In a move that will significantly ease the tax burden on India’s biggest information technology companies, the government has decided to amend the law relating to tax exemption for units operating out of special economic zones (SEZs).
SEZs set up by IT majors like Infosys, Wipro and Tata Consultancy Services (TCS) under the parent companies will soon be able to enjoy 100% tax exemption on profits on a par with those set up as separate entities. Prime Minister Manmohan Singh, who is also handling the finance ministry, has agreed to change the relevant norms under the Income Tax Act, a commerce department official has said. The finance ministry will soon issue a notification changing rules under Section 10AA (7) of the Income Tax Act, which will allow all SEZ units to be treated as separate entities and thus be eligible for 100% tax exemption on profits for the first five years of operation.
IT majors were losing out
We have finally been able to convince the finance ministry that Section 10AA(7) of the IT Act is an anomaly. All SEZs should be entitled to 100% tax exemption on profits. The relevant notification will be issued by the Central Board of Direct Taxes shortly,” a commerce department official told ET.
Section 10 AA (7) of the I-T Act states that only a proportion of profits of an SEZ unit, based on the proportion of export sales from the unit to the total turnover of the parent company, will be exempt from taxation. For instance, if an SEZ unit exports 50% of the company’s total turnover, then the tax exemption on the profit that the parent company makes from exports will be restricted to only 50% instead of 100% as otherwise promised in the SEZ Act.
While most SEZs are not affected by the law as they have been set up as individual entities, the three IT majors set up their zones under the parent company. They were thus entitled to minimal tax exemption on profits instead of 100% exemption that SEZs are entitled to in the first five years of operation. The SEZ Act also provides for 50% exemption on export profits for the next five years while for the following five years, units get up to 50% exemption on reinvested profits.
Interestingly, the provisions in the I-T Act on 100% exportoriented units (EoUs) allow them to be treated as separate entities for the calculation of income-tax exemption.
According to export promotion council for EoUs and SEZs director general LB Singhal, the prime minister’s decision to change Section 10 AA would remove uncertainty for all SEZ units, including SEZ manufacturing and IT sector units. He said the clarification should be applicable with effect from February 10, 2006, when the SEZ rules were notified. “We are grateful that the ambiguity is being removed. It was clear that this was an inadvertent omission as we cannot compare two uncomparables,” Mr Singhal said
Sunday, January 18, 2009
INVOCATION OF SECTION 263 OF IT ACT ON GROUND OF DEDUCTION UNDER SECTION 80-IA WRONGLY ALLOWED BY AO
Where the AO after enquiry had taken a possible view of the matter, it was obligatory on the part of the Commissioner to show for the purposes of provision of section 263 that assessment order was erroneous and insofar as prejudicial to the interest of the revenue,it was for the Commissioner to show that repair charges, if any, received by the assessee were totally unconnected with the manufacturing activities carried on by the assessee and, therefore, could not form part of manufacturing receipt for purposes of section 80-1A,the onus was not on the assessee but clearly on the Revenue to show that a specified amount out of total receipt of the assessee, exemption under section 80-IA was wrongly allowed as exempt.AGRA BENCH, AGRA (THIRD MEMBER)November 18, 2008Id. -CIT as legally erroneous. In this connection, reference is invited to the following decisions:
ITAT,
Pal & Pal Electromechanical (P.) Ltd. V CIT (ITA No. 52/Agra/07) Dated:
RELEVANT EXTRACTS:
25. On the basis of above material, it is not possible to hold that assessee was carrying on mere repair of transformers and not any manufacturing activity. Assessee’s claim that it is manufacturing electromechanical parts and accessories like winding coils, insulation material etc. etc. from different material is clearly established on record. No dispute had been raised that above items manufactured by the assessee were different in shape and in commercial value from the raw material used to manufacture them. On account of above activity, the assessee claimed to be a manufacturer. The further claim of the assessee that in its case repair tantamount to manufacturer of transformers was also to be viewed in the light of facts and circumstances noted above. In case of damaged or burnt transformers, which were required to be replaced during warranty / guarantee period, the assessee had used only the old cabinet with lamination of transformers. All other items were new items manufactured by the assessee and put in the cabinet in a similar manner as was done in the case of Saraf Electicals P.Ltd. (supra). Facts in that case are similar to facts in the present case. However, the learned Commissioner totally ignored the detailed submissions of the assessee and failed to examine the case as pleaded before him. It failed to examine documents produced by the assessee including certificate of registration/ exemption issued by the Excise and Department of Industries. The learned C.I.T failed to see the implication of the sales-tax paid by the assessee. The above facts clearly established that parts, coils etc. manufactured by the assessee from the raw material were separately sold. The aforesaid sale could not represent repair receipts. The learned Commissioner was also in error in concentrating on the fact that ownership did not change hands without considering that ownership was merely of old cabinet with lamination of the burnt transformers. It was - not of the entire transformer,more particularly the parts introduced in the cabinet were independently and separately sold. There is further material on record to show that these parts are commercially saleable items. The entire case could not be thrown out on the ground that assessee in the profit and loss account has stated sale receipts including of repair charges. It is further not permissible to invoke S.263 to correct a minor error findings or observations in the assessment order. “Error” and prejudice to the revenue has to be shown with reference to record. The case set up by the assessee in reply that it was manufacturer of electromechanical parts accessories was totally ignored. The same was the position of evidence on record. The appellate Tribunal is/was required to hold the approach of
(i) In the case of CIT Vs Gabriel India Ltd., 203 ITR 108 (Bom), their Lordships held as under:-
“An order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the Commissioner simply because according to him the order should have been written more elaborately. This section does not visualise a case of substitution of judgment of the Commissioner for that of the ITO, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where ITO while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimates himself The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and, left to the Commissioner, he would have estimated the income dated a higher figure than the one determined by the ITO. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interest of the Revenue^ But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, namely, the order is erroneous is absent. Similarly, if an order is erroneous but not prejudicial to the interest of the Revenue, then also the power of suo motu revision cannot be exercised Am and every erroneous order cannot be subject-matter of revision because the second requirement also must be fulfilled.”
(ii) In the case of Malabar Industrial Co. Ltd. Vs Commissioner of Income Tax 243 ITR 83(SC), their Lordships held as under:-
“A bare reading of provisions of s. 263 makes it clear that the prerequisite to exercise of jurisdiction by the CIT suo motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the Revenue. The C1T has to be satisfied , of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous,and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent - if the order of the HO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue – recourse cannot be had to s. 263(1). There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the AO,it is only when an order is erroneous that the section will be attracted” (underlined to emphasise)
26. The Id Judicial Member who passed a dissenting order here is herself the author of Her in the case of ITO Vs AMD Export Corporation (Kandla) Ltd. 381 (Del) wherein it is observed as under:-
” The provisions of the Act as well as the circulars of the Board would clearly show that the purpose of incorporating this section is to provide development and identified/identifi able backward areas of the State. The purpose is to encourage economic development and industrialisation of those areas. The object of s. 10A is to give fillip to a new industrial undertaking in the initial stage, the benefit cannot be taken away by imposing any restrictions which do not mention in the Act, This would be in consonance with the recognised principles of interpretation. The administrative authority or the court should not whittle down the plenitude of the exemption or relief granted by the legislation by laying stress on something which is not considered in that provision.”
28. On the facts of the case, the A.0 after enquiry had taken a possible view of the matter. It was, therefore, obligatory on the part of the Commissioner to show for the purposes of provision of Sec.263 that assessment order was erroneous and in so far as prejudicial to the interest of the Revenue. It was for the Id. Commissioner to show that repair charges, if any, received by the assessee were totally unconnected with the manufacturing activities carried on by the assessee and, therefore, could not form part of manufacturing receipt for purposes of Sec. 80-IA of the I. T. Act. The onus was not on the assessee but clearly on the Revenue to show that a specified amount out of total receipt of the assessee, exemption u/s 80IA was wrongly allowed as exempt. No such exercise was undertaken by the Id. Commissioner in spite of two innings provided to the Commissioner to show error and prejudice in the order of the A.O.
29. The aforesaid errors further crept in, in the proposed order of learned Judicial Member. In my considered opinion, the learned Judicial Member was not right in putting burden of proof on the assessee in proceedings u/s 263 and in not examining profit and loss account and balance sheet of the assessee and its claim that it was involved in the manufacture of electromechanical parts. The material available on record and discussed above, was also not examined in the light of the claim made by the assessee. The observations of the Id. Judicial Member in the proposed order are also not factually correct as noted above. In the light of above discussion, I am unable to agree with the reasoning given by the Id. Judicial Member in her proposed order my considered opinion, the Id. CIT was not justified in invoking provisions of Section 263 of the I.T. Act. I agree with the view taken by the Id. A.M. and answer both the questions referred to me in file negative
ITAT,
Pal & Pal Electromechanical (P.) Ltd. V CIT (ITA No. 52/Agra/07) Dated:
RELEVANT EXTRACTS:
25. On the basis of above material, it is not possible to hold that assessee was carrying on mere repair of transformers and not any manufacturing activity. Assessee’s claim that it is manufacturing electromechanical parts and accessories like winding coils, insulation material etc. etc. from different material is clearly established on record. No dispute had been raised that above items manufactured by the assessee were different in shape and in commercial value from the raw material used to manufacture them. On account of above activity, the assessee claimed to be a manufacturer. The further claim of the assessee that in its case repair tantamount to manufacturer of transformers was also to be viewed in the light of facts and circumstances noted above. In case of damaged or burnt transformers, which were required to be replaced during warranty / guarantee period, the assessee had used only the old cabinet with lamination of transformers. All other items were new items manufactured by the assessee and put in the cabinet in a similar manner as was done in the case of Saraf Electicals P.Ltd. (supra). Facts in that case are similar to facts in the present case. However, the learned Commissioner totally ignored the detailed submissions of the assessee and failed to examine the case as pleaded before him. It failed to examine documents produced by the assessee including certificate of registration/ exemption issued by the Excise and Department of Industries. The learned C.I.T failed to see the implication of the sales-tax paid by the assessee. The above facts clearly established that parts, coils etc. manufactured by the assessee from the raw material were separately sold. The aforesaid sale could not represent repair receipts. The learned Commissioner was also in error in concentrating on the fact that ownership did not change hands without considering that ownership was merely of old cabinet with lamination of the burnt transformers. It was - not of the entire transformer,more particularly the parts introduced in the cabinet were independently and separately sold. There is further material on record to show that these parts are commercially saleable items. The entire case could not be thrown out on the ground that assessee in the profit and loss account has stated sale receipts including of repair charges. It is further not permissible to invoke S.263 to correct a minor error findings or observations in the assessment order. “Error” and prejudice to the revenue has to be shown with reference to record. The case set up by the assessee in reply that it was manufacturer of electromechanical parts accessories was totally ignored. The same was the position of evidence on record. The appellate Tribunal is/was required to hold the approach of
(i) In the case of CIT Vs Gabriel India Ltd., 203 ITR 108 (Bom), their Lordships held as under:-
“An order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the Commissioner simply because according to him the order should have been written more elaborately. This section does not visualise a case of substitution of judgment of the Commissioner for that of the ITO, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where ITO while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimates himself The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and, left to the Commissioner, he would have estimated the income dated a higher figure than the one determined by the ITO. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interest of the Revenue^ But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, namely, the order is erroneous is absent. Similarly, if an order is erroneous but not prejudicial to the interest of the Revenue, then also the power of suo motu revision cannot be exercised Am and every erroneous order cannot be subject-matter of revision because the second requirement also must be fulfilled.”
(ii) In the case of Malabar Industrial Co. Ltd. Vs Commissioner of Income Tax 243 ITR 83(SC), their Lordships held as under:-
“A bare reading of provisions of s. 263 makes it clear that the prerequisite to exercise of jurisdiction by the CIT suo motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the Revenue. The C1T has to be satisfied , of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous,and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent - if the order of the HO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue – recourse cannot be had to s. 263(1). There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the AO,it is only when an order is erroneous that the section will be attracted” (underlined to emphasise)
26. The Id Judicial Member who passed a dissenting order here is herself the author of Her in the case of ITO Vs AMD Export Corporation (Kandla) Ltd. 381 (Del) wherein it is observed as under:-
” The provisions of the Act as well as the circulars of the Board would clearly show that the purpose of incorporating this section is to provide development and identified/identifi able backward areas of the State. The purpose is to encourage economic development and industrialisation of those areas. The object of s. 10A is to give fillip to a new industrial undertaking in the initial stage, the benefit cannot be taken away by imposing any restrictions which do not mention in the Act, This would be in consonance with the recognised principles of interpretation. The administrative authority or the court should not whittle down the plenitude of the exemption or relief granted by the legislation by laying stress on something which is not considered in that provision.”
28. On the facts of the case, the A.0 after enquiry had taken a possible view of the matter. It was, therefore, obligatory on the part of the Commissioner to show for the purposes of provision of Sec.263 that assessment order was erroneous and in so far as prejudicial to the interest of the Revenue. It was for the Id. Commissioner to show that repair charges, if any, received by the assessee were totally unconnected with the manufacturing activities carried on by the assessee and, therefore, could not form part of manufacturing receipt for purposes of Sec. 80-IA of the I. T. Act. The onus was not on the assessee but clearly on the Revenue to show that a specified amount out of total receipt of the assessee, exemption u/s 80IA was wrongly allowed as exempt. No such exercise was undertaken by the Id. Commissioner in spite of two innings provided to the Commissioner to show error and prejudice in the order of the A.O.
29. The aforesaid errors further crept in, in the proposed order of learned Judicial Member. In my considered opinion, the learned Judicial Member was not right in putting burden of proof on the assessee in proceedings u/s 263 and in not examining profit and loss account and balance sheet of the assessee and its claim that it was involved in the manufacture of electromechanical parts. The material available on record and discussed above, was also not examined in the light of the claim made by the assessee. The observations of the Id. Judicial Member in the proposed order are also not factually correct as noted above. In the light of above discussion, I am unable to agree with the reasoning given by the Id. Judicial Member in her proposed order my considered opinion, the Id. CIT was not justified in invoking provisions of Section 263 of the I.T. Act. I agree with the view taken by the Id. A.M. and answer both the questions referred to me in file negative
ALLOWABILITY OF DEFERRED REVENUE EXPENDITURE UNDER SECTION 37(1) OF IT ACT
ITAT, AHMEDABAD BENCH `B’ (SPECIAL BENCH)
ACIT v/s Ashina Syntex Ltd. (ITA Nos. 2001 & 2002/ Ahd./2001) Dated: October 17, 2008
The nature of the expenditure treated as a “deferred revenue expenditure” in the books needs to be properly analysed before taking a view on its allowbaility or otherwise under the provisions of the Act,where such expenditure results in the creation of any capital asset - tangible or intangible – a case can be made out to treat the same as a capital expenditure with corresponding allowability of depreciation in accordance with law,in cases where the nature of the revenue expenditure is such that the same can be clearly and unambiguously identified over specified future time periods (e.g. discount on issue of debentures) akin to prepaid expenses, the same would be allowable over the period to which these relate proportionately, applying the matching principle.
RELEVANT EXTRACTS:
8. We have heard rival contentions and gone through the facts of the case. The concept of deferred revenue expenditure is essentially an accounting concept and alien to the Act. The relevant provisions of the Act recognize only capital or revenue expenditure. Deferred revenue expenditure denotes expenditure for which a payment has been made or a liability incurred which is essentially revenue in nature but which for various reasons like quantum and period of expected future benefit etc., is written-off over a period of time e.g. expenditure on advertisement, sales promotion etc.. Though the nature of such expenditure is revenue, keeping in view the fact that the benefits arising therefrom are expected to be derived over a period of time, stretching sometimes over several accounting years, the taxpayers have been amortising the same over several accounting years, the taxpayers have been amortising the same over the expected time period over which the benefits are likely to accrue therefrom. Accordingly, only a proportion of such expenditure is amortised in the Profit and Loss Account but an appropriate adjustment is made in the computation of income, claiming the entire as allowable revenue expenditure in terms of provisions of section 37(1) of the Act. The expenditure which is treated as deferred revenue in the books almost in all cases comprises of items, the benefits derived wherefrom are ephemeral and transitory in nature in as much as these are incurred as a part of a continuous process and need to be expended in order to generate and increase the brand recall and sustain it in the minds of customers. Whether or not expenditure is of enduring nature, the Hon’bte Supreme Court in the case of Alembic Chemical Works Co. Ltd. vs. CIT (1989) 177 ITR 377 has itself observed that
“The idea of “once for all” payment and “enduring benefit” are not to be treated as something akin to statutory conditions ,nor are the notions of “capital” or “revenue” a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business The expression “asset or advantage of an enduring nature” was evolved to emphasise the element of a sufficient degree of durability appropriate to the context.”
9. Moreover, the deferred revenue expenditure is essentially revenue in nature and the decision to treat the same as deferred revenue only represents a management decision taken in view of the magnitude of the expenditure involved. For the purpose of allowability of any expenditure under the Act, what is material is the classification between the capital and revenue and the same-does not recognise of any concept of deferred revenue expenditure.
That is why
AO- himself allowed the amount debited in the profit and loss account. In a number of judgments viz. Amar Raja Batteries Ltd. v. ACIT [(2004) 91 ITD 280 (Hyd)j,JCIT v. Modi Olivetti Ltd. [(2005)4 SOT 859 (Delhi)], ACIT vs. Medicamen Biotech Ltd. [(2005) 1 SOT 347 (Delhi)],Hero Honda Motors Ltd. v. Joint Commissioner of Income Tax [(2005) 3 SOT 572 (Delhi)] and Charak Pharmaceuticals v. JCIT [(2005) 4SOT 393 (Mumbai)],it has been affirmed that where any expenditure is treated as a deferred revenue expenditure, it presupposes that the concerned expenditure, creating benefit is in the revenue field and is a revenue expenditure, but considering its enduring benefits as well as the fact that it does not result in the creation of any new asset or advantage of enduring nature in the capital field, the same is required to be treated distinctly from capital expenditure. However, where any identifiable capital asset, tangible or intangible comes into existence as a result of the amount expended, the same will have to be treated as a capital expenditure and depreciation allowable thereon as per the prescribed rules and procedures under the Income-tax Act.
14. To conclude, the position emerging from the above discussion can be summed up as follows:-
- the nature of the expenditure treated as a “deferred revenue expenditure” in the books needs to be properly analysed before taking a view on its allowability or otherwise under the provisions of the Act;
- where such expenditure results in the creation of any capital asset (tangible or intangible), a case can be made out to treat the same as a capital expenditure with corresponding allowability of depreciation in accordance with law;
- in cases where the nature of the revenue expenditure is such that the same can be clearly and unambiguously identified over specified future time periods (e.g. discount on issue of debentures) akin to prepaid expenses the same would be allowable over the period to which these relate proportionately, applying the matching principle.
In other cases where the same does not result in the creation of any capital asset or.where the same is not allocable over defined future time periods there .can be-no case for amortising the same under the Act over the expected period over which the benefit is likely to arise there from since in such cases the expenditure is essentially revenue in nature Out is amortised in the books only on account of some other considerations
ACIT v/s Ashina Syntex Ltd. (ITA Nos. 2001 & 2002/ Ahd./2001) Dated: October 17, 2008
The nature of the expenditure treated as a “deferred revenue expenditure” in the books needs to be properly analysed before taking a view on its allowbaility or otherwise under the provisions of the Act,where such expenditure results in the creation of any capital asset - tangible or intangible – a case can be made out to treat the same as a capital expenditure with corresponding allowability of depreciation in accordance with law,in cases where the nature of the revenue expenditure is such that the same can be clearly and unambiguously identified over specified future time periods (e.g. discount on issue of debentures) akin to prepaid expenses, the same would be allowable over the period to which these relate proportionately, applying the matching principle.
RELEVANT EXTRACTS:
8. We have heard rival contentions and gone through the facts of the case. The concept of deferred revenue expenditure is essentially an accounting concept and alien to the Act. The relevant provisions of the Act recognize only capital or revenue expenditure. Deferred revenue expenditure denotes expenditure for which a payment has been made or a liability incurred which is essentially revenue in nature but which for various reasons like quantum and period of expected future benefit etc., is written-off over a period of time e.g. expenditure on advertisement, sales promotion etc.. Though the nature of such expenditure is revenue, keeping in view the fact that the benefits arising therefrom are expected to be derived over a period of time, stretching sometimes over several accounting years, the taxpayers have been amortising the same over several accounting years, the taxpayers have been amortising the same over the expected time period over which the benefits are likely to accrue therefrom. Accordingly, only a proportion of such expenditure is amortised in the Profit and Loss Account but an appropriate adjustment is made in the computation of income, claiming the entire as allowable revenue expenditure in terms of provisions of section 37(1) of the Act. The expenditure which is treated as deferred revenue in the books almost in all cases comprises of items, the benefits derived wherefrom are ephemeral and transitory in nature in as much as these are incurred as a part of a continuous process and need to be expended in order to generate and increase the brand recall and sustain it in the minds of customers. Whether or not expenditure is of enduring nature, the Hon’bte Supreme Court in the case of Alembic Chemical Works Co. Ltd. vs. CIT (1989) 177 ITR 377 has itself observed that
“The idea of “once for all” payment and “enduring benefit” are not to be treated as something akin to statutory conditions ,nor are the notions of “capital” or “revenue” a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business The expression “asset or advantage of an enduring nature” was evolved to emphasise the element of a sufficient degree of durability appropriate to the context.”
9. Moreover, the deferred revenue expenditure is essentially revenue in nature and the decision to treat the same as deferred revenue only represents a management decision taken in view of the magnitude of the expenditure involved. For the purpose of allowability of any expenditure under the Act, what is material is the classification between the capital and revenue and the same-does not recognise of any concept of deferred revenue expenditure.
That is why
AO- himself allowed the amount debited in the profit and loss account. In a number of judgments viz. Amar Raja Batteries Ltd. v. ACIT [(2004) 91 ITD 280 (Hyd)j,JCIT v. Modi Olivetti Ltd. [(2005)4 SOT 859 (Delhi)], ACIT vs. Medicamen Biotech Ltd. [(2005) 1 SOT 347 (Delhi)],Hero Honda Motors Ltd. v. Joint Commissioner of Income Tax [(2005) 3 SOT 572 (Delhi)] and Charak Pharmaceuticals v. JCIT [(2005) 4SOT 393 (Mumbai)],it has been affirmed that where any expenditure is treated as a deferred revenue expenditure, it presupposes that the concerned expenditure, creating benefit is in the revenue field and is a revenue expenditure, but considering its enduring benefits as well as the fact that it does not result in the creation of any new asset or advantage of enduring nature in the capital field, the same is required to be treated distinctly from capital expenditure. However, where any identifiable capital asset, tangible or intangible comes into existence as a result of the amount expended, the same will have to be treated as a capital expenditure and depreciation allowable thereon as per the prescribed rules and procedures under the Income-tax Act.
14. To conclude, the position emerging from the above discussion can be summed up as follows:-
- the nature of the expenditure treated as a “deferred revenue expenditure” in the books needs to be properly analysed before taking a view on its allowability or otherwise under the provisions of the Act;
- where such expenditure results in the creation of any capital asset (tangible or intangible), a case can be made out to treat the same as a capital expenditure with corresponding allowability of depreciation in accordance with law;
- in cases where the nature of the revenue expenditure is such that the same can be clearly and unambiguously identified over specified future time periods (e.g. discount on issue of debentures) akin to prepaid expenses the same would be allowable over the period to which these relate proportionately, applying the matching principle.
In other cases where the same does not result in the creation of any capital asset or.where the same is not allocable over defined future time periods there .can be-no case for amortising the same under the Act over the expected period over which the benefit is likely to arise there from since in such cases the expenditure is essentially revenue in nature Out is amortised in the books only on account of some other considerations
Some Recent Imp Case Laws on Direct Tax
CCIT vs. Pampapathi
Tax deductible at source has to be excluded from tax payable while computing advance tax as
provided in section 209(1)(d), even if tax had not actually been deducted.
Dy. CIT vs. Pride Former SAS
Proceedings under section 158BD, have to be initiated within reasonable time after completion
of proceedings under section 158BC. Proceedings under section 158BD initiated beyond six
years of conclusion of proceedings under section 158BC are barred by time even though there is
satisfactory explanation for the delay.
Saroj Nursing Home vs. ACIT
Recording of satisfaction is mandatory and imperative before assumption of jurisdiction under
section 158 BD.
Manoj Aggrwal vs. Dy. CIT
It could not be said that passing of prohibitory order under sub section (3) of section 132 is in all
cases only to extend period of limitation for making assessments, without any facts and
circumstances or evidence justifying said conclusion and in bonafide case, where there is no such
attempt and prohibitory order is passed in normal course and bonafide reasons, search cannot be
deemed to have been concluded on day on which said order was passed.
Smt. Krishna Verma vs. ACIT
Business Expenditure - Education Expenses of son of Director –S. 37
Expenditure incurred on foreign education of a director who is son of director is not allowable as
deduction as the process of his admission to the foreign university had started even before he was
made a director and his appointment as a director was simply to ruse to claim deduction of said
expenditure which is personal obligation of his father and there is no nexus between the
expenditure and the business of the company.
UPS Freight Services vs. ACIT Source: www.itatonline.org
Income – Perquisite - Voluntary Gifts – S. 28(iv)
Assessee never charging any fee from his followers for attending his lectures gift of Rs
122,70,795, received by the assessee on his 80th birth day from his followers out of regard and
respect to the qualities of the assessee could not be charged to tax as "benefit" or "perquisite"
under section 28 (iv) of the Act.
Nirmala P. Athavale vs. ITO
Interest – S. 234D
Section 234 D, inserted by taxation laws (amendment) Act, 2003, w.e.f. 1st June 2003, being
substantive in nature, has no retrospective effect, hence applicable from asst year 2004-05, only.
Automated Securities vs. ITO (itatonline.org)
Profits and Gains from New Industrial Undertakings - Duty Draw Back and DEPB – S. 80 IB
Assessee, manufacturer and exporter, was entitled to deduction under section 80 IB, in respect of
duty draw back and DEPB received by it as same had a direct nexus with business of its
industrial undertaking.
Rajkumar Dugar (HUF) vs. ITO
Search and Seizure – Apportionment of Seized Assets - Cash Seized – S. 132B, 158BC (d) ,234
B & 234C
Assessee having requested the department to adjust the cash seized during the search against his
tax liability. The department has to adjust the seized amount towards the advance tax etc from
the date it was seized.
Sudhakar M. Shetty vs. ACIT
Unexplained Investment – S. 68,69, 69B
Where the assessee is not maintaining any books of account, section 68 will not be applicable,
yet cash deposit in bank should be explained by assessee under section 69 or section 69B.
Unless assessee by any clinching evidence, shows nature and source of money deposited in to
bank account, same should be added as assesses's unexplained income.
Manoj Aggrwal vs. Dy. CIT
Even when entry has been made in books of account of assessee as required by Voluntary
Disclosure of Income Scheme (VDIS) 1997, section 68 of Income Tax Act, can be invoked when
declared asset is sold later and sale proceeds are credited in books of account.
Tax deductible at source has to be excluded from tax payable while computing advance tax as
provided in section 209(1)(d), even if tax had not actually been deducted.
Dy. CIT vs. Pride Former SAS
Proceedings under section 158BD, have to be initiated within reasonable time after completion
of proceedings under section 158BC. Proceedings under section 158BD initiated beyond six
years of conclusion of proceedings under section 158BC are barred by time even though there is
satisfactory explanation for the delay.
Saroj Nursing Home vs. ACIT
Recording of satisfaction is mandatory and imperative before assumption of jurisdiction under
section 158 BD.
Manoj Aggrwal vs. Dy. CIT
It could not be said that passing of prohibitory order under sub section (3) of section 132 is in all
cases only to extend period of limitation for making assessments, without any facts and
circumstances or evidence justifying said conclusion and in bonafide case, where there is no such
attempt and prohibitory order is passed in normal course and bonafide reasons, search cannot be
deemed to have been concluded on day on which said order was passed.
Smt. Krishna Verma vs. ACIT
Business Expenditure - Education Expenses of son of Director –S. 37
Expenditure incurred on foreign education of a director who is son of director is not allowable as
deduction as the process of his admission to the foreign university had started even before he was
made a director and his appointment as a director was simply to ruse to claim deduction of said
expenditure which is personal obligation of his father and there is no nexus between the
expenditure and the business of the company.
UPS Freight Services vs. ACIT Source: www.itatonline.org
Income – Perquisite - Voluntary Gifts – S. 28(iv)
Assessee never charging any fee from his followers for attending his lectures gift of Rs
122,70,795, received by the assessee on his 80th birth day from his followers out of regard and
respect to the qualities of the assessee could not be charged to tax as "benefit" or "perquisite"
under section 28 (iv) of the Act.
Nirmala P. Athavale vs. ITO
Interest – S. 234D
Section 234 D, inserted by taxation laws (amendment) Act, 2003, w.e.f. 1st June 2003, being
substantive in nature, has no retrospective effect, hence applicable from asst year 2004-05, only.
Automated Securities vs. ITO (itatonline.org)
Profits and Gains from New Industrial Undertakings - Duty Draw Back and DEPB – S. 80 IB
Assessee, manufacturer and exporter, was entitled to deduction under section 80 IB, in respect of
duty draw back and DEPB received by it as same had a direct nexus with business of its
industrial undertaking.
Rajkumar Dugar (HUF) vs. ITO
Search and Seizure – Apportionment of Seized Assets - Cash Seized – S. 132B, 158BC (d) ,234
B & 234C
Assessee having requested the department to adjust the cash seized during the search against his
tax liability. The department has to adjust the seized amount towards the advance tax etc from
the date it was seized.
Sudhakar M. Shetty vs. ACIT
Unexplained Investment – S. 68,69, 69B
Where the assessee is not maintaining any books of account, section 68 will not be applicable,
yet cash deposit in bank should be explained by assessee under section 69 or section 69B.
Unless assessee by any clinching evidence, shows nature and source of money deposited in to
bank account, same should be added as assesses's unexplained income.
Manoj Aggrwal vs. Dy. CIT
Even when entry has been made in books of account of assessee as required by Voluntary
Disclosure of Income Scheme (VDIS) 1997, section 68 of Income Tax Act, can be invoked when
declared asset is sold later and sale proceeds are credited in books of account.
Appointment of a CS by companies- Limit increased from 2 Cr to 5 Cr
NOTIFICATION NO. G.S.R. 11 (E), DATED 5-1-2009
In exercise of the powers conferred by clauses (a) and (b) of sub-section (1) of section 642 read with clause (45) of section 2 and section 383A of the Companies Act, 1956 (1 of 1956), the Central Government hereby makes the following rules further to amend the Companies (Appointment and Qualifications of Secretary) Rules, 1988, namely :-
1. (1) These rules may be called the Companies (Appointment and Qualifications of Secretary) Amendment Rules, 2009.
(2) They shall come into force from the 15th day of March, 2009.
2. In the Companies (Appointment and Qualifications) of Secretary) Rules, 1988, in rule 2,
(i) in sub-rule (1) and in the proviso to sub-rule (4), for the words “rupees two crores” the following words shall be substituted, namely:-
“Five crore rupees”;
(ii) in sub-rule (3), the second and third proviso shall be omitted;
(iii) after sub-rule (3), the following sub-rule shall be inserted, namely:-
“(3A) A company having a paid up share capital of two crore rupees or more but less than five crore rupees may appoint any individual who possesses the qualification of membership of the Institute of Company Secretaries of India constituted under the Company Secretaries Act, 1980
(56 of 1980), as a whole-time secretary to perform the duties of a secretary under the Companies Act, 1956:
Provided that where a company has appointed under sub-rule (3) or this sub-rule, a whole-time company secretary, possessing the qualification of membership of the Institute of Company Secretaries of India, such a company is not required to obtain a certificate from a secretary in
whole-time practice under rule 3 of the Companies (Compliance Certificate) Rules, 2001.”
In exercise of the powers conferred by clauses (a) and (b) of sub-section (1) of section 642 read with clause (45) of section 2 and section 383A of the Companies Act, 1956 (1 of 1956), the Central Government hereby makes the following rules further to amend the Companies (Appointment and Qualifications of Secretary) Rules, 1988, namely :-
1. (1) These rules may be called the Companies (Appointment and Qualifications of Secretary) Amendment Rules, 2009.
(2) They shall come into force from the 15th day of March, 2009.
2. In the Companies (Appointment and Qualifications) of Secretary) Rules, 1988, in rule 2,
(i) in sub-rule (1) and in the proviso to sub-rule (4), for the words “rupees two crores” the following words shall be substituted, namely:-
“Five crore rupees”;
(ii) in sub-rule (3), the second and third proviso shall be omitted;
(iii) after sub-rule (3), the following sub-rule shall be inserted, namely:-
“(3A) A company having a paid up share capital of two crore rupees or more but less than five crore rupees may appoint any individual who possesses the qualification of membership of the Institute of Company Secretaries of India constituted under the Company Secretaries Act, 1980
(56 of 1980), as a whole-time secretary to perform the duties of a secretary under the Companies Act, 1956:
Provided that where a company has appointed under sub-rule (3) or this sub-rule, a whole-time company secretary, possessing the qualification of membership of the Institute of Company Secretaries of India, such a company is not required to obtain a certificate from a secretary in
whole-time practice under rule 3 of the Companies (Compliance Certificate) Rules, 2001.”
Wednesday, January 7, 2009
Notification No.33/2008 ST dt 7th December, 2008.
A. Certain conditions for refund of service tax by exporter of goods under
Notification No 41/2007 ST Dt. 6th October, 2007 relaxed vide Notification No.
33/2008 ST dt 7th December, 2008.
• Earlier refund of service tax on specified services was available to exporter, only if he had
exported the goods without availing the duty drawback of service tax. Now this condition
has been omitted.
• Refund of service tax under Business Auxiliary Service was restricted to lesser of the
Following
o actual amount of service tax paid or
o service tax calculated on 2% of FOB value of export goods
Now this limit has been increased to 10% of FOB value of export goods
• Refund of Clearing and Forwarding services used in relation to export of goods are also
eligible for refund provided invoice issued by clearing and forwarding agent contains
following additional detail
o number and date of shipping bill,
o description of export goods,
o number and date of the invoice issued by the exporter relating to export goods,
o details of all the charges, whether or not reimbursable, collected by the clearing and
forwarding agent from the exporter in relation to export goods.
B. Clarifications vide circular No. 106/9/2008 ST dt. 11th December, 2008 in
respect of refund claimed by exporter in Notification No. 41/2007 (supra):
• It has been clarified that invoice of the input service provider shall contain all the details as
given in Rule 4A of the service tax Rules, 1994. Refund claim cannot be allowed on the
basis of invoices not having complete details. In view of the above clarification it is in the
interest of the exporter to verify the invoice of the input service provider before releasing
payment and ensure that it shall contain following details.
o The name, address and the registration number of such person;
o The name and address of the person receiving such taxable service;
o Description, classification and value of taxable service provided and
o The service tax payable thereon.
Exporter has to furnish undertaking that the service tax, for which refund has been
claimed, has been paid.
• Further instruction has been issued by CBEC that, 80% of the refund amount due is to be
sanctioned as adhoc interim refund to following category of exports having good track
record, within 15 days of filing of a refund claim, if that refund claim is complete and
contains the requisite documents:
o all exporters having export turnover of more than Rs 5 crore in the current or preceding
financial year;
o PSUs including PSUs of State Governments;
o Star Export Houses as specified under Chapter 3.5 of the Foreign Trade Policy, 2004-2009;
o Manufacturer-exporters registered with Central Excise who have been exporting
during the previous two financial years and have minimum export of Rs. 1 crore or
more during the preceding financial year.
o exporters registered with service tax or central excise who have paid central excise
duty and/or service tax amounting to Rs. 1 crore or more during the preceding financial
year;
o All Export Oriented Units.
In view of the above clarification and notification claiming of refund of service tax by exporters
Under Notification 41/2007 ST becomes simpler and faster.
Notification No 41/2007 ST Dt. 6th October, 2007 relaxed vide Notification No.
33/2008 ST dt 7th December, 2008.
• Earlier refund of service tax on specified services was available to exporter, only if he had
exported the goods without availing the duty drawback of service tax. Now this condition
has been omitted.
• Refund of service tax under Business Auxiliary Service was restricted to lesser of the
Following
o actual amount of service tax paid or
o service tax calculated on 2% of FOB value of export goods
Now this limit has been increased to 10% of FOB value of export goods
• Refund of Clearing and Forwarding services used in relation to export of goods are also
eligible for refund provided invoice issued by clearing and forwarding agent contains
following additional detail
o number and date of shipping bill,
o description of export goods,
o number and date of the invoice issued by the exporter relating to export goods,
o details of all the charges, whether or not reimbursable, collected by the clearing and
forwarding agent from the exporter in relation to export goods.
B. Clarifications vide circular No. 106/9/2008 ST dt. 11th December, 2008 in
respect of refund claimed by exporter in Notification No. 41/2007 (supra):
• It has been clarified that invoice of the input service provider shall contain all the details as
given in Rule 4A of the service tax Rules, 1994. Refund claim cannot be allowed on the
basis of invoices not having complete details. In view of the above clarification it is in the
interest of the exporter to verify the invoice of the input service provider before releasing
payment and ensure that it shall contain following details.
o The name, address and the registration number of such person;
o The name and address of the person receiving such taxable service;
o Description, classification and value of taxable service provided and
o The service tax payable thereon.
Exporter has to furnish undertaking that the service tax, for which refund has been
claimed, has been paid.
• Further instruction has been issued by CBEC that, 80% of the refund amount due is to be
sanctioned as adhoc interim refund to following category of exports having good track
record, within 15 days of filing of a refund claim, if that refund claim is complete and
contains the requisite documents:
o all exporters having export turnover of more than Rs 5 crore in the current or preceding
financial year;
o PSUs including PSUs of State Governments;
o Star Export Houses as specified under Chapter 3.5 of the Foreign Trade Policy, 2004-2009;
o Manufacturer-exporters registered with Central Excise who have been exporting
during the previous two financial years and have minimum export of Rs. 1 crore or
more during the preceding financial year.
o exporters registered with service tax or central excise who have paid central excise
duty and/or service tax amounting to Rs. 1 crore or more during the preceding financial
year;
o All Export Oriented Units.
In view of the above clarification and notification claiming of refund of service tax by exporters
Under Notification 41/2007 ST becomes simpler and faster.
INVESTMENT PROOF FOR TDS CALCULATION
INVESTMENT PROOF FOR TDS CALCULATION
TDS on salaries is calculated based on intent to investment declaration generally called as
“Investment Declaration” given by the employees at the beginning of the year and as revised
from time to time. However, most of the employers ask for actual proof of investment from
January, so that correct TDS can be calculated and the effect on TDS because of Declaration is
removed.
Following guidelines can be kept in mind for submitting proofs
House Rent Allowance
• The least of the following amount is exempt from income tax
o Actual HRA earned for the year
o Rent paid minus 10% of Basic + D.A.
o 40% of Basic + D.A. or 50% of Basic + D.A. (in case of Metro cities)
• Proof: Proof of occupation of the rented house for the period when the house is occupied.
Original monthly rent receipts from April 2008 till Jan 2009, and for Feb 2009 and March
2009, the original receipt to be given in respective months.
80D Medical Insurance
• Maximum deduction allowed is limited to Rs.15000 in case of Individual, Spouse &
Children
• Additional benefit of 15000 in case of mediclaim premium paid for policy of parents below
65 years and Rs. 20000 in case of parents above 65 years
• Proof: Photocopy of receipt issued by the Insurance Company. Receipts should be paid in
the current year only Policy can be in the name of individual, spouse, children or
dependant parents.
80E Interest on Education Loan
• Loan taken for pursuing higher education such as MBA, Engineering etc by employee /
children.
• Loan availed from banks or financial institution
• Actual interest paid by the employee is allowed as deduction, there is no limit for this
deduction.
• Interest paid for first 8 years only is eligible for deduction.
• Proof: Certificate from the Bank / Financial Institution specifying the following:
o The loan is an Educational Loan.
o Amount of Interest paid on the loan in the current year
Interest on Home Loan
• Loan taken on self occupied house property; Maximum Amount of deduction allowed is
Payment of Interest of Rs. 1,50,000.
• Loan taken on Let out Property No limit on Interest. Income from such property is also to
be considered.
• The benefit of deduction is applicable only after occupancy of the house and Pre-EMI
interest (EMI paid before occupation of the house) is deductible in 5 equal installments
starting from the year when the construction is completed or property is acquired.
• In case of jointly availed property loan, the employee to declare only the amount paid by
him/her.
• In case of self-occupied property, employee cannot claim both HRA exemption as well as
Loss from house property where the property is in the same city.
• Proof: Provisional certificate from the Housing Finance Company / Bank stating the
Following.
o The Amount of Interest to be paid during the Financial Year
o The Amount of Pre-EMI Interest paid
Section 80C deductions
• Maximum Deduction allowed is Rs.1.00 Lakh
• The investment proofs must be paid in the current financial year only
80CCC (Pension Policy)
• Policy from any approved company by IRDA.
• Late payment fees will not be considered as premium paid.
• Policy should be in the name of individual, spouse and children
• Proofs: Photocopy of all premium receipt issued by the Insurance Company
Life Insurance Premium
• Policy from any approved company by IRDA.
• Late payment fees will not be considered as premium paid.
• Policy should be in the name of individual, spouse and children
• Proof: Photocopy of all premium receipt issued by the Insurance Company
Public Provident Fund
• Provident fund can be in the name of individual, spouse and children.
• Maximum contribution allowed under this scheme is Rs. 70,000/-
• Proof: Photocopy of stamped challan or PPF passbook proving investment made
NSC Interest
• NSC interest declared will also be accounted as “Other Income” and taxed.
• Proof: Photocopy of all the certificates for which interest is being claimed and Calculation
of Interest
Fixed Deposit in a Scheduled Bank
• Term deposits for a minimum period of 5 years with a scheduled bank
• Proof: Photocopy of the Receipt/certificate issued by the scheduled bank
ULIP, Mutual Funds / ELSS, Infrastructure Bond, NSC, Postal Deposits
• Proof: Copies of Receipts / Statements / Bonds / Certificates issued by respective
authority / company proving investment made in the current year
Children Education fees
• Only amount mentioned as 'Tuition Fee' in the fee receipt will be considered for deduction.
• Receipts should be of the current year only (Apr'08Mar'09).
• Proof: Receipts issued by the school, college, university or educational institution.
Deposit under Senior Citizens Saving Scheme
• Amount deposited under senior citizen saving scheme only will be considered.
• Proof: Copy of Receipts of amount deposited proving the investment made in the current
year only
Five Yr Time Deposit Scheme in Post Office
• Time deposit for a period of 5 years with a post office is eligible for deduction.
• Proof: Copy of the Receipt/certificate issued by the Post office to be submitted
Housing Principal Repayment and Registration / Stamp Duty Payment
• Proof: Provisional Certificate from the Financial Institution/Bank stating the amount of
Principal Repayment.
• Photocopy of Sale Deed and Stamp Duty Paid Receipt to be attached
Other Points
• For systematic investment plans (SIP) in equity linked savings schemes, attach a
photocopy of the last statement
• A clear demarcation should be made between “investments made” and “investments to be
made.”
• Some investments are to be made at regular intervals e.g. Monthly payment life insurance
premium and SIPs. It is advisable to attach photocopies of the premium receipts you have
paid in March of the previous year to convince your finance & accounts department. While
attaching photocopies, mark forthcoming payments as 'investments to be made'.
• Remember to include details of medical insurance premium paid through credit card.
TDS on salaries is calculated based on intent to investment declaration generally called as
“Investment Declaration” given by the employees at the beginning of the year and as revised
from time to time. However, most of the employers ask for actual proof of investment from
January, so that correct TDS can be calculated and the effect on TDS because of Declaration is
removed.
Following guidelines can be kept in mind for submitting proofs
House Rent Allowance
• The least of the following amount is exempt from income tax
o Actual HRA earned for the year
o Rent paid minus 10% of Basic + D.A.
o 40% of Basic + D.A. or 50% of Basic + D.A. (in case of Metro cities)
• Proof: Proof of occupation of the rented house for the period when the house is occupied.
Original monthly rent receipts from April 2008 till Jan 2009, and for Feb 2009 and March
2009, the original receipt to be given in respective months.
80D Medical Insurance
• Maximum deduction allowed is limited to Rs.15000 in case of Individual, Spouse &
Children
• Additional benefit of 15000 in case of mediclaim premium paid for policy of parents below
65 years and Rs. 20000 in case of parents above 65 years
• Proof: Photocopy of receipt issued by the Insurance Company. Receipts should be paid in
the current year only Policy can be in the name of individual, spouse, children or
dependant parents.
80E Interest on Education Loan
• Loan taken for pursuing higher education such as MBA, Engineering etc by employee /
children.
• Loan availed from banks or financial institution
• Actual interest paid by the employee is allowed as deduction, there is no limit for this
deduction.
• Interest paid for first 8 years only is eligible for deduction.
• Proof: Certificate from the Bank / Financial Institution specifying the following:
o The loan is an Educational Loan.
o Amount of Interest paid on the loan in the current year
Interest on Home Loan
• Loan taken on self occupied house property; Maximum Amount of deduction allowed is
Payment of Interest of Rs. 1,50,000.
• Loan taken on Let out Property No limit on Interest. Income from such property is also to
be considered.
• The benefit of deduction is applicable only after occupancy of the house and Pre-EMI
interest (EMI paid before occupation of the house) is deductible in 5 equal installments
starting from the year when the construction is completed or property is acquired.
• In case of jointly availed property loan, the employee to declare only the amount paid by
him/her.
• In case of self-occupied property, employee cannot claim both HRA exemption as well as
Loss from house property where the property is in the same city.
• Proof: Provisional certificate from the Housing Finance Company / Bank stating the
Following.
o The Amount of Interest to be paid during the Financial Year
o The Amount of Pre-EMI Interest paid
Section 80C deductions
• Maximum Deduction allowed is Rs.1.00 Lakh
• The investment proofs must be paid in the current financial year only
80CCC (Pension Policy)
• Policy from any approved company by IRDA.
• Late payment fees will not be considered as premium paid.
• Policy should be in the name of individual, spouse and children
• Proofs: Photocopy of all premium receipt issued by the Insurance Company
Life Insurance Premium
• Policy from any approved company by IRDA.
• Late payment fees will not be considered as premium paid.
• Policy should be in the name of individual, spouse and children
• Proof: Photocopy of all premium receipt issued by the Insurance Company
Public Provident Fund
• Provident fund can be in the name of individual, spouse and children.
• Maximum contribution allowed under this scheme is Rs. 70,000/-
• Proof: Photocopy of stamped challan or PPF passbook proving investment made
NSC Interest
• NSC interest declared will also be accounted as “Other Income” and taxed.
• Proof: Photocopy of all the certificates for which interest is being claimed and Calculation
of Interest
Fixed Deposit in a Scheduled Bank
• Term deposits for a minimum period of 5 years with a scheduled bank
• Proof: Photocopy of the Receipt/certificate issued by the scheduled bank
ULIP, Mutual Funds / ELSS, Infrastructure Bond, NSC, Postal Deposits
• Proof: Copies of Receipts / Statements / Bonds / Certificates issued by respective
authority / company proving investment made in the current year
Children Education fees
• Only amount mentioned as 'Tuition Fee' in the fee receipt will be considered for deduction.
• Receipts should be of the current year only (Apr'08Mar'09).
• Proof: Receipts issued by the school, college, university or educational institution.
Deposit under Senior Citizens Saving Scheme
• Amount deposited under senior citizen saving scheme only will be considered.
• Proof: Copy of Receipts of amount deposited proving the investment made in the current
year only
Five Yr Time Deposit Scheme in Post Office
• Time deposit for a period of 5 years with a post office is eligible for deduction.
• Proof: Copy of the Receipt/certificate issued by the Post office to be submitted
Housing Principal Repayment and Registration / Stamp Duty Payment
• Proof: Provisional Certificate from the Financial Institution/Bank stating the amount of
Principal Repayment.
• Photocopy of Sale Deed and Stamp Duty Paid Receipt to be attached
Other Points
• For systematic investment plans (SIP) in equity linked savings schemes, attach a
photocopy of the last statement
• A clear demarcation should be made between “investments made” and “investments to be
made.”
• Some investments are to be made at regular intervals e.g. Monthly payment life insurance
premium and SIPs. It is advisable to attach photocopies of the premium receipts you have
paid in March of the previous year to convince your finance & accounts department. While
attaching photocopies, mark forthcoming payments as 'investments to be made'.
• Remember to include details of medical insurance premium paid through credit card.
Futures Contract
Futures Contract
A futures contract is a contract, traded on a futures exchange, to buy or sell a standardized quantity of a specified commodity of standardized quality at a certain date in the future, at a price (futures price) determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders on the exchange at the time of the purchase or sale of the contract. The future date is called the delivery date or final settlement date. The official price of the futures contract at the end of a day's trading session on the exchange is called the settlement price for that day of business on the exchange.
Characterstics of Future Contract
Future contracts are organized / standardized contracts, which are traded on the exchanges.
These contracts, are standardized by the exchanges are very liquid in nature.
In futures market, clearing corporation/ house provides the settlement guarantee.
Counter party risk exists, but is assumed by the Clearing House reducing the risk to almost nil.
Very high Liquidity as contracts are standardized contracts.
Where a forward contract can only be reversed with the same counter party with whom it was entered into, a futures contract can be reversed with any member of the exchange.
Standardization
Futures contracts ensure their liquidity by being highly standardized, usually by specifying:
The underlying asset or instrument which could be anything from a barrel of crude oil to a short term interest rate.
The type of settlement, either cash settlement or physical settlement.
The amount and units of the underlying asset per contract, which can be the notional amount of bonds, a fixed number of barrels of oil, units of foreign currency, the notional amount of the deposit over which the short term interest rate is traded, etc.
The currency in which the futures contract is quoted.
The delivery month.
The last trading date.
Margin of Future Contracts
Futures margin rates are set by the futures exchanges and some brokerages will add an extra premium to the exchange minimum rate in order to lower their risk exposure. Margin is set based on risk. The larger dollar value moves that a futures market makes, the higher margin rates can be expected
Initial margin Initial Futures Margin: It is a security deposit to ensure that traders have sufficient funds to meet any potential loss from a trade. If a position involves an exchange-traded product, the amount or percentage of initial margin is set by the exchange concerned. In case of loss or if the value of the initial margin is being eroded, the broker will make a margin call in order to restore the amount of initial margin available. Often referred to as “variation margin”, margin called for this reason is usually done on a daily basis, however, in times of high volatility a broker can make a margin call or calls intra-day. Calls for margin are usually expected to be paid and received on the same day. If not, the broker has the right to close sufficient positions to meet the amount called by way of margin. After the position is closed-out the client is liable for any resulting deficit in the client’s account
Maintenance margin: A set minimum margin per outstanding futures contract that a customer must maintain in his margin account.
· Margin-equity ratio is a term used by speculators, representing the amount of their trading capital that is being held as margin at any particular time. The low margin requirements of futures results in substantial leverage of the investment. However, the exchanges require a minimum amount that varies depending on the contract and the trader. The broker may set the requirement higher, but may not set it lower. A trader, of course, can set it above that, if he doesn't want to be subject to margin calls.
Performance bond margin: The amount of money deposited by both a buyer and seller of a futures contract or an options seller to ensure performance of the term of the contract. Margin in commodities is not a payment of equity or down payment on the commodity itself, but rather it is a security deposit.
Settlement of the Future Contracts
Settlement is the act of consummating the contract, and can be done in one of two ways, as specified per type of futures contract:
Physical delivery - the amount specified of the underlying asset of the contract is delivered by the seller of the contract to the exchange, and by the exchange to the buyers of the contract. Physical delivery is common with commodities and bonds. The Nymex crude futures contract uses this method of settlement upon expiration.
Cash settlement - a cash payment is made based on the underlying reference rate, such as a short term interest rate index such as Euribor, or the closing value of a stock market index. A futures contract might also opt to settle against an index based on trade in a related spot market. Ice Brent futures use this method.
Expiry of the Contract
Expiry is the time and the day that a particular delivery month of a futures contract stops trading and the final settlement price for that contract month and year obtains.
Futures contracts and exchanges
There are many different kinds of futures contracts, reflecting the many different kinds of tradable assets of which they are derivatives. Following is the list of of tradable commodities futures contracts, see List of traded commodities.
Foreign exchange market
Money market
Bond market
Equity index market
Commodities Market
Index Futures: Index futures are the future contracts for which underlying is the cash market index. For example: BSE may launch a future contract on "BSE Sensitive Index" and NSE may launch a future contract on "S&P CNX NIFTY".
Frequently used terms in Index Futures market: -
Contract Size - is the value of the contract at a specific level of Index. It is Index level * Multiplier.
Multiplier - It is a pre-determined value, used to arrive at the contract size. It is the price per index point.
Tick Size - It is the minimum price difference between two quotes of similar nature.
Contract Month - is the month in which the contract will expire.
Expiry Day - is the last day on which the contract is available for trading.
Open interest - it's the total outstanding long or short positions in the market at any specific point in time. As total long positions for market would be equal to total short positions, for calculation of open Interest, only one side of the contracts is counted.
Volume - Number of contracts traded during a specific period of time - During a day, during a week or during a month.
Long position - Outstanding/unsettled purchase position at any point of time.
Short position - Outstanding/ unsettled sales position at any point of time.
Open position - is the outstanding/unsettled long or short position at any point of time.
Physical delivery - Open position at the expiry of the contract is settled through delivery of the underlying. In futures market, delivery is low.
Cash settlement - Open position at the expiry of the contract is settled in cash. These contracts are designated as cash settled contracts. Index Futures fall in this category.
Alternative Delivery Procedure (ADP) - Open position at the expiry of the contract is settled by two parties - one buyer and one seller, at the terms other than defined by the exchange. World wide a significant portion of the energy and energy related contracts (crude oil, heating and gasoline oil) are settled through Alternative Delivery Procedure.
Equity futures are futures on stock market indices. The biggest equity markets include the Dow Jones Industrial index, S&P 500 and the FTSE100 in the UK. Trading Index futures is an ideal way to speculate on price movements of the big indices without having to physically own the shares. One advantage that makes equity index future trading appealing is the fact that these contracts typically have a low margin requirement.
Dow Jones Index
Dow Jones Futures: Dow Jones Futures are futures contracts on the Dow Jones Industrial Index. The Dow is made up of the biggest companies across nine industries.
Dow Futures Contract: A standard Dow contract is 10 times the index value. For example if the index is priced at 13,000 points, the contract will be for $130,000. There are also mini sized Dow futures (also known as Dow emini). These contracts are half the size of the standard contracts. The Symbol for Dow contracts is ZD. The mini Dow contract symbol is YM.
FTSE Index
FTSE Futures : FTSE Futures are contracts on Britain’s top 100 companies.
FTSE Contracts: FTSE 100 Index futures are priced at 10x the FTSE price. For example if the FTSE is priced at 6,000, the contract will be £60,000.The FTSE 100 futures contract symbol is LFX.
NASDAQ Index
NASDAQ Futures: NASDAQ Futures are futures contracts on the NASDAQ 100 index. The NASDAQ contains companies both in and out of the United States. The index is tech heavy and does not include financial companies.
NASDAQ Futures Contract: One contract is 100 times the price of the index. For example if the NASDAQ was priced at 2,500 points, a standard contract would be worth $250,000. There are also mini NASDAQ contracts that are half of this value. The requirements for the mini contract are half of this. The symbol standard NASDAQ contract is ND and NQ for the mini contract.
S & P 500 Index
S&P 500 Futures : The S&P 500 consists of 500 large cap stocks. The vast majority of these are companies based in the United States.
S & P 500 Futures Contract: The SP 500 contract is 250 times the price of the index. For example if the S&P 500 is currently priced at 1,500 points, the contract will be $375,000. This is too high for many traders. There is also a mini contract. The mini contract is 5 times smaller than the standard contract. The symbol for the standard contract is SP
A futures contract is a contract, traded on a futures exchange, to buy or sell a standardized quantity of a specified commodity of standardized quality at a certain date in the future, at a price (futures price) determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders on the exchange at the time of the purchase or sale of the contract. The future date is called the delivery date or final settlement date. The official price of the futures contract at the end of a day's trading session on the exchange is called the settlement price for that day of business on the exchange.
Characterstics of Future Contract
Future contracts are organized / standardized contracts, which are traded on the exchanges.
These contracts, are standardized by the exchanges are very liquid in nature.
In futures market, clearing corporation/ house provides the settlement guarantee.
Counter party risk exists, but is assumed by the Clearing House reducing the risk to almost nil.
Very high Liquidity as contracts are standardized contracts.
Where a forward contract can only be reversed with the same counter party with whom it was entered into, a futures contract can be reversed with any member of the exchange.
Standardization
Futures contracts ensure their liquidity by being highly standardized, usually by specifying:
The underlying asset or instrument which could be anything from a barrel of crude oil to a short term interest rate.
The type of settlement, either cash settlement or physical settlement.
The amount and units of the underlying asset per contract, which can be the notional amount of bonds, a fixed number of barrels of oil, units of foreign currency, the notional amount of the deposit over which the short term interest rate is traded, etc.
The currency in which the futures contract is quoted.
The delivery month.
The last trading date.
Margin of Future Contracts
Futures margin rates are set by the futures exchanges and some brokerages will add an extra premium to the exchange minimum rate in order to lower their risk exposure. Margin is set based on risk. The larger dollar value moves that a futures market makes, the higher margin rates can be expected
Initial margin Initial Futures Margin: It is a security deposit to ensure that traders have sufficient funds to meet any potential loss from a trade. If a position involves an exchange-traded product, the amount or percentage of initial margin is set by the exchange concerned. In case of loss or if the value of the initial margin is being eroded, the broker will make a margin call in order to restore the amount of initial margin available. Often referred to as “variation margin”, margin called for this reason is usually done on a daily basis, however, in times of high volatility a broker can make a margin call or calls intra-day. Calls for margin are usually expected to be paid and received on the same day. If not, the broker has the right to close sufficient positions to meet the amount called by way of margin. After the position is closed-out the client is liable for any resulting deficit in the client’s account
Maintenance margin: A set minimum margin per outstanding futures contract that a customer must maintain in his margin account.
· Margin-equity ratio is a term used by speculators, representing the amount of their trading capital that is being held as margin at any particular time. The low margin requirements of futures results in substantial leverage of the investment. However, the exchanges require a minimum amount that varies depending on the contract and the trader. The broker may set the requirement higher, but may not set it lower. A trader, of course, can set it above that, if he doesn't want to be subject to margin calls.
Performance bond margin: The amount of money deposited by both a buyer and seller of a futures contract or an options seller to ensure performance of the term of the contract. Margin in commodities is not a payment of equity or down payment on the commodity itself, but rather it is a security deposit.
Settlement of the Future Contracts
Settlement is the act of consummating the contract, and can be done in one of two ways, as specified per type of futures contract:
Physical delivery - the amount specified of the underlying asset of the contract is delivered by the seller of the contract to the exchange, and by the exchange to the buyers of the contract. Physical delivery is common with commodities and bonds. The Nymex crude futures contract uses this method of settlement upon expiration.
Cash settlement - a cash payment is made based on the underlying reference rate, such as a short term interest rate index such as Euribor, or the closing value of a stock market index. A futures contract might also opt to settle against an index based on trade in a related spot market. Ice Brent futures use this method.
Expiry of the Contract
Expiry is the time and the day that a particular delivery month of a futures contract stops trading and the final settlement price for that contract month and year obtains.
Futures contracts and exchanges
There are many different kinds of futures contracts, reflecting the many different kinds of tradable assets of which they are derivatives. Following is the list of of tradable commodities futures contracts, see List of traded commodities.
Foreign exchange market
Money market
Bond market
Equity index market
Commodities Market
Index Futures: Index futures are the future contracts for which underlying is the cash market index. For example: BSE may launch a future contract on "BSE Sensitive Index" and NSE may launch a future contract on "S&P CNX NIFTY".
Frequently used terms in Index Futures market: -
Contract Size - is the value of the contract at a specific level of Index. It is Index level * Multiplier.
Multiplier - It is a pre-determined value, used to arrive at the contract size. It is the price per index point.
Tick Size - It is the minimum price difference between two quotes of similar nature.
Contract Month - is the month in which the contract will expire.
Expiry Day - is the last day on which the contract is available for trading.
Open interest - it's the total outstanding long or short positions in the market at any specific point in time. As total long positions for market would be equal to total short positions, for calculation of open Interest, only one side of the contracts is counted.
Volume - Number of contracts traded during a specific period of time - During a day, during a week or during a month.
Long position - Outstanding/unsettled purchase position at any point of time.
Short position - Outstanding/ unsettled sales position at any point of time.
Open position - is the outstanding/unsettled long or short position at any point of time.
Physical delivery - Open position at the expiry of the contract is settled through delivery of the underlying. In futures market, delivery is low.
Cash settlement - Open position at the expiry of the contract is settled in cash. These contracts are designated as cash settled contracts. Index Futures fall in this category.
Alternative Delivery Procedure (ADP) - Open position at the expiry of the contract is settled by two parties - one buyer and one seller, at the terms other than defined by the exchange. World wide a significant portion of the energy and energy related contracts (crude oil, heating and gasoline oil) are settled through Alternative Delivery Procedure.
Equity futures are futures on stock market indices. The biggest equity markets include the Dow Jones Industrial index, S&P 500 and the FTSE100 in the UK. Trading Index futures is an ideal way to speculate on price movements of the big indices without having to physically own the shares. One advantage that makes equity index future trading appealing is the fact that these contracts typically have a low margin requirement.
Dow Jones Index
Dow Jones Futures: Dow Jones Futures are futures contracts on the Dow Jones Industrial Index. The Dow is made up of the biggest companies across nine industries.
Dow Futures Contract: A standard Dow contract is 10 times the index value. For example if the index is priced at 13,000 points, the contract will be for $130,000. There are also mini sized Dow futures (also known as Dow emini). These contracts are half the size of the standard contracts. The Symbol for Dow contracts is ZD. The mini Dow contract symbol is YM.
FTSE Index
FTSE Futures : FTSE Futures are contracts on Britain’s top 100 companies.
FTSE Contracts: FTSE 100 Index futures are priced at 10x the FTSE price. For example if the FTSE is priced at 6,000, the contract will be £60,000.The FTSE 100 futures contract symbol is LFX.
NASDAQ Index
NASDAQ Futures: NASDAQ Futures are futures contracts on the NASDAQ 100 index. The NASDAQ contains companies both in and out of the United States. The index is tech heavy and does not include financial companies.
NASDAQ Futures Contract: One contract is 100 times the price of the index. For example if the NASDAQ was priced at 2,500 points, a standard contract would be worth $250,000. There are also mini NASDAQ contracts that are half of this value. The requirements for the mini contract are half of this. The symbol standard NASDAQ contract is ND and NQ for the mini contract.
S & P 500 Index
S&P 500 Futures : The S&P 500 consists of 500 large cap stocks. The vast majority of these are companies based in the United States.
S & P 500 Futures Contract: The SP 500 contract is 250 times the price of the index. For example if the S&P 500 is currently priced at 1,500 points, the contract will be $375,000. This is too high for many traders. There is also a mini contract. The mini contract is 5 times smaller than the standard contract. The symbol for the standard contract is SP
No penal action on e-Returns with date stamp of 1st October 2008
No penal action on e-Returns with date stamp of 1st October 2008
PIB Release BSC/SS/GN-338 Dated 22-12-2008
CBDT has ordered that any return of income for the assessment year 2008-09 filed electronically on 30th September 2008, in respect f which the electronic acknowledgement bears the date stamp of 1st October 2008, shall be treated as having been filed within the due date, i.e. 30th September 2008.
Accordingly, such returns of income shall be eligible for all benefits of filing of tax returns by the due date and no penal consequence shall be attracted for failure to file the return by the due date.
Comments
Over 2.56 Lakh returns were received on the last date . Out of this 13437 returns were filed between 11 Pm and 12 mid night. However, this release now clarifies that even if the date stamp is 1st October ,these will be treated as being submitted on 30th September 2008
PIB Release BSC/SS/GN-338 Dated 22-12-2008
CBDT has ordered that any return of income for the assessment year 2008-09 filed electronically on 30th September 2008, in respect f which the electronic acknowledgement bears the date stamp of 1st October 2008, shall be treated as having been filed within the due date, i.e. 30th September 2008.
Accordingly, such returns of income shall be eligible for all benefits of filing of tax returns by the due date and no penal consequence shall be attracted for failure to file the return by the due date.
Comments
Over 2.56 Lakh returns were received on the last date . Out of this 13437 returns were filed between 11 Pm and 12 mid night. However, this release now clarifies that even if the date stamp is 1st October ,these will be treated as being submitted on 30th September 2008
Notification No. 3/2009, dated 5.1.2009 and Notification No. 2/2009, dated 5.1.2009
Notification No. 2/2009, dated 5.1.2009
Additional statement to be furnished for approval u/s 35
The Government has amended Rules 5D and 5E pertaining to conditions for approval to a scientific research association u/s 35(1)(ii) or to a university, college or other institution u/s 35(1)(ii)/(iii), to provide that such association shall, by the due date of furnishing the return of income u/s 139(1), furnish a statement to CIT/DIT containing (i) a detailed note on the research work undertaken by it during the previous year; (ii) a summary of research articles published in national or international journals during the year; (iii) any patent or other similar rights applied for or registered during the year; (iv) programme of research projects to be undertaken during the forthcoming year and the financial allocation for such programme.
Notification No. 3/2009, dated 5.1.2009
Government notifies NHB Deposit Scheme u/s 80C
The Government has notified that subscription to National Housing Bank (Tax Saving) Term Deposit Scheme, 2008 shall qualify for deduction under section 80C.
Additional statement to be furnished for approval u/s 35
The Government has amended Rules 5D and 5E pertaining to conditions for approval to a scientific research association u/s 35(1)(ii) or to a university, college or other institution u/s 35(1)(ii)/(iii), to provide that such association shall, by the due date of furnishing the return of income u/s 139(1), furnish a statement to CIT/DIT containing (i) a detailed note on the research work undertaken by it during the previous year; (ii) a summary of research articles published in national or international journals during the year; (iii) any patent or other similar rights applied for or registered during the year; (iv) programme of research projects to be undertaken during the forthcoming year and the financial allocation for such programme.
Notification No. 3/2009, dated 5.1.2009
Government notifies NHB Deposit Scheme u/s 80C
The Government has notified that subscription to National Housing Bank (Tax Saving) Term Deposit Scheme, 2008 shall qualify for deduction under section 80C.
Notification No. 1/2009, dated 5.1.2009
Government notifies conditions for pre-paid meal cards for the purpose of FBT
As per section 115WB(2)(B)(iii), inserted from the assessment year 2009-10, hospitality expenditure for the purpose of levy of FBT, does not include any expenditure on or payment through non-transferable pre-paid electronic meal card usable only at eating joints or outlets and which fulfils other prescribed conditions. CBDT has now notified Rule 40E prescribing such conditions. Following conditions have been prescribed:
(i) The card shall be granted by the employer to its employees under a scheme framed by the employer specifying therein the circumstances under which the meal card can be used by the employee.
(ii) The card shall be issued by the issuing bank.
(iii) An employee shall not be issued more than one card.
(iv) The card shall bear the name of the employer along with the name, photograph and signature of the employee to whom the card is issued.
(v) The card shall be used only by the employee to whom the card is issued.
(vi) The card shall be used by the employee only for the purpose of purchasing ready to eat food or non-alcoholic beverage from a member establishment.
(vii) The aggregate amount of ready to eat food or non-alcoholic beverage purchased during a day by an employee shall not exceed one hundred rupees.
(viii) The details of each transaction of purchases made by the employee against the card shall be maintained by the employer and the member establishment in such manner and for such period as is required under the Act for any other similar transaction
As per section 115WB(2)(B)(iii), inserted from the assessment year 2009-10, hospitality expenditure for the purpose of levy of FBT, does not include any expenditure on or payment through non-transferable pre-paid electronic meal card usable only at eating joints or outlets and which fulfils other prescribed conditions. CBDT has now notified Rule 40E prescribing such conditions. Following conditions have been prescribed:
(i) The card shall be granted by the employer to its employees under a scheme framed by the employer specifying therein the circumstances under which the meal card can be used by the employee.
(ii) The card shall be issued by the issuing bank.
(iii) An employee shall not be issued more than one card.
(iv) The card shall bear the name of the employer along with the name, photograph and signature of the employee to whom the card is issued.
(v) The card shall be used only by the employee to whom the card is issued.
(vi) The card shall be used by the employee only for the purpose of purchasing ready to eat food or non-alcoholic beverage from a member establishment.
(vii) The aggregate amount of ready to eat food or non-alcoholic beverage purchased during a day by an employee shall not exceed one hundred rupees.
(viii) The details of each transaction of purchases made by the employee against the card shall be maintained by the employer and the member establishment in such manner and for such period as is required under the Act for any other similar transaction
Wednesday, November 19, 2008
Repo (Repurchase Options)
Repo (Repurchase Options)
(Concept , Impact Analysis on Economy & Trends)
Technical Definition :
Repo is a financial agreement used primarily in the government securities dealt in money market or capital market whereby a dealer or other holder of such government securities sells the securities and agrees to re-purchase them at an agreed future date at an agreed price which will provide the lender with an extremely low risk return.
Reverse Repo is simply the same repurchase agreement from the buyer’s viewpoint, not the sellers. Hence, the seller executing the transaction would describe it as a “repo”, while the buyer in same transaction would describe it as a “reverse repo”.
So, Repo and Reverse Repo are exactly the same kind of transaction, just described from opposite viewpoints.
Understanding the Concept in Indian Economy Context :
Repo Rate is the rate at which the banks borrows from RBI. Whenever the banks have any shortage of funds to meet their current demand and term liabilities, they can borrow from RBI.
Reverse Repo Rate is the rate at which RBI borrows money from banks.
Repo Rate is the thus, the difference between borrowed and paid back cash expressed as percentage.
Differentiation from Loan Concept :
Although, the actual effect of whole transaction is identical to a cash loan, while using the “repurchase” terminology, the emphasis is placed upon the current legal ownership of the collateral securities by the respective parties.
Forms & Types of Repo Agreements/ Auctions :
Forms of Repo :
• Specified Delivery : It requires the delivery of pre specified bond at the onset and at maturity of the contractual period.
• Tri-party : This utilizes a tri-party clearing agent or bank and is more efficient.
• Held in Custody : This form is quite rare in development markets primarily due to risks associated with its nature.
Types of Repo Maturities :
• Overnight Repo : refers to one day maturity transaction.
• Term Repo : refers to a repo with specified end date.
• Open Repo : simply has no end date.
Securities settled in Repo Transactions/Auctions :
All transferable Government of India dated securities and Treasury Bills.
Minimum amount of Repo Transactions/Auctions :
Bids will be received for a minimum amount of Rs.5 crore and in multiples of 5 crore thereafter.
Participants in Repo Transactions/Auctions :
• All Scheduled Commercial Banks (excluding RRBs).
• Primary Dealers maintaining SGL and Current A/c with RBI.
Impact Analysis on Indian Economy :
The changes in Repo Rates or Reverse Repo Rates are likely to have impact across the sectors and can be enumerated as follow:
• Financial Sector - Banking / Credit System / Markets – Debt or Equity
• General Economy
• Industrial Sector
• Corporate Sector
• External Sector
Impact on Financial Sector – Banking / Credit / Markets (Debt or Equity)
The Central Bank of India (RBI) manages short – term falls and surpluses in the banking system through its LAF(Liquidity Adjustment Facility), whereby it borrows and lends money at fixed rates under the repo and reverse repo facilities.
Since, RBI technically has unlimited capacity to lend and borrow rupees, the repo and reverse repo rate act as a ceiling and a floor rate for the interest rates.
When RBI cuts the repo rate, it is in effect sends the signal that short term rates are too high and should come down. The central bank has been traditionally using the repo to signal short term rates and the bank rate to indicate its view on long term rates.
However, with the longer –term interest rates being increasingly driven by short-term money markets, the repo signal has been used to nudge banks to bring down their Benchmark Lending Rates.
Regulation of Money Supply / Liquidity in Monetary - Credit System :
To temporarily expand the money supply, the RBI decreases repo rates which will help banks to get money at cheaper rates while to contract the money supply, it increases the repo rates which makes the borrowings expensive.
Repo is the injection of liquidity by the RBI while Reverse Repo is the absorption of liquidity by RBI.
Due to this fine tuning of RBI using tools of CRR, Bank Rate, Repo Rate and Reverse Repo Rate, banks adjust their lending or investment rates, hence, infusing or diffusing liquidity in the Monetary and Credit system.
Impact on Markets (Debt /Equity) :
Bond Markets will be the biggest beneficiary as the rate cut will make it easier for banks to borrow short term money and invest in government securities at a marginal spread.
The rupee will weaken in the foreign exchange markets as Indian debt will be become less attractive for foreign investors.
The impact on Stock Market will be mixed as Equities are largely driven by portfolio flows, which in turn are largely unaffected by the central bank’s monetary measures.
Other Impacts :
Reduction in Repo Rates may lead to cut in :
• Floating Home Loan Rates / Consumer Loan Rates.
• BPLR (Benchmark Prime Lending Rates).
• May usher in a lower rate regime if liquidity stays easy.
While, Rising Interest Rates would mean higher EMI payments, this would, in turn affect consumer durable companies as well as financing companies.
Impact on General Economy
The interest rate hike will bring a general slow down in the economic activity as higher cost of funds would result in reduced consumption and investment expenditures. As a result, the aggregate demand will also get a hit.
Impact on Industrial Sector
The interest rate hike will increase the cost of raw materials and thus, high cost of funds which will result in reduced industrial investment. This could adversely affect the Greenfield projects.
Impact on Corporate Sector
With increase in rates, due to higher raw material cost and fuel cost, corporate profits are likely to go down. Reduced bottom line of corporate sector implies lower plough back of profits.
Impact on External Sector
Higher Interest Rates leading to Higher Interest Costs will adversely affect the competitiveness of the Indian Exports.
Changes in Repo Rates or Reverse Repo Rates could reduce the differential between the Fed Fund Rates (USA) and EU Main Operation Refinancing rates. Expectedly this could lead to higher capital inflows into India, leading to strengthening of the Balance of Payments situation.
Trends in Reverse Repo Rates (Year 2000 - 2008) :
Following is the chronology of Repo Rates since June 2000. The central bank of India (RBI) holds daily repo and reverse repo acutions as part of its Liquidity Adjustment facility. (Exemplary table attached in Annexure I).
-------------------------------------------------------
RATE (percent) EFFECTIVE DATE (Source : RB I)
-------------------------------------------------------
7.50 03-11-2008
8.50 24-06-2008
8.00 11-06-2008
7.75 30-03-2007
7.50 31-01-2007
7.25 30-10-2006
7.00 25-07-2006
6.75 08-06-2006
6.50 24-01-2006
6.25 26-10-2005
6.00 31-03-2004
7.00 19-03-2003
7.10 07-03-2003
7.50 12-11-2002
8.00 28-03-2002
8.50 07-06-2001
8.75 30-04-2001
9.00 09-03-2001
10.00 06-11-2000
10.25 13-10-2000
13.50 06-09-2000
15.00 30-08-2000
16.00 09-08-2000
10.00 21-07-2000
9.00 13-07-2000
12.25 28-06-2000
12.60 27-06-2000
13.05 23-06-2000
13.00 22-06-2000
13.50 21-06-2000
14.00 20-06-2000
13.50 19-06-2000
10.85 14-06-2000
9.55 13-06-2000
9.25 12-06-2000
9.05 09-06-2000
9.00 07-06-2000
9.05 05-06-2000
Annexure – I
Policy Rates & Reserve Ratios
(As on 09/11/08)
Policy Rates
Bank Rate : 6%
Repo Rate : 7.50%
Reverse Repo Rate : 6%
Reserve Ratios
Cash Reserve Ratio : 5.50%
Statutory Liquidity Ratio : 24%
(Source : www.rbi.org.in)
Annexure – II (RBI Circular on Repo Dated November 3rd, 2008)
RBI/2008-2009/257
FMD.MOAG. No.28/01.01.01/2008-09
November 3, 2008
All Scheduled Commercial Banks (excluding RRBs) and Primary Dealers
Dear Sir,
Liquidity Adjustment Facility – Repo and Reverse Repo Rates
1.As already announced on November 1, 2008, the Reserve Bank has decided to reduce the fixed repo rate under the Liquidity Adjustment Facility (LAF) by 50 basis points from 8.0 per cent to 7.5 per cent with effect from November 3, 2008, in view of the ebbing of upside inflation risks as also to address concerns relating to the moderation in the growth momentum.
2. The reverse repo rate under LAF remains unchanged at 6.00 per cent.
3. All other terms and conditions of the current LAF Scheme remain unchanged.
(Concept , Impact Analysis on Economy & Trends)
Technical Definition :
Repo is a financial agreement used primarily in the government securities dealt in money market or capital market whereby a dealer or other holder of such government securities sells the securities and agrees to re-purchase them at an agreed future date at an agreed price which will provide the lender with an extremely low risk return.
Reverse Repo is simply the same repurchase agreement from the buyer’s viewpoint, not the sellers. Hence, the seller executing the transaction would describe it as a “repo”, while the buyer in same transaction would describe it as a “reverse repo”.
So, Repo and Reverse Repo are exactly the same kind of transaction, just described from opposite viewpoints.
Understanding the Concept in Indian Economy Context :
Repo Rate is the rate at which the banks borrows from RBI. Whenever the banks have any shortage of funds to meet their current demand and term liabilities, they can borrow from RBI.
Reverse Repo Rate is the rate at which RBI borrows money from banks.
Repo Rate is the thus, the difference between borrowed and paid back cash expressed as percentage.
Differentiation from Loan Concept :
Although, the actual effect of whole transaction is identical to a cash loan, while using the “repurchase” terminology, the emphasis is placed upon the current legal ownership of the collateral securities by the respective parties.
Forms & Types of Repo Agreements/ Auctions :
Forms of Repo :
• Specified Delivery : It requires the delivery of pre specified bond at the onset and at maturity of the contractual period.
• Tri-party : This utilizes a tri-party clearing agent or bank and is more efficient.
• Held in Custody : This form is quite rare in development markets primarily due to risks associated with its nature.
Types of Repo Maturities :
• Overnight Repo : refers to one day maturity transaction.
• Term Repo : refers to a repo with specified end date.
• Open Repo : simply has no end date.
Securities settled in Repo Transactions/Auctions :
All transferable Government of India dated securities and Treasury Bills.
Minimum amount of Repo Transactions/Auctions :
Bids will be received for a minimum amount of Rs.5 crore and in multiples of 5 crore thereafter.
Participants in Repo Transactions/Auctions :
• All Scheduled Commercial Banks (excluding RRBs).
• Primary Dealers maintaining SGL and Current A/c with RBI.
Impact Analysis on Indian Economy :
The changes in Repo Rates or Reverse Repo Rates are likely to have impact across the sectors and can be enumerated as follow:
• Financial Sector - Banking / Credit System / Markets – Debt or Equity
• General Economy
• Industrial Sector
• Corporate Sector
• External Sector
Impact on Financial Sector – Banking / Credit / Markets (Debt or Equity)
The Central Bank of India (RBI) manages short – term falls and surpluses in the banking system through its LAF(Liquidity Adjustment Facility), whereby it borrows and lends money at fixed rates under the repo and reverse repo facilities.
Since, RBI technically has unlimited capacity to lend and borrow rupees, the repo and reverse repo rate act as a ceiling and a floor rate for the interest rates.
When RBI cuts the repo rate, it is in effect sends the signal that short term rates are too high and should come down. The central bank has been traditionally using the repo to signal short term rates and the bank rate to indicate its view on long term rates.
However, with the longer –term interest rates being increasingly driven by short-term money markets, the repo signal has been used to nudge banks to bring down their Benchmark Lending Rates.
Regulation of Money Supply / Liquidity in Monetary - Credit System :
To temporarily expand the money supply, the RBI decreases repo rates which will help banks to get money at cheaper rates while to contract the money supply, it increases the repo rates which makes the borrowings expensive.
Repo is the injection of liquidity by the RBI while Reverse Repo is the absorption of liquidity by RBI.
Due to this fine tuning of RBI using tools of CRR, Bank Rate, Repo Rate and Reverse Repo Rate, banks adjust their lending or investment rates, hence, infusing or diffusing liquidity in the Monetary and Credit system.
Impact on Markets (Debt /Equity) :
Bond Markets will be the biggest beneficiary as the rate cut will make it easier for banks to borrow short term money and invest in government securities at a marginal spread.
The rupee will weaken in the foreign exchange markets as Indian debt will be become less attractive for foreign investors.
The impact on Stock Market will be mixed as Equities are largely driven by portfolio flows, which in turn are largely unaffected by the central bank’s monetary measures.
Other Impacts :
Reduction in Repo Rates may lead to cut in :
• Floating Home Loan Rates / Consumer Loan Rates.
• BPLR (Benchmark Prime Lending Rates).
• May usher in a lower rate regime if liquidity stays easy.
While, Rising Interest Rates would mean higher EMI payments, this would, in turn affect consumer durable companies as well as financing companies.
Impact on General Economy
The interest rate hike will bring a general slow down in the economic activity as higher cost of funds would result in reduced consumption and investment expenditures. As a result, the aggregate demand will also get a hit.
Impact on Industrial Sector
The interest rate hike will increase the cost of raw materials and thus, high cost of funds which will result in reduced industrial investment. This could adversely affect the Greenfield projects.
Impact on Corporate Sector
With increase in rates, due to higher raw material cost and fuel cost, corporate profits are likely to go down. Reduced bottom line of corporate sector implies lower plough back of profits.
Impact on External Sector
Higher Interest Rates leading to Higher Interest Costs will adversely affect the competitiveness of the Indian Exports.
Changes in Repo Rates or Reverse Repo Rates could reduce the differential between the Fed Fund Rates (USA) and EU Main Operation Refinancing rates. Expectedly this could lead to higher capital inflows into India, leading to strengthening of the Balance of Payments situation.
Trends in Reverse Repo Rates (Year 2000 - 2008) :
Following is the chronology of Repo Rates since June 2000. The central bank of India (RBI) holds daily repo and reverse repo acutions as part of its Liquidity Adjustment facility. (Exemplary table attached in Annexure I).
-------------------------------------------------------
RATE (percent) EFFECTIVE DATE (Source : RB I)
-------------------------------------------------------
7.50 03-11-2008
8.50 24-06-2008
8.00 11-06-2008
7.75 30-03-2007
7.50 31-01-2007
7.25 30-10-2006
7.00 25-07-2006
6.75 08-06-2006
6.50 24-01-2006
6.25 26-10-2005
6.00 31-03-2004
7.00 19-03-2003
7.10 07-03-2003
7.50 12-11-2002
8.00 28-03-2002
8.50 07-06-2001
8.75 30-04-2001
9.00 09-03-2001
10.00 06-11-2000
10.25 13-10-2000
13.50 06-09-2000
15.00 30-08-2000
16.00 09-08-2000
10.00 21-07-2000
9.00 13-07-2000
12.25 28-06-2000
12.60 27-06-2000
13.05 23-06-2000
13.00 22-06-2000
13.50 21-06-2000
14.00 20-06-2000
13.50 19-06-2000
10.85 14-06-2000
9.55 13-06-2000
9.25 12-06-2000
9.05 09-06-2000
9.00 07-06-2000
9.05 05-06-2000
Annexure – I
Policy Rates & Reserve Ratios
(As on 09/11/08)
Policy Rates
Bank Rate : 6%
Repo Rate : 7.50%
Reverse Repo Rate : 6%
Reserve Ratios
Cash Reserve Ratio : 5.50%
Statutory Liquidity Ratio : 24%
(Source : www.rbi.org.in)
Annexure – II (RBI Circular on Repo Dated November 3rd, 2008)
RBI/2008-2009/257
FMD.MOAG. No.28/01.01.01/2008-09
November 3, 2008
All Scheduled Commercial Banks (excluding RRBs) and Primary Dealers
Dear Sir,
Liquidity Adjustment Facility – Repo and Reverse Repo Rates
1.As already announced on November 1, 2008, the Reserve Bank has decided to reduce the fixed repo rate under the Liquidity Adjustment Facility (LAF) by 50 basis points from 8.0 per cent to 7.5 per cent with effect from November 3, 2008, in view of the ebbing of upside inflation risks as also to address concerns relating to the moderation in the growth momentum.
2. The reverse repo rate under LAF remains unchanged at 6.00 per cent.
3. All other terms and conditions of the current LAF Scheme remain unchanged.
Special Economic Zone units to be surveyed for Service Tax Compliance
Special Economic Zone units to be surveyed for Service Tax Compliance
SEZ units providing taxable services to recipients outside the special economic zones (SEZ) are under Government scanner. The revenue department officials have been directed to submit by October 31 a report on whether such units were discharging their service tax obligations or not. The report is to be submitted to the Director-General of Service Tax. The Central Board of Excise & Customs (CBEC) directive to survey the SEZ units follows a recent report of the Comptroller and Auditor General (CAG) which highlighted that certain SEZ units in Chennai and Kochi were providing taxable services such as manpower supply services, technical testing and analysis service to units / persons outside the zone without payment of service tax.
Taxable services received by SEZ units and SEZ developers for consumption within the SEZ are exempt from service tax. However, service tax is applicable on taxable services provided by SEZ units, except in situations where specifically exempted. In a communiqué to its field formations, the CBEC has said they should ensure that SEZ units, providing taxable services to any person for consumption in domestic tariff area, should register with the jurisdictional service tax authorities and discharge their service tax liability. Meanwhile, The Central Board of Excise and Customs has also clarified that Special Economic Zone units claiming refund of service tax should register with the jurisdictional service tax authorities.
SEZ units providing taxable services to recipients outside the special economic zones (SEZ) are under Government scanner. The revenue department officials have been directed to submit by October 31 a report on whether such units were discharging their service tax obligations or not. The report is to be submitted to the Director-General of Service Tax. The Central Board of Excise & Customs (CBEC) directive to survey the SEZ units follows a recent report of the Comptroller and Auditor General (CAG) which highlighted that certain SEZ units in Chennai and Kochi were providing taxable services such as manpower supply services, technical testing and analysis service to units / persons outside the zone without payment of service tax.
Taxable services received by SEZ units and SEZ developers for consumption within the SEZ are exempt from service tax. However, service tax is applicable on taxable services provided by SEZ units, except in situations where specifically exempted. In a communiqué to its field formations, the CBEC has said they should ensure that SEZ units, providing taxable services to any person for consumption in domestic tariff area, should register with the jurisdictional service tax authorities and discharge their service tax liability. Meanwhile, The Central Board of Excise and Customs has also clarified that Special Economic Zone units claiming refund of service tax should register with the jurisdictional service tax authorities.
“EARLY INVESTMENT-BETTER INVESTMENT”
INTORDUCTION:
Responsibility increases with the age and the capability of bearing the risk decreases. The capability of bearing highly strong risk is more incase of young persons and it will be very less in case of people who are about to retire or retired persons. Based on this, an investor has to make a plan for the investment.
Let us have a look at the investment portfolio based on ages.
According to the changing scenario, a lot of investment avenues have emerged to invest money .Out of that some may be of risky securities and some are risk less securities which provides returns to the investors at a given level of risk. At the time of preparing investment plan, age of the investor plays an important role. He is required to consider age, family and other factors at the time making investment .For example, an investor who has retired can make an investment in risk less securities which gives him a fixed income .In case if the time of retirement is more (young), they can make investment in risky securities where the return is also very high along with the risk.
The below table tells how to make an investment by taking in to consideration the factors like age, family , other constraints and so on. Basing on the needs and requirements, an investor can make modifications in the investment .the capability of taking risk differ from one investor to another investor. For Example, if an investor has more no of dependants, his capability of taking risk will be low and vice versa.
Investment avenues can be classified as Gold, Bullion, Fixed Income Securities, Equities and Mutual Funds .Among those Gold and Bullion are considered to be as highly liquid securities ,which also includes savings accounts of the bank. After shares, Fixed Income Securities and Mutual Funds play an important role in investment. Along with these, those investment securities which are prone to less risk also need to be given much importance.
I Age : 22-30 years
It is an age where the investor is single or married having no children. The number of dependents on the investor is also less where there will be a chance to mobilize more savings for the future. Annual income and the risk bearing capability of the investor will also be high. At this time, it is better to make investment in equity shares for a long time i.e. for 5 years. For an investor with in an age group of 22-30 years, the investment portfolio as follows:
22-30 years of age
%
Cash ,Bullion
10
Fixed Income Securities
30
Equity Markets
40
Mutual Fund-Equity Growth
20
II Age: 31-45 years
A stage where the number of dependants will be more children an other responsibilities will arise. More focus will be on protection of investment rather than on returns .The risk bearing capability of the investor will also decreases to certain extent . For the investor more priority will be towards children studies and mobilization of future savings and so on.
31-45 years of age
%
Cash ,Bullion
10
Fixed Income Securities
40
Equity Markets
30
Mutual Fund-Equity Growth
20
III Age: 45-60years
At this stage, more focus of the investor will be towards mobilizing of savings for higher education and marriage of children.He also focuses on future savings to lead his retirement life.Risk bearing capability of the investor will be zero and depending upon his needs ,he is required to change the investment portfolio accordingly.
45-60 years of age
%
Cash ,Bullion
10
Fixed Income Securities
50
Equity Markets
20
Mutual Fund-Equity Growth
20
III Age: Above 60 years
At this stage investor is more focused on enjoying his life with family or doing a part time leisurely work. The risk bearing capability is zero .For an investor at this time, it is better to hold less equity investments and hold more of fixed income securities to earn a fixed income which also ensures liquidity.
Above 60 years of age
%
Cash ,Bullion
10
Fixed Income Securities
70
Equity Markets
10
Mutual Fund-Equity Growth
10
Conclusion: Like this the investment portfolio changes depending upon the age of the investor The proportionate of investment may not be exactly but it may vary depending on the other constraints that are taken in to consideration by the investor.
“EARLY INVESTMENT-BETTER INVESTMENT”
For Example: An investor goal is to mobilize 10 lakhs after 20 years. For one year from now he has to make an investment of Rs14000/- Per annum. If he is willing to make investment after 10 years, he has to make an investment of nearly Rs 60000/- per annum. So get ready for savings at an early stage.
Responsibility increases with the age and the capability of bearing the risk decreases. The capability of bearing highly strong risk is more incase of young persons and it will be very less in case of people who are about to retire or retired persons. Based on this, an investor has to make a plan for the investment.
Let us have a look at the investment portfolio based on ages.
According to the changing scenario, a lot of investment avenues have emerged to invest money .Out of that some may be of risky securities and some are risk less securities which provides returns to the investors at a given level of risk. At the time of preparing investment plan, age of the investor plays an important role. He is required to consider age, family and other factors at the time making investment .For example, an investor who has retired can make an investment in risk less securities which gives him a fixed income .In case if the time of retirement is more (young), they can make investment in risky securities where the return is also very high along with the risk.
The below table tells how to make an investment by taking in to consideration the factors like age, family , other constraints and so on. Basing on the needs and requirements, an investor can make modifications in the investment .the capability of taking risk differ from one investor to another investor. For Example, if an investor has more no of dependants, his capability of taking risk will be low and vice versa.
Investment avenues can be classified as Gold, Bullion, Fixed Income Securities, Equities and Mutual Funds .Among those Gold and Bullion are considered to be as highly liquid securities ,which also includes savings accounts of the bank. After shares, Fixed Income Securities and Mutual Funds play an important role in investment. Along with these, those investment securities which are prone to less risk also need to be given much importance.
I Age : 22-30 years
It is an age where the investor is single or married having no children. The number of dependents on the investor is also less where there will be a chance to mobilize more savings for the future. Annual income and the risk bearing capability of the investor will also be high. At this time, it is better to make investment in equity shares for a long time i.e. for 5 years. For an investor with in an age group of 22-30 years, the investment portfolio as follows:
22-30 years of age
%
Cash ,Bullion
10
Fixed Income Securities
30
Equity Markets
40
Mutual Fund-Equity Growth
20
II Age: 31-45 years
A stage where the number of dependants will be more children an other responsibilities will arise. More focus will be on protection of investment rather than on returns .The risk bearing capability of the investor will also decreases to certain extent . For the investor more priority will be towards children studies and mobilization of future savings and so on.
31-45 years of age
%
Cash ,Bullion
10
Fixed Income Securities
40
Equity Markets
30
Mutual Fund-Equity Growth
20
III Age: 45-60years
At this stage, more focus of the investor will be towards mobilizing of savings for higher education and marriage of children.He also focuses on future savings to lead his retirement life.Risk bearing capability of the investor will be zero and depending upon his needs ,he is required to change the investment portfolio accordingly.
45-60 years of age
%
Cash ,Bullion
10
Fixed Income Securities
50
Equity Markets
20
Mutual Fund-Equity Growth
20
III Age: Above 60 years
At this stage investor is more focused on enjoying his life with family or doing a part time leisurely work. The risk bearing capability is zero .For an investor at this time, it is better to hold less equity investments and hold more of fixed income securities to earn a fixed income which also ensures liquidity.
Above 60 years of age
%
Cash ,Bullion
10
Fixed Income Securities
70
Equity Markets
10
Mutual Fund-Equity Growth
10
Conclusion: Like this the investment portfolio changes depending upon the age of the investor The proportionate of investment may not be exactly but it may vary depending on the other constraints that are taken in to consideration by the investor.
“EARLY INVESTMENT-BETTER INVESTMENT”
For Example: An investor goal is to mobilize 10 lakhs after 20 years. For one year from now he has to make an investment of Rs14000/- Per annum. If he is willing to make investment after 10 years, he has to make an investment of nearly Rs 60000/- per annum. So get ready for savings at an early stage.
Monday, November 10, 2008
Minister Pranab to talk to PM on SEZ tax tangle
External Affairs Minister Pranab Mukherjee, who heads an Empowered Group of Ministers (EGoM) on special economic zones (SEZs), is likely to consult Prime Minister Manmohan Singh to resolve the dispute between finance and commerce ministries over tax exemption for export profits from the zones.
The EGoM has failed to arrive at a decision on the Income Tax Act’s Section 10 AA, which provides tax exemption on profits earned by units in SEZs.
While the commerce ministry wants export profits to be determined on the basis of the turnover of an SEZ unit, the finance ministry wants to take into account the company’s total turnover, including from the non-SEZ units. This, according to the commerce ministry, would reduce the exemption that was promised earlier.
The SEZ Act of 2005 provides the zones 100 per cent income tax deduction on export profits in the first five years of operation. But Section 10 AA says the export profit has to be taxed in proportion to the unit’s contribution to the company’s turnover.
Companies argue that the export profit of an SEZ unit should be computed in proportion to the turnover of the unit and not the entire company. This is because the present arrangement eats into the income tax deduction.
According to sources, the commerce ministry has been arguing that this is an anomaly, while the finance ministry says this is a conscious decision. “The finance ministry told the EGoM that the present arrangement will discourage shifting of existing work by companies to their SEZ units.
But the commerce ministry is saying there have been no cases of misuse,” said the source.
The EGoM has failed to arrive at a decision on the Income Tax Act’s Section 10 AA, which provides tax exemption on profits earned by units in SEZs.
While the commerce ministry wants export profits to be determined on the basis of the turnover of an SEZ unit, the finance ministry wants to take into account the company’s total turnover, including from the non-SEZ units. This, according to the commerce ministry, would reduce the exemption that was promised earlier.
The SEZ Act of 2005 provides the zones 100 per cent income tax deduction on export profits in the first five years of operation. But Section 10 AA says the export profit has to be taxed in proportion to the unit’s contribution to the company’s turnover.
Companies argue that the export profit of an SEZ unit should be computed in proportion to the turnover of the unit and not the entire company. This is because the present arrangement eats into the income tax deduction.
According to sources, the commerce ministry has been arguing that this is an anomaly, while the finance ministry says this is a conscious decision. “The finance ministry told the EGoM that the present arrangement will discourage shifting of existing work by companies to their SEZ units.
But the commerce ministry is saying there have been no cases of misuse,” said the source.
IT SEZs must wait for 100% tax exemption
IT may be a long wait for IT SEZs which are looking forward to a review of section 10AA (7) of the Income Tax Act for enjoying 100% tax exemption on profits.
The empowered group of ministers (eGoM) on special economic zones (SEZs), which met on Thursday, has not only deferred a decision on the need for a review, it is also now clear that a change in the section can only happen through an amendment to the Act. Since the Act can be amendment only by Parliament, any change in the current provisions could take several months.
Section 10 AA (7) of the Income Tax Act states that only a proportion of profits of a SEZ unit, based on the proportion of export sales from the unit to the total turnover of the parent company, will be exempt from taxation.
Under the SEZ Act, profits earned by the unit are 100% tax-exempt in the first five years and 50% tax-exempt for the next five years. Units are also eligible for 50% tax exemption on reinvested profits for another five years. “Section 10AA (7) is an aberration and that needs to be corrected
The empowered group of ministers (eGoM) on special economic zones (SEZs), which met on Thursday, has not only deferred a decision on the need for a review, it is also now clear that a change in the section can only happen through an amendment to the Act. Since the Act can be amendment only by Parliament, any change in the current provisions could take several months.
Section 10 AA (7) of the Income Tax Act states that only a proportion of profits of a SEZ unit, based on the proportion of export sales from the unit to the total turnover of the parent company, will be exempt from taxation.
Under the SEZ Act, profits earned by the unit are 100% tax-exempt in the first five years and 50% tax-exempt for the next five years. Units are also eligible for 50% tax exemption on reinvested profits for another five years. “Section 10AA (7) is an aberration and that needs to be corrected
Thursday, November 6, 2008
How to Calculate Sensex
The Sensex , an abbreviation of the BSE sensitive index, is a market capitalisation-weighted index of 30 stocks representing a sample of large, well-established and financially sound companies. It is the oldest index in India and has acquired a unique place in the collective consciousness of investors. The index is widely used to measure the performance of the Indian stock markets. Sensex is considered to be the pulse of the Indian stock markets as it represents the underlying universe of listed stocks on The Stock Exchange, Mumbai. Further, as the oldest index of the Indian stock market, it provides time series data over a fairly long period of time (since 1978-79). Sensex is not only scientifically designed but also based on globally accepted construction and review methodology. Sensex Calculation Methodology As per the methodology, the level of index at any point of time reflects the free-float market value of 30 component stocks relative to a base period. The market capitalisation of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalisation is further multiplied by the free-float factor to determine the free-float market capitalisation. The base period of Sensex is 1978-79, and the base value is 100 points. This is often indicated by the notation 1978-79=100. The calculation of Sensex involves dividing the free-float market capitalisation of 30 companies in the index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the Sensex. It keeps the index comparable over time and is the adjustment point for all index adjustments arising out of corporate actions, replacement of scrips etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate the Sensex every 15 seconds and disseminated in real time.
Lehman Brothers - How ?
Lehman decided to play chicken with the market and they lost. In whats been likened to Black Monday (1987) today around 5,000 UK-based employees will lose their jobs as 158-year-old investment bank Lehman Brothers filed for bankruptcy protection under Chaper 11 of the US Bankruptcy Code. All of the employees in Londons Canary Wharf, as well as those at Lehman Brothers subsidiary, Capstone Mortgage Services in High Wycombe, are likely to find themselves out of a job. Ill now try to move into another industry, said one. Its a far cry from a year ago, when the bank was valued at some $47bn and was the largest trader on the London Stock Exchange. Eleventh hour discussions with Barclays and Bank of America faltered yesterday when it became clear the US government could not guarantee the troubled banks assets. It is, of course, the majority of Lehman Brothers 25,000 employees who stand to lose the most, along with 411,000 shareholders, George Soros among them he was among those who expected a rebound and doubled his shares in Lehman earlier this year. The Bank of England has made 5bn available and the European Central Bank added 30bn euros to keep liquidity flowing in the City. In a refreshing act of solidarity, 10 leading banks, including Credit Suisse, Citigroup and Deutsche Bank, are pooling their money to create an emergency borrowing fund of $70bn. Dr Housing Bubble blames Lehmans sub-prime mortage exposure. It is up in the air whether they held onto to these assets because of a foolish investment move or whether there simply wasnt a market for these assets. Plenty accuse CEO Richard Fuld (apparently nicknamed the Gorilla) of hubris, as well as for waiting too long to write off these bad bets. Greenlight Capitals outspoken David Einhorn raised alarm bells earlier this year about the banks lack of transparency when it came to declaring its liabilities. Other than the charismatic value of the leadership and maybe the popularity of the company, Lehmans exposures are worse than Bear [Stearn]s on an apples-to-apples basis, he told a reporter in June. It makes me rather sad to see this organisation brought to its knees as a result of what Ill call a lack of control, poor management of internal risk and ultimate self-interest, former Lehmans employee Walter Gerasimowicz told Bloomberg. (Its unfortunate, under the circumstances, that Fulds board positions include one for a charity called Robin Hood, targeting poverty in New York City.) The Reasoned Sceptic plays no favourites in apportioning blame. Lehman, Bear Stearns and Merrill Lynch all exhibited horrifically bad risk management in a sea of financial excess and excess capacity. Blame here goes straight to the board, then, whose members include Sir Christopher Gent. But theres a silver lining, says Anatole Kaletsky, arguing that the financial transactions between banks and hedge funds have less effect on the availability of credit to non-financial businesses than might be imagined. Had the US government bailed out Lehman or Merrill Lynch, there wouldve been a massive regulatory overhaul to appease taxpayers for having to take on the banks risks. As it is, the longer term effects are likely to be less drastic, argues Tracy Corrigan. But as investment banks cede supremacy to the commercial concerns, will the star system with its high bonus culture and short-term focus also go the way of the dinosaur?
Sub Prime Meaning
Sub-Prime Crises
Meaning of SubPrime :Meaning of sub prime commonly used where bank is landing a person at little bit higher rate than normal(prime) rate due to
• Loan to that person is little bit more risky than normal
• Person does not satisfy the condition for taking the loan
• less income than required
• Ratio of loan repayment /income is adverse
• Property involved is in area where rates of property is volatile and not stable
• Risk is high of repayment or some what speculative.
In brief they are landing to a person who is not otherwise eligible as per normal banking condition at higher rates.It does not mean that they are landing to any body without checking any thing but with a knowledge that risk is there, and due to more risk involved , they charge more interest from the party.These Type of loan generally mortgaged by Property or other assets.
If a lay man read this than he can also predict that the bank doing such practices will sooner or later have losses..........?but why the best brain of the world(so called) in US are unable to predict the crises. And Bank/companies which has never shown losses in their history of 140 years ,sank in one quarter losses..
Refinancing:Means bank giving loans directly to the customer,takes loan from other big company on the guarantee that they will pay back the money,as soon as it is received from the client.
Securitization :simple meaning of the securitization is giving loans out of balance sheet and have more cash to give more loan by transfer the mortgaged loans to special purpose vehicles (SPY) created for this purpose by the big houses. After securitization of mortgage assets ,Loan given will not shown in balance sheet and after securitisation of loans banks have good capital adequacy ratio and solvency margins, can give more loan ,but servicing/default risk of all loan remains with the institute and does not transfer to the SPV.
Step by step of reason of Crises
• The bank/companies which are giving loan at sub prime rates ,are small in the size.
• They have more specific information about the consumer and lend money to them on consideration other than financial .
• Then they have refinance their loans from the other big houses like Lahman ,Merrill lynch,AIG or other in the market
• With the money refinanced from the big company they gives more loan and so on
• They have given loan much more than what they have actually owned.
• Rates of property in USA is going south.And interest rates were going up.
• Some client which have Purchased property on loan for capital appreciation/or on the basis of some speculation like future increase in income , in the property was not able to return the loan
• Banks enforcing the foreclosures and taken the properties from the client or properties has been put to sale in the declining price market,Feeding more stock(property for sale) in the market and leads to further price fall
• Small companies collapses on default of some major customers as they are not able to manage cash flows.
• After default from customer they are unable to service the funds refinanced from big company.
• As I have explained above sub prime loans are more risky than normal ,this whole process of collapsing is so fast and have much cascading effect .
• The securitisation of laons also have a role as after securitization of laons companies have more clean balance sheet and one can not judge the Inherent risk involved in that due to less disclosures norms and other reasons.
• And we have now much longer list of casualties like Lahman Bros,Merill Lynch,AIG,Bear stearn,Fannie Mae and Freddie Mac...........and so on .This is not end of story more will come.
and more reason which leads to the crises is securitization ,simple meaning of the securitization is giving loans out of balance sheet and have more cash to give more loan by transfer the mortgaged loans to special purpose vehicle (SPY) prepared for this purpose by the big houses. After securitization of mortgage assets ,Loan given will not shown in balance sheet and after than they have good capital adequacy ratio and solvency margins, can give more loan ,but servicing/default risk of all loan remains with the institute and does not transfer to the SPV.
Meaning of SubPrime :Meaning of sub prime commonly used where bank is landing a person at little bit higher rate than normal(prime) rate due to
• Loan to that person is little bit more risky than normal
• Person does not satisfy the condition for taking the loan
• less income than required
• Ratio of loan repayment /income is adverse
• Property involved is in area where rates of property is volatile and not stable
• Risk is high of repayment or some what speculative.
In brief they are landing to a person who is not otherwise eligible as per normal banking condition at higher rates.It does not mean that they are landing to any body without checking any thing but with a knowledge that risk is there, and due to more risk involved , they charge more interest from the party.These Type of loan generally mortgaged by Property or other assets.
If a lay man read this than he can also predict that the bank doing such practices will sooner or later have losses..........?but why the best brain of the world(so called) in US are unable to predict the crises. And Bank/companies which has never shown losses in their history of 140 years ,sank in one quarter losses..
Refinancing:Means bank giving loans directly to the customer,takes loan from other big company on the guarantee that they will pay back the money,as soon as it is received from the client.
Securitization :simple meaning of the securitization is giving loans out of balance sheet and have more cash to give more loan by transfer the mortgaged loans to special purpose vehicles (SPY) created for this purpose by the big houses. After securitization of mortgage assets ,Loan given will not shown in balance sheet and after securitisation of loans banks have good capital adequacy ratio and solvency margins, can give more loan ,but servicing/default risk of all loan remains with the institute and does not transfer to the SPV.
Step by step of reason of Crises
• The bank/companies which are giving loan at sub prime rates ,are small in the size.
• They have more specific information about the consumer and lend money to them on consideration other than financial .
• Then they have refinance their loans from the other big houses like Lahman ,Merrill lynch,AIG or other in the market
• With the money refinanced from the big company they gives more loan and so on
• They have given loan much more than what they have actually owned.
• Rates of property in USA is going south.And interest rates were going up.
• Some client which have Purchased property on loan for capital appreciation/or on the basis of some speculation like future increase in income , in the property was not able to return the loan
• Banks enforcing the foreclosures and taken the properties from the client or properties has been put to sale in the declining price market,Feeding more stock(property for sale) in the market and leads to further price fall
• Small companies collapses on default of some major customers as they are not able to manage cash flows.
• After default from customer they are unable to service the funds refinanced from big company.
• As I have explained above sub prime loans are more risky than normal ,this whole process of collapsing is so fast and have much cascading effect .
• The securitisation of laons also have a role as after securitization of laons companies have more clean balance sheet and one can not judge the Inherent risk involved in that due to less disclosures norms and other reasons.
• And we have now much longer list of casualties like Lahman Bros,Merill Lynch,AIG,Bear stearn,Fannie Mae and Freddie Mac...........and so on .This is not end of story more will come.
and more reason which leads to the crises is securitization ,simple meaning of the securitization is giving loans out of balance sheet and have more cash to give more loan by transfer the mortgaged loans to special purpose vehicle (SPY) prepared for this purpose by the big houses. After securitization of mortgage assets ,Loan given will not shown in balance sheet and after than they have good capital adequacy ratio and solvency margins, can give more loan ,but servicing/default risk of all loan remains with the institute and does not transfer to the SPV.
Friday, October 31, 2008
EXPOSURE DRAFT STANDARD ON INTERNAL AUDIT (SIA)
EXPOSURE DRAFT
STANDARD ON INTERNAL AUDIT (SIA)
COMMUNICATION WITH MANAGEMENT
The Committee on Internal Audit of the Institute of Chartered Accountants of
India invites comments on the Exposure Draft of the Standard on Internal Audit
(SIA), Communication with Management. Comments are most helpful if they
indicate the specific paragraph(s) to which they relate, contain a clear rationale
and, where applicable, provide a suggestion for alternative wording. Comments
should be submitted in writing to the Secretary, Committee on Internal Audit, The
Institute of Chartered Accountants of India, C-1, Sector-1, NOIDA-201 301 so as
to be received on or before November 17, 2008. Comments can also be sent
by e-mail at cia@icai.org.
Introduction
1. This Standard on Internal Audit provides an overarching framework for the
internal auditor’s communication with management and identifies some specific
matters to be communicated with the management as described in the terms of
the engagement.
2. In performing such an activity the internal auditor should :
a. Communicate clearly the responsibilities of the internal auditor, and an
overview of the planned scope and timing of the audit with the management;
b. Obtain information relevant to the internal audit from the management;
c. Provide timely observations arising from the internal audit that are significant
and relevant to their responsibility as described in the scope of the
engagement to the management; and
d. Promote effective two-way communication between the internal auditor and
the management.
Matters to be Communicated
The Internal Auditor’s Responsibilities in Relation to the Terms of
Engagement
3. The internal auditor’s responsibility for the performing the audit, in
accordance with the terms of engagement.
Planned Scope and Timing of the Audit
4. Communication regarding the planned scope and timing of the internal
audit may:
a. Assist the management to understand better the consequences of the
internal auditor’s work, to discuss issues of risk and materiality with the
internal auditor, and to identify any areas in which they may request the
auditor to undertake additional procedures; and
b. Assist the internal auditor to understand better the entity and its
environment.
5. Care is required when communicating to management about the planned
scope and timing of the audit so as not to compromise with the effectiveness of
the audit. For example, communicating the nature and timing of detailed audit
procedures may reduce the effectiveness of those procedures by making them
too predictable.
6. Matters communicated may include:
• How the internal auditor proposes to address the significant risks of material
misstatement, whether due to fraud or error.
• The internal auditor’s approach to internal control relevant to the internal
audit.
• The application of materiality in the context of an internal audit.
7. Communication with management, may assist the internal auditor to plan
the scope and timing of the audit. It does not change the internal auditor’s sole
responsibility to establish the overall audit strategy and the audit plan, including
the nature, timing and extent of procedures necessary to obtain sufficient
appropriate audit evidence.
Significant Findings from the Internal Audit
8. Paragraph 25 of the SIA – 4, “Reporting”, states:
“25. The internal audit report contains the observations and comments of
the internal auditor, presents the audit findings, and discusses
recommendations for improvements. To facilitate communication and
ensure that the recommendations presented in the final report are practical
from the point of view of implementation, the internal auditor should
discuss the draft with the entity’s management prior to issuing the final
report. The different stages of communication and discussion should be as
under:
Discussion Draft - At the conclusion of fieldwork, the internal auditor should
draft the report after thoroughly reviewing his working papers and the
discussion draft before it is presented to the entity’s management for
auditee’s comments. This discussion draft should be submitted to the entity
management for their review before the exit meeting.
Exit Meeting - The internal auditor should discuss with the management of
the entity regarding the findings, observations, recommendations, and text
of the discussion draft. At this meeting, the entity’s management should
comment on the draft and the internal audit team should work to achieve
consensus and reach an agreement on the internal audit findings.
Formal Draft - The internal auditor should then prepare a formal draft,
taking into account any revision or modification resulting from the exit
meeting and other discussions. When the changes have been reviewed by
the internal auditor and the entity management, the final report should be
issued.
Final Report - The internal auditor should submit the final report to the
appointing authority or such members of management, as directed. The
periodicity of the Report should be as agreed in the scope of the internal
audit engagement. The internal auditor should mention in the Report, the
dates of discussion draft, exit meeting, Formal Draft and Final Report.”
The Communication Process
Establishing the Communication Process
9. Clear communication of the internal auditor’s responsibilities, the planned
scope and timing of the internal audit, and the expected general content of
communications helps establishing the basis for effective two-way
communication.
10. Matters that contribute to effective two-way communication include:
• The purpose of communications should be clear, which make the internal
auditor and the management better placed to have a mutual understanding
of relevant issues and the expected actions arising from the communication
process.
• The form in which communications will be made.
• The person(s) in the internal audit team and the representative of the
management, will communicate regarding particular matters.
• The internal auditor’s expectation that communication will be two-way, and
that the management will communicate with the internal auditor, matters
they consider relevant to the internal audit, for example, strategic decisions
that may significantly affect the nature, timing and extent of internal audit
procedures, the suspicion or the detection of fraud, and concerns with the
integrity or competence of senior management.
• The process for taking action and reporting back on matters communicated
by the auditor and the management.
Forms of Communication
11. Effective communication may involve structured presentations and written
reports as well as less structured communications, including discussions. The
internal auditor may communicate matters other than those described in the
terms of engagement, either orally or in writing.
12. In addition to the significance of a particular matter, the form of
communication (e.g., whether to communicate orally or in writing, the extent of
detail or summarization in the communication, and whether to communicate in a
structured or unstructured manner) may be affected by such factors as:
a. Whether the matter has been satisfactorily resolved.
b. Whether management has previously communicated the matter.
c. The size, operating structure, control environment, and legal structure of the
entity.
d. In the case of an internal audit of a specific aspect of an operation, whether
the internal auditor also audits the entire operation or the entity.
e. The expectations of those charged with governance, including arrangements
made for periodic meetings or communications with the auditor.
f. The amount of ongoing contact and dialogue the internal auditor has with
those charged with governance.
g. Whether there have been significant changes in the membership of a
governing body.
Timing of Communications
13. The appropriate timing for communications will vary with the circumstances
of the engagement. Relevant circumstances include the significance and nature
of the matter, and the action expected to be taken by those charged with
governance. For example:
• Communications regarding planning matters may often be made early in
the audit engagement
• It may be appropriate to communicate a significant difficulty encountered
during the audit as soon as practicable.
• Similarly, it may be appropriate to communicate material weaknesses in the
design, implementation or operating effectiveness of internal control that
have come to the auditor’s attention as soon as practicable.
• Communications regarding independence may be appropriate whenever
significant judgments are made about threats to independence and related
safeguards.
• The exit meeting may also be an appropriate time to communicate findings
from the audit.
Adequacy of the Communication Process
14. The internal auditor need not design specific procedures to support the
evaluation of the two-way communication with the management, rather, that
evaluation may be based on observations resulting from audit procedures
performed for other purposes. Such observations may include:
• The appropriateness and timeliness of actions taken by the management in
response to matters raised by the internal auditor. Where significant
matters raised in previous communications have not been dealt with
effectively, it may be appropriate for the internal auditor to inquire as to why
appropriate action has not been taken, and to consider raising the point
again. This avoids the risk of giving an impression that the internal auditor
is satisfied that the matter has been adequately addressed or is no longer
significant.
• The apparent openness of the management in their communications with
the internal auditor.
• The apparent ability of the management to fully comprehend matters raised
by the internal auditor, for example, the extent to which the management
probes issues and questions recommendations made to them.
• Difficulty in establishing with those charged with governance, a mutual
understanding of the form, timing and expected general content of
communications.
• Whether the two-way communication between the internal auditor and
those charged with governance meets applicable legal and regulatory
requirements.
15. Inadequate two-way communication may indicate an unsatisfactory control
environment and influence the internal auditor’s assessment of the risks of
material misstatements. There is also a risk that the internal auditor may not
have obtained sufficient appropriate audit evidence to support his findings or
opinion.
Documentation
16. Where matters required by this SIA to be communicated are
communicated orally, the internal auditor shall document them, and when and to
whom they were communicated. Where matters have been communicated in
writing, the auditor shall retain a copy of the communication as part of the
internal audit documentation.
Effective Date
17. This SIA is effective for all internal audits undertaken on or after
STANDARD ON INTERNAL AUDIT (SIA)
COMMUNICATION WITH MANAGEMENT
The Committee on Internal Audit of the Institute of Chartered Accountants of
India invites comments on the Exposure Draft of the Standard on Internal Audit
(SIA), Communication with Management. Comments are most helpful if they
indicate the specific paragraph(s) to which they relate, contain a clear rationale
and, where applicable, provide a suggestion for alternative wording. Comments
should be submitted in writing to the Secretary, Committee on Internal Audit, The
Institute of Chartered Accountants of India, C-1, Sector-1, NOIDA-201 301 so as
to be received on or before November 17, 2008. Comments can also be sent
by e-mail at cia@icai.org.
Introduction
1. This Standard on Internal Audit provides an overarching framework for the
internal auditor’s communication with management and identifies some specific
matters to be communicated with the management as described in the terms of
the engagement.
2. In performing such an activity the internal auditor should :
a. Communicate clearly the responsibilities of the internal auditor, and an
overview of the planned scope and timing of the audit with the management;
b. Obtain information relevant to the internal audit from the management;
c. Provide timely observations arising from the internal audit that are significant
and relevant to their responsibility as described in the scope of the
engagement to the management; and
d. Promote effective two-way communication between the internal auditor and
the management.
Matters to be Communicated
The Internal Auditor’s Responsibilities in Relation to the Terms of
Engagement
3. The internal auditor’s responsibility for the performing the audit, in
accordance with the terms of engagement.
Planned Scope and Timing of the Audit
4. Communication regarding the planned scope and timing of the internal
audit may:
a. Assist the management to understand better the consequences of the
internal auditor’s work, to discuss issues of risk and materiality with the
internal auditor, and to identify any areas in which they may request the
auditor to undertake additional procedures; and
b. Assist the internal auditor to understand better the entity and its
environment.
5. Care is required when communicating to management about the planned
scope and timing of the audit so as not to compromise with the effectiveness of
the audit. For example, communicating the nature and timing of detailed audit
procedures may reduce the effectiveness of those procedures by making them
too predictable.
6. Matters communicated may include:
• How the internal auditor proposes to address the significant risks of material
misstatement, whether due to fraud or error.
• The internal auditor’s approach to internal control relevant to the internal
audit.
• The application of materiality in the context of an internal audit.
7. Communication with management, may assist the internal auditor to plan
the scope and timing of the audit. It does not change the internal auditor’s sole
responsibility to establish the overall audit strategy and the audit plan, including
the nature, timing and extent of procedures necessary to obtain sufficient
appropriate audit evidence.
Significant Findings from the Internal Audit
8. Paragraph 25 of the SIA – 4, “Reporting”, states:
“25. The internal audit report contains the observations and comments of
the internal auditor, presents the audit findings, and discusses
recommendations for improvements. To facilitate communication and
ensure that the recommendations presented in the final report are practical
from the point of view of implementation, the internal auditor should
discuss the draft with the entity’s management prior to issuing the final
report. The different stages of communication and discussion should be as
under:
Discussion Draft - At the conclusion of fieldwork, the internal auditor should
draft the report after thoroughly reviewing his working papers and the
discussion draft before it is presented to the entity’s management for
auditee’s comments. This discussion draft should be submitted to the entity
management for their review before the exit meeting.
Exit Meeting - The internal auditor should discuss with the management of
the entity regarding the findings, observations, recommendations, and text
of the discussion draft. At this meeting, the entity’s management should
comment on the draft and the internal audit team should work to achieve
consensus and reach an agreement on the internal audit findings.
Formal Draft - The internal auditor should then prepare a formal draft,
taking into account any revision or modification resulting from the exit
meeting and other discussions. When the changes have been reviewed by
the internal auditor and the entity management, the final report should be
issued.
Final Report - The internal auditor should submit the final report to the
appointing authority or such members of management, as directed. The
periodicity of the Report should be as agreed in the scope of the internal
audit engagement. The internal auditor should mention in the Report, the
dates of discussion draft, exit meeting, Formal Draft and Final Report.”
The Communication Process
Establishing the Communication Process
9. Clear communication of the internal auditor’s responsibilities, the planned
scope and timing of the internal audit, and the expected general content of
communications helps establishing the basis for effective two-way
communication.
10. Matters that contribute to effective two-way communication include:
• The purpose of communications should be clear, which make the internal
auditor and the management better placed to have a mutual understanding
of relevant issues and the expected actions arising from the communication
process.
• The form in which communications will be made.
• The person(s) in the internal audit team and the representative of the
management, will communicate regarding particular matters.
• The internal auditor’s expectation that communication will be two-way, and
that the management will communicate with the internal auditor, matters
they consider relevant to the internal audit, for example, strategic decisions
that may significantly affect the nature, timing and extent of internal audit
procedures, the suspicion or the detection of fraud, and concerns with the
integrity or competence of senior management.
• The process for taking action and reporting back on matters communicated
by the auditor and the management.
Forms of Communication
11. Effective communication may involve structured presentations and written
reports as well as less structured communications, including discussions. The
internal auditor may communicate matters other than those described in the
terms of engagement, either orally or in writing.
12. In addition to the significance of a particular matter, the form of
communication (e.g., whether to communicate orally or in writing, the extent of
detail or summarization in the communication, and whether to communicate in a
structured or unstructured manner) may be affected by such factors as:
a. Whether the matter has been satisfactorily resolved.
b. Whether management has previously communicated the matter.
c. The size, operating structure, control environment, and legal structure of the
entity.
d. In the case of an internal audit of a specific aspect of an operation, whether
the internal auditor also audits the entire operation or the entity.
e. The expectations of those charged with governance, including arrangements
made for periodic meetings or communications with the auditor.
f. The amount of ongoing contact and dialogue the internal auditor has with
those charged with governance.
g. Whether there have been significant changes in the membership of a
governing body.
Timing of Communications
13. The appropriate timing for communications will vary with the circumstances
of the engagement. Relevant circumstances include the significance and nature
of the matter, and the action expected to be taken by those charged with
governance. For example:
• Communications regarding planning matters may often be made early in
the audit engagement
• It may be appropriate to communicate a significant difficulty encountered
during the audit as soon as practicable.
• Similarly, it may be appropriate to communicate material weaknesses in the
design, implementation or operating effectiveness of internal control that
have come to the auditor’s attention as soon as practicable.
• Communications regarding independence may be appropriate whenever
significant judgments are made about threats to independence and related
safeguards.
• The exit meeting may also be an appropriate time to communicate findings
from the audit.
Adequacy of the Communication Process
14. The internal auditor need not design specific procedures to support the
evaluation of the two-way communication with the management, rather, that
evaluation may be based on observations resulting from audit procedures
performed for other purposes. Such observations may include:
• The appropriateness and timeliness of actions taken by the management in
response to matters raised by the internal auditor. Where significant
matters raised in previous communications have not been dealt with
effectively, it may be appropriate for the internal auditor to inquire as to why
appropriate action has not been taken, and to consider raising the point
again. This avoids the risk of giving an impression that the internal auditor
is satisfied that the matter has been adequately addressed or is no longer
significant.
• The apparent openness of the management in their communications with
the internal auditor.
• The apparent ability of the management to fully comprehend matters raised
by the internal auditor, for example, the extent to which the management
probes issues and questions recommendations made to them.
• Difficulty in establishing with those charged with governance, a mutual
understanding of the form, timing and expected general content of
communications.
• Whether the two-way communication between the internal auditor and
those charged with governance meets applicable legal and regulatory
requirements.
15. Inadequate two-way communication may indicate an unsatisfactory control
environment and influence the internal auditor’s assessment of the risks of
material misstatements. There is also a risk that the internal auditor may not
have obtained sufficient appropriate audit evidence to support his findings or
opinion.
Documentation
16. Where matters required by this SIA to be communicated are
communicated orally, the internal auditor shall document them, and when and to
whom they were communicated. Where matters have been communicated in
writing, the auditor shall retain a copy of the communication as part of the
internal audit documentation.
Effective Date
17. This SIA is effective for all internal audits undertaken on or after
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