Decision in favour of : Revenue Bench: Delhi HC

Whereas section 158 BD refers to the satisfaction of the AO that any undisclosed income belongs to any person other than searched person, section 153C(1) in contrast refers merely to the satisfaction of the AO valuable article or books of account or document belongs to a person other than searched person. At the time when AO having jurisdiction over searched person reaches satisfaction that documents belongs to a third person, it is not necessary for him to also reach a firm conclusion / opinion that document shows undisclosed income. This is a matter for enquiry which is to be conducted in the manner prescribed under section 153 C. Statute: Income Tax Act - Section 194 I No TDS on sharing of premises Title : ACIT vs Result Services Private Ltd Citation: 52 SOT 598

Decision in favour of : Assessee Bench: Delhi Trib

Holding company took an office premises on rent and permitted subsidiary to use portion of said premises. Subsidiary reimbursed rent to holding company with out TDS. Actual payment made by holding company to landowner after deduction of TDS. Since there was no lessor and lessee relationship between holding and subsidiary company, TDS was not attracted. Statute: Income Tax Act - Section 245N(a) AAR order can be challenged before HC Title : Columbia Sportswear Company vs DIT Citation: 346 ITR 161 SC

Decision in favour of : Assessee Bench: Supreme Court of India

It would not be proper to hold than a ruling of AAR can only be challenged under article 136 of the Constitution before the Supreme Court and not under articles 226 and 227 of the Constitution before the High Court. To hold that order of AAR cannot be challenged before HC would be to negate part of the basic structure of the Constitution. Liberty granted to move the appropriate HC. Statute: Income Tax Act - Section 263 - Reassessment or rectification possible not a reason barring revision Title : CIT vs B and A Plantation and Industries Ltd Citation: 346 ITR 43

Decision in favour of : Revenue Bench: Gauhati HC

Payment of bonus was claimed twice and assessment was revised by CIT. It could not be said that such an was beyond the revision jurisdiction. Similar objection of audit party did not affect the revision jurisdiction. The fact that error could be rectified by AO under 154 or re-opened under section 147 could be a bar to exercise revision. It was not a case of substitution of opinion of CIT for the opinion of the AO. Order of the Single Bench reported in 290 ITR 395 set aside. Statute: Income Tax Act – Section 194 H – Trade discount is not commission Title : Jagran Prakashan Ltd vs DCIT Citation: 345 ITR 288

Decision in favour of : Assessee Bench: Allahabad HC

Trade discount allowed by publisher of newspaper to advertising agency is not a discount or commission falling under section 194 H . No prinicipal – agent relationship for services rendered. TDS not applicable. Statute: Income Tax Act – Section 201(1) – Notice beyond 4 years is time barred Title : CIT vs Satluj Jal Vidyut Nigam Ltd Citation: 74 DTR HP 145

Decision in favour of : Assessee Bench: Himachal Pradesh HC

Notices under section 201(1) and 201(1A) issued beyond the reasonable period of four years were barred by limitation.

AUDITOR • October 2012