The government and the Reserve Bank of India (RBI) are planning to ask companies to disclose the name and the email address of their statutory auditors on an yearly basis to the banks where they hold accounts. The banks, in turn, would be asked to generate and directly send automated status reports of these accounts to the auditors at the end of every quarter or financial year.
This is a simple solution under consideration to remove the most glaring systemic weakness at the heart of India’s biggest corporate scandal — the failure of statutory auditors to independently verify the inflated bank balance of Satyam Computer Services. The proposal is being considered by PMO and RBI. If approved, the measure, which would not cost an extra rupee, would prevent auditors from failing in independently verifying the bank balances of their clients, said Suresh Prabhakar Prabhu, a former Cabinet minister and now a member of a Parliamentary panel that is looking into the Satyam scandal. Mr Prabhu, also a chartered accountant by profession, has written to the prime minister to take the proposal forward. “Almost all banks have automated technology platforms verified by RBI. It should also be made legally obligatory for all corporate bodies to notify any change in their statutory auditors to their banks,” Mr Prabhu told ET.
Many auditors ET spoke to confirmed it is impossible to independently verify all the bank statements and other invoices that companies provide to auditors while completing the audit of large corporations within a fortnight. Auditors approach their work with an unbiased mind, unlike that of a detective, who presumes that a fraud has already taken place. They independently verify only a sample of the thousands of documents as a full-fledged investigation by them is not feasible. The Parliamentary Standing Committee on Finance, which interacted with RBI on January 29 on the Satyam scandal, is also learned to have made this suggestion to the central bank.
Friday, February 20, 2009
Accumulated Balance of Credit in CENVAT account as on 1st April, 2008:
• As you are aware, from 1st April, 2008 Rule 6(3) of CENVAT credit Rules, 2004 has been
Amended.
• The service Provider providing taxable as well as exempted service and not maintaining
Separate account.
o can either opt to pay amount equal to 8% on value of exempted service
O or pay proportionate input service in the ratio of exempted turnover to total turnover
o Earlier it was restricted to the extend of 20% of Service tax payable.
• A question was raised before CBEC about the utilization of credit available as on 1st April,
2008 i.e. balance accumulated under old method. Can this balance be utilized under new
Method.
• CBEC vide letter No. 137/72/2008-CX.4 Dated: November 21, 2008 clarified that “As no
Lapsing provision was incorporated and that the existing Rule 6(3) of the CENVAT Credit
Rules does not explicitly bar the utilization of the accumulated credit, the department
Should not deny the utilization of such accumulated CENVAT credit by the taxpayer after
01/04/2008. Further, it must be kept in mind that taking of credit and its utilization is a
Substantive right of a taxpayer under value added taxation scheme. Therefore, in the
Absence of a clear legal prohibition, this right cannot be denied.”
Amended.
• The service Provider providing taxable as well as exempted service and not maintaining
Separate account.
o can either opt to pay amount equal to 8% on value of exempted service
O or pay proportionate input service in the ratio of exempted turnover to total turnover
o Earlier it was restricted to the extend of 20% of Service tax payable.
• A question was raised before CBEC about the utilization of credit available as on 1st April,
2008 i.e. balance accumulated under old method. Can this balance be utilized under new
Method.
• CBEC vide letter No. 137/72/2008-CX.4 Dated: November 21, 2008 clarified that “As no
Lapsing provision was incorporated and that the existing Rule 6(3) of the CENVAT Credit
Rules does not explicitly bar the utilization of the accumulated credit, the department
Should not deny the utilization of such accumulated CENVAT credit by the taxpayer after
01/04/2008. Further, it must be kept in mind that taking of credit and its utilization is a
Substantive right of a taxpayer under value added taxation scheme. Therefore, in the
Absence of a clear legal prohibition, this right cannot be denied.”
SEZ an Introduction
Q. What is a Special Economic Zone ?
Special Economic Zone (SEZ) is a specifically delineated duty free enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs in India.
Q. Where SEZs are located in India ?
At present, there eight functional Special Economic Zones located at Santa Cruz (Maharashtra) ( which ic product specific) , Cochin (Kerala), Kandla and Surat (Gujarat), Chennai (Tamil Nadu), Visakhapatnam (Andhra Pradesh), Falta (West Bengal), and Noida (Uttar Pradesh) in India. Further a Special Economic Zone at Indore ( Madhya Pradesh ) is already in operation. In addition more than 150 in principle approvals have been given for setting up new SEZs across India.
Q. Who can set up SEZs?
Any private/public/joint sector or State Government or its agencies can set up Special Economic Zone (SEZ).
Q Can Foreign Companies set up SEZs ?
Yes
Q. Are there any terms & conditions for setting up of SEZ ?
Only units approved under SEZ scheme would be permitted to be located in SEZ.
The SEZ units shall abide by local laws, rules, regulations or bye-laws in regard to area planning, sewerage disposal, pollution control and the like. They shall also comply with industrial and labour laws as may be locally applicable. Such SEZ shall make security arrangements to fulfill all the requirements of the laws, rules and procedures applicable to such SEZ.
The Multi-Product SEZs should have a minimum area of 1000 hectares and at least 35 % ( now it is proposed to increase it to 50% by some state governments) of the area is to be earmarked for developing industrial area for setting up of units. IT & ITES SEZs can be established in an area minimum 10 Hectares and above.
Minimum area of 1000 hectares will not be applicable to product specific and port/airport based SEZs . Wherever the SEZs are landlocked, an Inland Container Depot (ICD) will be an integral part of SEZs.
Q What are the Incentive available to SEZ Developer ?
100% FDI allowed for:
(a) townships with residential, educational and recreational facilities on a case to case basis,
(b)franchise for basic telephone service in SEZ.
Income Tax benefit under ( 80 IA ) to developers for any block of 10 years in 15 years
Duty free import/domestic procurement of goods for development, operation and maintenance of SEZs.
Exemption from Service Tax /CST.
The income of infrastructure company investing in SEZ is exempt from Income Tax.
Q. What are the incentive/facilities available for SEZ units?
Following incentive/ facilities to SEZ enterprises :
Customs and Excise :
Duty Benefits: SEZ units may import or procure from the domestic sources all their requirements of capital goods, raw materials, consumables, spares, packing materials, office equipment, DG sets etc. duty free.
Duty free import/domestic procurement of goods for setting up of SEZ units.
Goods imported / procured locally duty free could be utilised over the approval period of 5 years.
Domestic sales by SEZ units will now be exempt from SAD.
Domestic sale of finished products, by-products on payment of applicable Custom duty.
Domestic sale rejects and waste and scrap on payment of applicable Custom duty on the transaction value .
Income Tax Benefits:
100% IT exemption (10A) for first 5 years and 50% for 2 years thereafter.
Reinvestment allowance to the extend of 50% of ploughed back profits
Carry forward of losses
Foreign Direct Investment :
100% foreign direct investment is under the automatic route is allowed in manufacturing sector in SEZ units except arms and ammunition, explosive, atomic substance, narcotics and hazardous chemicals, distillation and brewing of alcoholic drinks and cigarettes , cigars and manufactured tobacco substitutes.
No cap on foreign investments for SSI reserved items.
Banking / Insurance/External Commercial Borrowings
Setting up Off-shore Banking Units allowed in SEZs.
OBU’s allowed 100% Income Tax exemption on profit for 3 years and 50 % for next two years.
External commercial borrowings by units up to $ 500 million a year allowed without any maturity restrictions.
Flexibility to keep 100% of export proceeds in EEFC account.
Commodity hedging permitted.
Exemption from interest rate surcharge on import finance.
SEZ units allowed to ‘write-off’ unrealized export bills.
Central Sales Tax Act :
Exemption to sales made from Domestic Tariff Area to SEZ units.
Service Tax:
Exemption from Service Tax to SEZ units
Environment :
SEZs permitted to have non-polluting industries in IT and facilities like golf courses, desalination plants, hotels and non-polluting service industries in the Coastal Regulation Zone area Exemption from public hearing under Environment Impact Assessment Notification.
Companies Act :
Enhanced limit of Rs. 2.4 crores per annum allowed for managerial remuneration Agreement to opening of Regional office of Registrar of Companies in SEZs. Exemption from requirement of domicile in India for 12 months prior to appointment as Director.
Drugs and Cosmetics :
Exemption from import restriction under Drugs & Cosmetics Rules for registration of drugs prior to imports.
Sub-Contracting/Contract Farming
SEZ units may sub-contract part of production or production process through units in the Domestic Traiff Area or through other EOU/SEZ units. SEZ units may also sub-contract part of their production process abroad.
Q. Whether SEZs have been exempted from Labour laws?
Normal Labour Laws are applicable to SEZs, which are enforced by the respective state Governments. The state Government have been requested to simplify the procedures/returns and for introduction of a single window clearance mechanism by delegating appropriate powers to Development Commissioners of SEZs.
Special Economic Zone (SEZ) is a specifically delineated duty free enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs in India.
Q. Where SEZs are located in India ?
At present, there eight functional Special Economic Zones located at Santa Cruz (Maharashtra) ( which ic product specific) , Cochin (Kerala), Kandla and Surat (Gujarat), Chennai (Tamil Nadu), Visakhapatnam (Andhra Pradesh), Falta (West Bengal), and Noida (Uttar Pradesh) in India. Further a Special Economic Zone at Indore ( Madhya Pradesh ) is already in operation. In addition more than 150 in principle approvals have been given for setting up new SEZs across India.
Q. Who can set up SEZs?
Any private/public/joint sector or State Government or its agencies can set up Special Economic Zone (SEZ).
Q Can Foreign Companies set up SEZs ?
Yes
Q. Are there any terms & conditions for setting up of SEZ ?
Only units approved under SEZ scheme would be permitted to be located in SEZ.
The SEZ units shall abide by local laws, rules, regulations or bye-laws in regard to area planning, sewerage disposal, pollution control and the like. They shall also comply with industrial and labour laws as may be locally applicable. Such SEZ shall make security arrangements to fulfill all the requirements of the laws, rules and procedures applicable to such SEZ.
The Multi-Product SEZs should have a minimum area of 1000 hectares and at least 35 % ( now it is proposed to increase it to 50% by some state governments) of the area is to be earmarked for developing industrial area for setting up of units. IT & ITES SEZs can be established in an area minimum 10 Hectares and above.
Minimum area of 1000 hectares will not be applicable to product specific and port/airport based SEZs . Wherever the SEZs are landlocked, an Inland Container Depot (ICD) will be an integral part of SEZs.
Q What are the Incentive available to SEZ Developer ?
100% FDI allowed for:
(a) townships with residential, educational and recreational facilities on a case to case basis,
(b)franchise for basic telephone service in SEZ.
Income Tax benefit under ( 80 IA ) to developers for any block of 10 years in 15 years
Duty free import/domestic procurement of goods for development, operation and maintenance of SEZs.
Exemption from Service Tax /CST.
The income of infrastructure company investing in SEZ is exempt from Income Tax.
Q. What are the incentive/facilities available for SEZ units?
Following incentive/ facilities to SEZ enterprises :
Customs and Excise :
Duty Benefits: SEZ units may import or procure from the domestic sources all their requirements of capital goods, raw materials, consumables, spares, packing materials, office equipment, DG sets etc. duty free.
Duty free import/domestic procurement of goods for setting up of SEZ units.
Goods imported / procured locally duty free could be utilised over the approval period of 5 years.
Domestic sales by SEZ units will now be exempt from SAD.
Domestic sale of finished products, by-products on payment of applicable Custom duty.
Domestic sale rejects and waste and scrap on payment of applicable Custom duty on the transaction value .
Income Tax Benefits:
100% IT exemption (10A) for first 5 years and 50% for 2 years thereafter.
Reinvestment allowance to the extend of 50% of ploughed back profits
Carry forward of losses
Foreign Direct Investment :
100% foreign direct investment is under the automatic route is allowed in manufacturing sector in SEZ units except arms and ammunition, explosive, atomic substance, narcotics and hazardous chemicals, distillation and brewing of alcoholic drinks and cigarettes , cigars and manufactured tobacco substitutes.
No cap on foreign investments for SSI reserved items.
Banking / Insurance/External Commercial Borrowings
Setting up Off-shore Banking Units allowed in SEZs.
OBU’s allowed 100% Income Tax exemption on profit for 3 years and 50 % for next two years.
External commercial borrowings by units up to $ 500 million a year allowed without any maturity restrictions.
Flexibility to keep 100% of export proceeds in EEFC account.
Commodity hedging permitted.
Exemption from interest rate surcharge on import finance.
SEZ units allowed to ‘write-off’ unrealized export bills.
Central Sales Tax Act :
Exemption to sales made from Domestic Tariff Area to SEZ units.
Service Tax:
Exemption from Service Tax to SEZ units
Environment :
SEZs permitted to have non-polluting industries in IT and facilities like golf courses, desalination plants, hotels and non-polluting service industries in the Coastal Regulation Zone area Exemption from public hearing under Environment Impact Assessment Notification.
Companies Act :
Enhanced limit of Rs. 2.4 crores per annum allowed for managerial remuneration Agreement to opening of Regional office of Registrar of Companies in SEZs. Exemption from requirement of domicile in India for 12 months prior to appointment as Director.
Drugs and Cosmetics :
Exemption from import restriction under Drugs & Cosmetics Rules for registration of drugs prior to imports.
Sub-Contracting/Contract Farming
SEZ units may sub-contract part of production or production process through units in the Domestic Traiff Area or through other EOU/SEZ units. SEZ units may also sub-contract part of their production process abroad.
Q. Whether SEZs have been exempted from Labour laws?
Normal Labour Laws are applicable to SEZs, which are enforced by the respective state Governments. The state Government have been requested to simplify the procedures/returns and for introduction of a single window clearance mechanism by delegating appropriate powers to Development Commissioners of SEZs.
Advances to sister concerns
Advances to sister concerns must be presumed to have come out of own funds and not borrowed funds
CIT vs. Reliance Utilities (Bombay High Court)
Where the assessee had its own funds as well as borrowed funds and it advanced funds to its sister concerns for allegedly non-business purposes and the question arose whether the AO was justified in disallowing the interest on the borrowed funds on the ground that they had been used for non-business purposes, HELD:
Where an assessee has his own funds as well as borrowed funds, a presumption can be made that the advances for non-business purposes have been made out of the own funds and that the borrowed funds have not been used for this purpose.
Accordingly, the disallowance of the interest on the borrowed funds is not justified
CIT vs. Reliance Utilities (Bombay High Court)
Where the assessee had its own funds as well as borrowed funds and it advanced funds to its sister concerns for allegedly non-business purposes and the question arose whether the AO was justified in disallowing the interest on the borrowed funds on the ground that they had been used for non-business purposes, HELD:
Where an assessee has his own funds as well as borrowed funds, a presumption can be made that the advances for non-business purposes have been made out of the own funds and that the borrowed funds have not been used for this purpose.
Accordingly, the disallowance of the interest on the borrowed funds is not justified
advance tax interest u/s 234B and 234C
Snowcem vs. DCIT (Bombay High Court)
Where an assessment is made u/s 115JA of the Act, an assessee is not liable to pay interest for non-payment/shortfall of advance tax u/ss 234B and 234C of the Act. CIT v. Kwality Biscuits Ltd 284 ITR 434 (SC) followed;
(ii) There is a difference between dismissal of a Special Leave Petition and dismissal of an Appeal. While the dismissal of a SLP does not result in merger of the judgment of the High Court with that of the Supreme Court and there is no affirmation, the dismissal of an Appeal results in an affirmation and merger of the order of the High Court into that of the Supreme Court.
Note: In CIT v. Kwality Biscuits Ltd 284 ITR 434 (SC) the Court was concerned with s. 115J of the Act
Where an assessment is made u/s 115JA of the Act, an assessee is not liable to pay interest for non-payment/shortfall of advance tax u/ss 234B and 234C of the Act. CIT v. Kwality Biscuits Ltd 284 ITR 434 (SC) followed;
(ii) There is a difference between dismissal of a Special Leave Petition and dismissal of an Appeal. While the dismissal of a SLP does not result in merger of the judgment of the High Court with that of the Supreme Court and there is no affirmation, the dismissal of an Appeal results in an affirmation and merger of the order of the High Court into that of the Supreme Court.
Note: In CIT v. Kwality Biscuits Ltd 284 ITR 434 (SC) the Court was concerned with s. 115J of the Act
Faster service tax refunds on cards
Service tax refunds for exporters are set to become easier and speedier. The government is likely to do away with some of the procedural requirements that delay issue of refunds to exporters.
The issue of delay in refund of service tax paid on input services used by exporters has been hanging fire for some time now. The Central Board of Excise & Customs (CBEC) officials have had a series of meetings with industry representatives from various sectors including IT, commerce ministry officials and its field officials to resolve the issue and ensure speedier refunds.
The new rules are expected to be unveiled this week, a government official said.
Some steps being considered to make the refunds easier are doing away with the requirement of documentary proof and third-party verification in some cases. Interpretation of export of service rules has also led to piling of refunds or issue of showcause notices to units, especially in the case of business process outsourcing.
The ministry is also taking a relook at the rule which was slowing down refund claims wherein the finance ministry was insisting that service tax refunds would be made only after proof of realisation of export proceeds was given by exporters.
Exporters claim that often there was a time lag between shipment sent and payment realised and, therefore, it was unfair to keep exporters hanging till they realise payment.
The exporting community has time and again taken up the issue with the finance ministry saying that though service tax reimbursement had been allowed on paper, little was actually being refunded as the rules for making claims remained ambiguous and unrealistic.
"We have asked the finance ministry to give us details of the claims made and the refunds given. Wherever we find that claims have been rejected on unrealistic grounds, we are going to contest that," a commerce ministry official said.
The finance ministry has, till now, allowed exporters to claim refunds on total 19 services. An impetus on linkage between service availed and exports made was also making things difficult for the exporters as for a number of services, it was difficult to directly link it to exports.
The issue of delay in refund of service tax paid on input services used by exporters has been hanging fire for some time now. The Central Board of Excise & Customs (CBEC) officials have had a series of meetings with industry representatives from various sectors including IT, commerce ministry officials and its field officials to resolve the issue and ensure speedier refunds.
The new rules are expected to be unveiled this week, a government official said.
Some steps being considered to make the refunds easier are doing away with the requirement of documentary proof and third-party verification in some cases. Interpretation of export of service rules has also led to piling of refunds or issue of showcause notices to units, especially in the case of business process outsourcing.
The ministry is also taking a relook at the rule which was slowing down refund claims wherein the finance ministry was insisting that service tax refunds would be made only after proof of realisation of export proceeds was given by exporters.
Exporters claim that often there was a time lag between shipment sent and payment realised and, therefore, it was unfair to keep exporters hanging till they realise payment.
The exporting community has time and again taken up the issue with the finance ministry saying that though service tax reimbursement had been allowed on paper, little was actually being refunded as the rules for making claims remained ambiguous and unrealistic.
"We have asked the finance ministry to give us details of the claims made and the refunds given. Wherever we find that claims have been rejected on unrealistic grounds, we are going to contest that," a commerce ministry official said.
The finance ministry has, till now, allowed exporters to claim refunds on total 19 services. An impetus on linkage between service availed and exports made was also making things difficult for the exporters as for a number of services, it was difficult to directly link it to exports.
SEZ + Registers
The below registers has to maintain In SEZ Unit
S.NO NAME OF THE REGISTER
1 INWARD REGISTER
2 OUTWARD REGISTER
3 IMPORT REGISTER
4 ARE-1 REGISTER
5 MATERIAL RECEIPT & ISSUE REGISTER
6 BOND REGISTER
7 EXPORT REGISTER
8 SERVICE TAX REGISTER
9 REWREHOUSING LETTER ISSUE REGISTER
10 LAP TOP REGISTER
11 I.D. CARD REGISTER FOR DIRECT EMPLOYEE
12 I.D. CARD REGISTER FOR INDIRECT EMPLOYEE
Soft Copies to be maintained:
Imports
ARE-1,
Local Puchase (Data Base, Daily Tracker, Consuption),
Month End Reports as of month,
Laptop Movements,
Returnable Challan Register,
Delivery challan Register,
Scarp Material Issue,
SEZ format for (Covering Letter, Re-warehousing certificate format for IMPORT & ARE-1).
Hard Copies or files to be kept
Import Bond Register,
ARE-1 Bond Register,
Import file (Customs & Office File),
ARE-1(Customs & Office File),
Local Purchase File,
Laptop Issue Register,
Laptop Issue Original File,
Stock Issue Register,
Non-returnable Delivery Challan,
Returnable Delivery Challan
S.NO NAME OF THE REGISTER
1 INWARD REGISTER
2 OUTWARD REGISTER
3 IMPORT REGISTER
4 ARE-1 REGISTER
5 MATERIAL RECEIPT & ISSUE REGISTER
6 BOND REGISTER
7 EXPORT REGISTER
8 SERVICE TAX REGISTER
9 REWREHOUSING LETTER ISSUE REGISTER
10 LAP TOP REGISTER
11 I.D. CARD REGISTER FOR DIRECT EMPLOYEE
12 I.D. CARD REGISTER FOR INDIRECT EMPLOYEE
Soft Copies to be maintained:
Imports
ARE-1,
Local Puchase (Data Base, Daily Tracker, Consuption),
Month End Reports as of month,
Laptop Movements,
Returnable Challan Register,
Delivery challan Register,
Scarp Material Issue,
SEZ format for (Covering Letter, Re-warehousing certificate format for IMPORT & ARE-1).
Hard Copies or files to be kept
Import Bond Register,
ARE-1 Bond Register,
Import file (Customs & Office File),
ARE-1(Customs & Office File),
Local Purchase File,
Laptop Issue Register,
Laptop Issue Original File,
Stock Issue Register,
Non-returnable Delivery Challan,
Returnable Delivery Challan
Tuesday, February 3, 2009
SEBI notifies amendments for disclosure of pledged shares of Promoters
SEBI has notified here the amendments requiring disclosure of pledged shares of Promoters and persons forming part of the Promoter Group (referred collectively as “Promoters” here). This issue has been the hot topic on and off this Blog and hence much background is not required for this except a few brief following sentences.
The Satyam episode brought to the forefront the concern that Promoters’ may have pledged a substantial quantity of their shares and thus shareholders and others who rely on the holding of the Promoters may be misled of the real Promoters’ stake. There were also concerns of Insider Trading. Whatever the background, SEBI has now finally notified the amendments.
I will post more thoughts in a later post but the following are the highlights of the amendments:-
1. The requirements have been made through an amendment of the SEBI Takeover Regulations. I had expected that they would also amend the Insider Trading Regulations and the Listing Agreement. I am not ruling this out wholly but, looking at the wording of the amendment, it is likely that this may be the only provision covering this issue.
2. The amendment is by introducing a new Regulation 8A to the Takeover Regulations.
3. As expected, though highly debated, the disclosure is required only of the pledged shares of the listed company and not of shares pledged of the holding or investment Company. Though, see also the concern expressed later.
4. The Promoters have to make disclosure of pledged shares to the Company within 7 working days of the amendment.
a. What is the date of amendment – whether 28th January 2009 being the date of notification or a later date is an area of ambiguity and SEBI should clarify on this specifically, more so when it makes such flash amendments having almost immediate effect. But more on this in a later post.
5. The Company in turn should inform the stock exchanges within 7 working days of receipt of this information.
a. There is a cutoff quantity for this discussed later.
6. The Promoters will continue to inform the Company of further pledges from time to time and the Company will in turn inform the stock exchanges from time to time.
7. The Promoters have also to inform the Company when the pledge is invoked.
8. The Promoters have to make disclosures to the Company of all pledges. However, the Company will inform the stock exchanges only if, during a quarter (March, etc.), the cumulative quantity pledged is 25000 or 1% of capital (peculiarly defined), whichever is less.
Some areas of concern that I can immediately highlight are:-
1. What details are to be given in the disclosures? There is no further clarification on this, nor is any form specified.
2. What about disclosure of shares removed from pledge from time to time? There is no requirement but obviously there is nothing to stop Promoters from giving such disclosures.
3. What is “pledge” of shares? Though this is a common term in law, it is not defined for the purposes of these Regulations. In the context of “shares”, a definition would have helped.
4. Does the Company have to inform on a quarterly basis or every time information is received? The words used are just slightly ambiguous.
5. Is the minimum quantity (25000 or 1%) per person or for the Promoters/Promoters Group taken as a whole?
The Satyam episode brought to the forefront the concern that Promoters’ may have pledged a substantial quantity of their shares and thus shareholders and others who rely on the holding of the Promoters may be misled of the real Promoters’ stake. There were also concerns of Insider Trading. Whatever the background, SEBI has now finally notified the amendments.
I will post more thoughts in a later post but the following are the highlights of the amendments:-
1. The requirements have been made through an amendment of the SEBI Takeover Regulations. I had expected that they would also amend the Insider Trading Regulations and the Listing Agreement. I am not ruling this out wholly but, looking at the wording of the amendment, it is likely that this may be the only provision covering this issue.
2. The amendment is by introducing a new Regulation 8A to the Takeover Regulations.
3. As expected, though highly debated, the disclosure is required only of the pledged shares of the listed company and not of shares pledged of the holding or investment Company. Though, see also the concern expressed later.
4. The Promoters have to make disclosure of pledged shares to the Company within 7 working days of the amendment.
a. What is the date of amendment – whether 28th January 2009 being the date of notification or a later date is an area of ambiguity and SEBI should clarify on this specifically, more so when it makes such flash amendments having almost immediate effect. But more on this in a later post.
5. The Company in turn should inform the stock exchanges within 7 working days of receipt of this information.
a. There is a cutoff quantity for this discussed later.
6. The Promoters will continue to inform the Company of further pledges from time to time and the Company will in turn inform the stock exchanges from time to time.
7. The Promoters have also to inform the Company when the pledge is invoked.
8. The Promoters have to make disclosures to the Company of all pledges. However, the Company will inform the stock exchanges only if, during a quarter (March, etc.), the cumulative quantity pledged is 25000 or 1% of capital (peculiarly defined), whichever is less.
Some areas of concern that I can immediately highlight are:-
1. What details are to be given in the disclosures? There is no further clarification on this, nor is any form specified.
2. What about disclosure of shares removed from pledge from time to time? There is no requirement but obviously there is nothing to stop Promoters from giving such disclosures.
3. What is “pledge” of shares? Though this is a common term in law, it is not defined for the purposes of these Regulations. In the context of “shares”, a definition would have helped.
4. Does the Company have to inform on a quarterly basis or every time information is received? The words used are just slightly ambiguous.
5. Is the minimum quantity (25000 or 1%) per person or for the Promoters/Promoters Group taken as a whole?
Supreme Court on 'Allotment of Shares' and 'Issue of Bonus Shares'
In a recent judgment (Khoday Distilleries v. CIT, Civil Appeal 6654/2008, judgment of 14 November 2008), the Supreme Court explained some important corporate law concepts. The issues before the Supreme Court arose out of a matter under the Gift Tax Act, 1958; and the Supreme Court had to elaborate upon the nature of an allotment of rights issue.
In the facts of the case, twenty out of the twenty-seven shareholders of the appellant company did not take part in a rights issue, upon which the shares were allotted to the other seven shareholders. The contention raised by the Revenue was that this amounted to a ‘transfer’ in favour of the seven shareholders.
The Court explained that the term “allotment of shares” is used to indicate “… the creation of shares by appropriation out of the unappropriated share capital to a particular person. A share is a chose in action. A chose in action implies existence of some person entitled to rights in action in contradistinction from rights in possession. There is a difference between issue of a share to a subscriber and the purchase of a share from an existing shareholder. The first case is that of creation whereas the second case is that of transfer of chose in action. In this case, when twenty shareholders did not subscribe to the rights issue, the appellant allotted them to the seven investment companies, such allotment was not transfer.”
The Court held that for a ‘transfer’ of shares to take place, it was essential that some right was transferred from one person to another. In an allotment of shares such as the one seen in the case, the shares were created for the first time – there was no transfer of any right but the creation of a right.
It is perhaps still open to the Department to contend that in certain situations, such a transaction may be treated as a device for evasion; and that the substance of the transaction is one of transfer. In that case, however, the transfer would not be from the company, but from the shareholders who did not take part in the rights issue. Thus, under no circumstances can the company be said to have transferred shares through an allotment.
The case also discussed the nature of an issue of bonus shares. The question in this connection was “Whether there is an element of ‘gift’ in the appellant issuing bonus shares in the ratio of 1:23?”
The Court explained, “The idea behind the issue of bonus shares is to bring the nominal share capital into line with the excess of assets over liabilities. A company would like to have more working capital but it need not go into the market for obtaining fresh capital by issuing fresh shares. The necessary money is available with it and this money is converted into shares, which really means that the undistributed profits have been ploughed back into the business and converted into share capital. Therefore, fully paid bonus shares are merely a distribution of capitalized undivided profit. It would be a misnomer to call the recipients of bonus shares as donees of shares from the company.”
In the facts of the case, twenty out of the twenty-seven shareholders of the appellant company did not take part in a rights issue, upon which the shares were allotted to the other seven shareholders. The contention raised by the Revenue was that this amounted to a ‘transfer’ in favour of the seven shareholders.
The Court explained that the term “allotment of shares” is used to indicate “… the creation of shares by appropriation out of the unappropriated share capital to a particular person. A share is a chose in action. A chose in action implies existence of some person entitled to rights in action in contradistinction from rights in possession. There is a difference between issue of a share to a subscriber and the purchase of a share from an existing shareholder. The first case is that of creation whereas the second case is that of transfer of chose in action. In this case, when twenty shareholders did not subscribe to the rights issue, the appellant allotted them to the seven investment companies, such allotment was not transfer.”
The Court held that for a ‘transfer’ of shares to take place, it was essential that some right was transferred from one person to another. In an allotment of shares such as the one seen in the case, the shares were created for the first time – there was no transfer of any right but the creation of a right.
It is perhaps still open to the Department to contend that in certain situations, such a transaction may be treated as a device for evasion; and that the substance of the transaction is one of transfer. In that case, however, the transfer would not be from the company, but from the shareholders who did not take part in the rights issue. Thus, under no circumstances can the company be said to have transferred shares through an allotment.
The case also discussed the nature of an issue of bonus shares. The question in this connection was “Whether there is an element of ‘gift’ in the appellant issuing bonus shares in the ratio of 1:23?”
The Court explained, “The idea behind the issue of bonus shares is to bring the nominal share capital into line with the excess of assets over liabilities. A company would like to have more working capital but it need not go into the market for obtaining fresh capital by issuing fresh shares. The necessary money is available with it and this money is converted into shares, which really means that the undistributed profits have been ploughed back into the business and converted into share capital. Therefore, fully paid bonus shares are merely a distribution of capitalized undivided profit. It would be a misnomer to call the recipients of bonus shares as donees of shares from the company.”
Companies Bill, 2008: No advisory services by auditors
One of the important measures taken in the Companies Bill, 2008 is to prevent Chartered Accountants from offering actuarial, advisory and management services to companies which have engaged them as statutory auditors. Section 127 of the Bill provides:
An auditor appointed under this Act shall provide the company only such other services as are approved by the Board of Directors or the audit committee, as the case may be, but which shall not include any of the following services, namely:-
(a) accounting or book-keeping services;
(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
(g) rendering of outsourced financial services; and
(h) management services.
The Economic Times carries a report on this change, which would be welcome from the perspective of accountability in company audits. The report is linked here. The following is an extract:
The proposal forms part of the Companies Bill 2008, currently pending before the Lok Sabha. The move is expected to usher in greater independence in the audit function and infuse greater confidence in the minds of investors on the credibility of financial statements. At present, the statutory auditors are barred from providing accounting and internal audit services for their clients, but are allowed to deliver consultancy and advisory services.
…
The initiative assumes significance in the wake of a slowdown in the economy where companies may hire consultancy services from their statutory auditors who may turn a blind eye to discrepancies in financial statements...
An auditor appointed under this Act shall provide the company only such other services as are approved by the Board of Directors or the audit committee, as the case may be, but which shall not include any of the following services, namely:-
(a) accounting or book-keeping services;
(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
(g) rendering of outsourced financial services; and
(h) management services.
The Economic Times carries a report on this change, which would be welcome from the perspective of accountability in company audits. The report is linked here. The following is an extract:
The proposal forms part of the Companies Bill 2008, currently pending before the Lok Sabha. The move is expected to usher in greater independence in the audit function and infuse greater confidence in the minds of investors on the credibility of financial statements. At present, the statutory auditors are barred from providing accounting and internal audit services for their clients, but are allowed to deliver consultancy and advisory services.
…
The initiative assumes significance in the wake of a slowdown in the economy where companies may hire consultancy services from their statutory auditors who may turn a blind eye to discrepancies in financial statements...
Sunday, February 1, 2009
Proof of travel not required for claiming LTA: Supreme Court
Employers, while assessing the conveyance and leave & travel allowance (LTA) claims of their staff, are under no statutory obligation to collect supporting evidence and furnish them to tax authorities, the Supreme Court said on Wednesday.
A bench comprising Justice SH Kapadia and Justice Aftab Alam said that assessee employers are under no statutory obligation to collect bills and details to prove that the employees had utilised the amounts obtained against these claims on travel and related expenses.
According to prevailing rules, if claims on LTA and conveyance are not supported by journey bills, they would be taxed. For instance, on an LTA allowance of Rs 1 lakh, if documentary proof such as air tickets, taxi vouchers and other public transport bills are submitted only for Rs 50,000, then tax is applicable on the rest of the amount.
Regardless of the amount an executive is entitled to as LTA, tax laws allow air tickets only in the domestic sector for the claim.
The apex court order came in a plea by companies including Larsen &Toubro and ITI. In its defence, the revenue department had argued that assessee companies were under statutory obligation under Income Tax Act, 1961, and relevant rules, to collect documentary proof to show that their employee(s) had actually utilised the amount paid towards the leave travel concession and conveyance allowance.
Rejecting the plea, the court in its order said: “The beneficiary of exemption under Section 10(5) (of the Income Tax Act) is an individual employee. There is no circular of Central Board of Direct Taxes (CBDT) requiring the employer under Section 192 to collect and examine the supporting evidence to the declaration to be submitted by an employee(s).”
LTA Supreme Court Judgement on Leave and Travel Allowance - No proof needed for claiming leave and travel allowance.
The Supreme Court of India has said that there is no need to provide proof of travel while assessing the conveyance and leave and travel allowance LTA.
The bench comprising of Justice SH Kapadia and Justice Aftab said that employers need no evidence for collecting LTA.
The prevailing rules insist that any claims on LTA and conveyance should be supported by journey bills.
The apex court order came in a plea by companies including Larsen & Toubro and ITI.
A bench comprising Justice SH Kapadia and Justice Aftab Alam said that assessee employers are under no statutory obligation to collect bills and details to prove that the employees had utilised the amounts obtained against these claims on travel and related expenses.
According to prevailing rules, if claims on LTA and conveyance are not supported by journey bills, they would be taxed. For instance, on an LTA allowance of Rs 1 lakh, if documentary proof such as air tickets, taxi vouchers and other public transport bills are submitted only for Rs 50,000, then tax is applicable on the rest of the amount.
Regardless of the amount an executive is entitled to as LTA, tax laws allow air tickets only in the domestic sector for the claim.
The apex court order came in a plea by companies including Larsen &Toubro and ITI. In its defence, the revenue department had argued that assessee companies were under statutory obligation under Income Tax Act, 1961, and relevant rules, to collect documentary proof to show that their employee(s) had actually utilised the amount paid towards the leave travel concession and conveyance allowance.
Rejecting the plea, the court in its order said: “The beneficiary of exemption under Section 10(5) (of the Income Tax Act) is an individual employee. There is no circular of Central Board of Direct Taxes (CBDT) requiring the employer under Section 192 to collect and examine the supporting evidence to the declaration to be submitted by an employee(s).”
LTA Supreme Court Judgement on Leave and Travel Allowance - No proof needed for claiming leave and travel allowance.
The Supreme Court of India has said that there is no need to provide proof of travel while assessing the conveyance and leave and travel allowance LTA.
The bench comprising of Justice SH Kapadia and Justice Aftab said that employers need no evidence for collecting LTA.
The prevailing rules insist that any claims on LTA and conveyance should be supported by journey bills.
The apex court order came in a plea by companies including Larsen & Toubro and ITI.
Depreciation not debited to the profit and loss account, but disclosed in notes appended to the accounts, deductible while determining “book profit”
Depreciation not debited to the profit and loss account, but disclosed in notes appended to the accounts, deductible while determining “book profit” under Section 115J
Commissioner of Income Tax (Central) – I, New Delhi v. Sain Processing and Weaving Mills (P) Ltd.(Delhi HC)
Facts
The assessee had not debited current year depreciation to the profit and loss account but had disclosed this fact and the quantum of depreciation in the notes appended to the accounts.
Issue
Whether current year depreciation is deductible in computing “book profit” for Minimum Alternate Tax purposes under section 115J of the Income Tax Act, 1961 (“the Act”), although the same was not debited to the profit and loss account, but disclosed in the notes to the account.
Contention of the Revenue
• The provisions dealing with determination of “book profit” indicate the adjustments that are to be made to the net profit as shown in the profit and loss account. Apart from the adjustments so indicated, no other adjustments can be made. In the instant case as depreciation was not debited to the profit and loss account and an adjustment of this nature is not contemplated, no adjustment can be made to the net profit to arrive at the “book profit” for Minimum Alternate Tax.
Contentions of the assessee
• “Book profit”, as defined, means net profit as shown in the profit and loss account for the relevant assessment year which is prepared as per the provisions of Parts II and III of the Schedule VI of the Companies Act, 1956 (“Companies Act”).
• Where depreciation is not charged to profit and loss account, it is obligatory to disclose the same in the notes to accounts (clause 3(iv) of Part II of Schedule VI of Companies Act).
• Notes to accounts form intrinsic part of the profit and loss account and hence, the quantum of depreciation disclosed therein would have to be taken into account in determining the “book profit”.
Observations of Hon’ble Delhi High Court
• It is obligatory under the Companies Act to give information of depreciation which has not been provided for, alongwith the quantum of arrears, by way of notes to accounts.
• Section 211(6) of the Companies Act provides that except where context otherwise requires any reference to a balance sheet or profit and loss account shall include the notes thereon or documents annexed thereto, giving information required to be given and/or allowed to be given in the form of notes or documents.
• The expression used by the legislature is net profit in contra distinction to the well known accounting term cash profit. Accordingly, the net profit of a company cannot be determined till all the items of income and expenses as recognized, as well as, depreciation are taken into account.
Judgment of the Hon’ble High Court
The Hon’ble High Court has held that current year depreciation can be reduced from the net profit to arrive at book profit even though it is not charged to the profit and loss account, but disclosed in the notes appended to the accounts.
Commissioner of Income Tax (Central) – I, New Delhi v. Sain Processing and Weaving Mills (P) Ltd.(Delhi HC)
Facts
The assessee had not debited current year depreciation to the profit and loss account but had disclosed this fact and the quantum of depreciation in the notes appended to the accounts.
Issue
Whether current year depreciation is deductible in computing “book profit” for Minimum Alternate Tax purposes under section 115J of the Income Tax Act, 1961 (“the Act”), although the same was not debited to the profit and loss account, but disclosed in the notes to the account.
Contention of the Revenue
• The provisions dealing with determination of “book profit” indicate the adjustments that are to be made to the net profit as shown in the profit and loss account. Apart from the adjustments so indicated, no other adjustments can be made. In the instant case as depreciation was not debited to the profit and loss account and an adjustment of this nature is not contemplated, no adjustment can be made to the net profit to arrive at the “book profit” for Minimum Alternate Tax.
Contentions of the assessee
• “Book profit”, as defined, means net profit as shown in the profit and loss account for the relevant assessment year which is prepared as per the provisions of Parts II and III of the Schedule VI of the Companies Act, 1956 (“Companies Act”).
• Where depreciation is not charged to profit and loss account, it is obligatory to disclose the same in the notes to accounts (clause 3(iv) of Part II of Schedule VI of Companies Act).
• Notes to accounts form intrinsic part of the profit and loss account and hence, the quantum of depreciation disclosed therein would have to be taken into account in determining the “book profit”.
Observations of Hon’ble Delhi High Court
• It is obligatory under the Companies Act to give information of depreciation which has not been provided for, alongwith the quantum of arrears, by way of notes to accounts.
• Section 211(6) of the Companies Act provides that except where context otherwise requires any reference to a balance sheet or profit and loss account shall include the notes thereon or documents annexed thereto, giving information required to be given and/or allowed to be given in the form of notes or documents.
• The expression used by the legislature is net profit in contra distinction to the well known accounting term cash profit. Accordingly, the net profit of a company cannot be determined till all the items of income and expenses as recognized, as well as, depreciation are taken into account.
Judgment of the Hon’ble High Court
The Hon’ble High Court has held that current year depreciation can be reduced from the net profit to arrive at book profit even though it is not charged to the profit and loss account, but disclosed in the notes appended to the accounts.
ICAI Favour Rotation of Auditors After 3 Years
The self regulatory body for auditors, ICAI is pushing for compulsory rotation of auditors by companies in view of mounting pressure from local financial institutions. “A high-powered committee is currently examining the option and a decision will be taken, based on their recommendation, very soon,” ICAI president Ved Jain told.
To begin with, ICAI is likely to ask auditors of top-listed companies to retire after a three-year term, he said. At the next stage, a mandatory rotation of auditors would be proposed for all public interest entities like private banks and insurance companies, Mr Jain said.
Currently, only public sector banks are required to rotate auditors, appointed from among RBI-empanelled list of audit firms, but there is no compulsion on private banks and insurance companies to follow the practice.
Industry insiders, however, feel that even if ICAI makes rotation of auditors mandatory, it may not help unless it is enshrined in the Companies Act or enforced as a regulator requirement by Sebi and Company Law Board. “If ICAI can make it mandatory for its members to retire every three years, auditors will not have a choice but to adhere to it. But an amendment to the Companies Act will institutionalise the process,” a chartered accountant said.
To begin with, ICAI is likely to ask auditors of top-listed companies to retire after a three-year term, he said. At the next stage, a mandatory rotation of auditors would be proposed for all public interest entities like private banks and insurance companies, Mr Jain said.
Currently, only public sector banks are required to rotate auditors, appointed from among RBI-empanelled list of audit firms, but there is no compulsion on private banks and insurance companies to follow the practice.
Industry insiders, however, feel that even if ICAI makes rotation of auditors mandatory, it may not help unless it is enshrined in the Companies Act or enforced as a regulator requirement by Sebi and Company Law Board. “If ICAI can make it mandatory for its members to retire every three years, auditors will not have a choice but to adhere to it. But an amendment to the Companies Act will institutionalise the process,” a chartered accountant said.
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