ICAIseptember2010-students Newsletter36P

8/8/2019 ICAIseptember2010-students Newsletter36P

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2 September 2010 I The Chartered Accountant Student

Dear Students,

I on behalf of our Institute felicitateand convey my heartiest greetings tothe teaching fraternity on theauspicious occasion of Teachers Day

which is observed every year on 5 th September tocommemorate the birthday of the former President of India late Dr Sarvepalli Radhakhrishnan , a philosopherand a teacher par excellence. No other personality canhave an influence more insightful than that of a teacher.Teachers mould their students to bring out their latentskills and impart quality education to prepare goodcitizens for the nation. I do hope that under the ableguidance and parental shadow of your respectivePrincipal who is imparting practical training as a Guru ,you will be successful in carving a niche in the realmof accounting profession.

Being a teacher myself for more than two decades, I amvery much concerned about your overall developmentand professional growth. I can easily understand andrealize your practical problems. We at the Institute arestriving hard to solve all such problems. Hence, recentlythe Council of the Institute has decided to modifyeligibility criteria applicable to different stream of students for appearing in the Final Examination to beheld in November, 2010 examination and onwards.Uniformly all the students of PE-II Course irrespectiveof their switching over from PCC or to PCC and then to

PresidentsCommunication

MESSAGES

IPCC or to IPCC can take up their Final Examinationduring the last 12 months of their articled training. PCCstudents are also allowed to take up their FinalExamination during the last 6 months of their articledtraining. Moreover, in order to mitigate the hardshipfaced by PE-II students and bring uniformity among allthe streams at the Intermediate level, the Councildecided to allow PE-II students to commence theirarticled training on passing either of the groups in PE-IIExamination.Our Council has also decided to provide exemption/ relaxation to the students who have switched over fromIntermediate/PE-II to IPCC from undergoing 35 hoursOrientation Programme and such students are allowedto complete ITT before commencing articled trainingor at the time of Final examination. Further, the Councilhas allowed PCC students to submit proof of InformationTechnology Training (ITT) completion certificate beforethe declaration of the result of the relevant examination.

I advise you to log on to our Institutes website for thedetailed information in this regard and hope that your Planning, Persistent hard work , Positive attitude and Perseverance will lead you to the pinnacle of success.

With Best Wishes

Yours sincerely,

CA. Amarjit ChopraPresident, ICAI, New Delhi

Vice-presidentsCommunicationDear Students,

At the outset, I extend my best wishesto all the Gurus on the idyllic occasionof Teachers Day. The role of a teacherin any society is both noteworthy and

valuable. Having a teacher to guide us is precious. Theteachers are the role models for the students as they tryto follow them in their manners, costumes, etiquette and

style of conversation. Teachers are considered architectsfor building the future of their students.In the Accounting Profession, the role of our principalis very pivotal. The practical training serves as thelaunching platform to unfold the horizons of asuccessful professional career. Being a well groomedand disciplined student of Chartered AccountancyCourse, it is the utmost responsibility of our studentsto follow the code of conduct while learning the nitty-gritty of the professional skills under the masterly andable guidance of their respective Principals .Undoubtedly, Guru represents the radiance of information and knowledge that dispels our professionalignorance. In order to be a truly global professional of high order and rank, you need to uphold high ethicalstandard and discharge your professional duties with

diligence. As a CA professional you should always keepyourself adhere with the core principles of our enduringprofession viz. Integrity, Objectivity, Independence,Confidentiality, Technical Standard, ProfessionalCompetence and Ethical Behavior. I hope that byfollowing these principles candidly and earnestly, youcan reach to the acme of success in your professionalendeavors.The Chartered Accountants play a very vital role in thesociety promoting reliable and transparent informationboth in the public and private domain. Being aresponsible Accounting Professional, we can contributefor the betterment of the world around us by fostering a

value based ethical professional environment. You haveto be very agile, active and aware about latesthappenings and keep your knowledge update. At thetime of campus recruitment, organizations look forwardfor the candidates who are not only intelligent but alsosmart as well. Hone your communication skills anddevelop positive attitude to emerge as a successfulprofessional.Wishing you all the best for a wonderful time ahead Yours sincerely,

CA . G. RamaswamyVice-President, ICAI, New Delhi


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3September 2010 I The Chartered Accountant Student

Message From TheChairman,Board of StudiesEXAMINATION TIPSDear Students,The examination system of theInstitute is one of the best systems

in India and it has maintained very high standards of integrity, confidentiality and creditability over theyears. It seeks to test the multifaceted knowledge whicha chartered accountant is expected to possess. To achievesuccess you have to approach the examination with apositive attitude . I am sure you would have alreadystarted your preparations for the November examinationwith some plans. Here, I have penned down the strategyto clear the examinations based on my experience of somany years which may be of help to you:

Read Study Material thoroughly : The studymaterials would help you to develop a strongconceptual base. They give you the parameterswithin which you have to study. Make it a habit of going through them thoroughly as these will enableyou to understand the basic concepts of the subjectsand develop your ability in understanding thedifferent concepts and their applications. Apart fromthe study material, do refer to at least one standardtext book and solve all the illustrations and problemstherein. This will further build your conceptualclarity of a particular subject and strengthen yourproblem solving skills.Practice and Practice : Practice makes a man perfect.

Therefore, I suggest that you practicse as much aspossible. Here I would like to mention that manystudents start practising from various books withoutfirst understanding the subject and the conceptsinvolved . This approach is absolutely wrong. Youneed to first make your base, understand theconcepts and then start practising.The following publications brought out by theInstitute will be of a great help:

The Practice Manual for each subjectSuggested Answers, CompilationsRevisionary Test Papers for last few attempts

The more you practice, the better engraved will beconcepts in your mind.

Dont indulge in Selective Studies : No portion of the syllabus is less important and leaving any portioncould be fatalStay Focussed :

Make goals: long term, medium term and shortterm and stick to themMake a time table depending upon your aptitudeand the time availableKeep regular hours of studyDo not spent time on making notesCut out disturbing factors like television,internet, mobile phones etc.Take short breaks after each hour of study

Revise and Review : It is important to study the

reading material at least 3 to 4 times.This wouldinclude:

MESSAGE

First reading : This will be more like Novelreading to gain overviewSecond Reading : This will be in depth studywhere concepts emergeThird Reading : This will be very intensivereading to fully understand the concept and tounderline important points to be revised on examday i.e. Fourth readingTake Practical Training seriously : Many astudents take practical training to be aburdensome job. Practical knowledge is a mustfor success in exam

Visit Institutes Website: Make it a habit of visiting The ICAIs website. It contains all theeducational inputs of the Board of Studies likelatest study materials, suggested answers, RTPs,supplementary study materials, notifications etc.It also contains announcements like relevant listof publications, Accounting Standards andStandards on Auditing etc. applicable for the

examination.Refer the Chartered Accountant Students Journaland other publications : The Students Journal isanother form of disseminating importantinformation for your benefit. It provides qualityarticles and academic updates that will help you inyour professional learning. You can also send in yourarticles for publishing in the journal.Presentation : It is not only necessary that youprepare well, it is equally essential that you presentyour answers well. For this following points areimportant:

Relax before the exam. Your mind thinks wellwhen it is in a relaxed state.Attempt those questions first which you areconfident about.Budget your time wisely. At least 15 minutesshould be spent on reading the question paperthoroughly and 15 minutes should be kept inreserve for revision.Give working notes to each practical questionproperly.Give your assumptions wherever you feelnecessary.Give to the point answers and do not indulge inunnecessary details.While answering questions involving applicationof law/standards etc, briefly state the facts, thelegal position, your analysis backed up with caselaws, if any and your conclusion.Write legibly; avoid spelling mistakes andgrammatical errors.

I am sure that the above points will help you in clearingthe forthcoming examination with flying colours. Justkeep a positive attitude and keep your cool and conquerthe world!Wishing you all the best in all your pursuits of life!Yours sincerely,

CA. Vinod JainEmail : [email protected]


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Availability of Merit, Merit-cum-Need, Need Based and Weaker Sections and EndowmentScholarship w.e.f. 1 st October, 2010

Sl. No. Name of No. of Amount EligibilityScholarship Scholarship (p.m.)

1. Merit 30 1,250 Students whose names appear atSl. No. 1- 10 of Merit lists of CPT/ IPCC/PCC/ PE II of May/June2010 Exam.

2. Merit cum Need 30 1,250 Rank holders of CPT/IPCC/PCC/ PE II May/June 2010 Exam.

3. Need Based and 50 1,000 Students of PCC/IPCC/FinalWeaker Sections

4. Sri Dhanraj Kanhaiyalal 7 1000 Students of IPCC/Final ofDudheria Scholarship Karnataka State

5. Shorilal Kapoor Memorial 1 500 Non-Commerce Students of IPCCScholarship from Maharashtra State6. G. D. Salarpuria 1 500 Students of IPCC/Final Preferably

Foundation Scholarship for SC/ST Students7. Rukmani Devi Banarsilal 1 500 Students of IPCC/Final

Satnaliwala SevaTrust Shlolarship

8. Pallonji N Mehta Scholarship 1 500 Students of IPCC/Final ofWestern Region

9. R. K. Khanna Memorial 3 300 Students of PCC/IPCC/FinalScholarship

10. V. Suundararajan 1 300 Students of Final Course ofMemorial Scholarship Chennai

11. Chandu Lal Kapuri Devi 1 300 Students of IPCC/FinalCharitable Trust Scholarship

12. Satish Khanna Memorial 1 300 Students of IPCC/ FinalScholarship

13. P. S. Krishnan Scholarship 1 300 Students of PCC/IPCC/Final ofSouthern Region

14. J.S. Lodha Memorial Scholarship 1 300 Students of PCC/IPCC/FinalNotes:

1. The total annual income of parents/guardians should not exceed Rs. 1, 50,000 for students applyingfor Merit-cum-Need Scholarship and Rs. 1,00,000 for students applying for Need-based andWeaker Sections/Endowment Scholarships.

2. Applicants for grant of above scholarships should be registered students of PCC/IPCC or FINAL.Students of PCC/IPCC and Final Course will be paid scholarship for a maximum period of 18 and30 months respectively or balance period of their articleship.

3. For students under SC/ ST/ OBC category, an additional amount of Rs. 100/ - p.m. will be paidunder Need-based and Weaker Section category of scholarship.

4. Two scholarships are reserved for physically handicapped students under Need Based and WeakerSection category.

The duly completed scholarship application in the prescribed Form No. 3 should reach the Director (BOS),The Institute of Chartered Accountants of India, ICAI Bhawan, A 29, Sector 62, Noida 201301 latestby 30 th September, 2010. Application form can be downloaded from the Institute web site www.icai.org .


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President and Editor-in-ChiefCA. Amarjit Chopra, New Delhi

Vice-PresidentCA. G. Ramaswamy, Coimbatore

Chairman and EditorCA. Vinod Jain, New Delhi

Vice-ChairmanCA. V. Murali, Chennai

MembersCA. Atul C. Bheda, MumbaiShri Deepak Narain, New DelhiCA. M. Devaraja Reddy, HyderabadCA. Mahesh P. Sarda, JamnagarCA. Pankaj Inderchand Jain, MumbaiShri Prithvi Haldea, New DelhiCA. Ravindra Holani, GwaliorCA. Sanjeev Maheshwari, MumbaiShri Sidharth Birla, New DelhiCA. Sumantra Guha, KolkataCA. Vijay K. Garg, Jaipur

Co-opted MembersCA. Chandra Prakash ToshniwalCA. MS. KeshavaCA. R. Ananda KumarCA. Rajesh Kumar KankariaCA. Sachithanantham R

Director Board of StudiesShri Vijay Kapur

Editorial SupportPrem Bhutani, Deputy DirectorK. Sudhakaran, Sr. Education Officer

OfficeBoard of StudiesThe Institute of Chartered Accountants of India,ICAI Bhawan, A-94/4, Sector-58,Noida-201 301.Phone : 0120-3045938

Correspondents with regard to subscription,advertising and writing articlesEmail : [email protected]

Non-receipt of Students' JournalEmail : [email protected]

Head OfficeThe Institute of Chartered Accountants ofIndia, ICAI Bhawan, Indraprastha Marg,New Delhi - 110 104.http://www.icai.org

Check your Address : All students should check their mailing address printed onback cover. In case, there is any change or the PIN Code (Postal Index Code) is eithermissing or incorrect, kindly inform immediately the concerned Regional Office givingfull particulars of your address along with correct PIN Code. This would enable us toensure smooth and prompt delivery of the Journal.

Editor: CA. Vinod JainPrinted and published by Shri Vijay Kapur, on behalf of The Institute of CharteredAccountants of India, New Delhi. Published at the Institute's Office at IndraprasthaMarg, New Delhi and printed at International Print-O-Pac Ltd., B-204, 205, OkhlaIndustrial Area, Phase-1, New Delhi.

The views and opinions expressed or implied in THE CHARTERED ACCOUNTANT STUDENT are those of the authors and do not necessarily reflect those of ICAI. Unsolicited

articles and transparencies are sent at the owners risk and the publisher accepts noliability for loss or damage. Material in this publication may not be reproduced, whether

in part or in whole, without the consent of ICAI.

DISCLAIMER: The ICAI is not in any way responsible for the result of any action takenon the basis of the advertisement published in the Journal.

Annual Subscription Rates:CA Students : Rs. 200Members & Others : Rs. 500Overseas : US $ 100

2 Messages, President & Vice President

3 Message, Chairman, Board of Studies

6 Revised Discussion Paper on DirectTaxes Code

10 Authority for Advance Rulings

14 Academic Updates

20 Case Laws

21 Interview

23 Summary of Examiners Comments

33 Notification

InsideSeptember

Total Circulation:2,06,900

CONTENTS

EDITORIAL BOARD


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DIRECT TAXES CODE

Revised Discussion Paper on Direct Taxes Code:Background and Effects

*CA. Priya Subramanian

It is rightly said that Ignorantia juris non excusat i.e. ignorance is not an excuse for failure to complywith the law. Thus, no one can avoid or circumventlaw on the plea of ignorance. Likewise, the complex

language of the legislation cannot also be an excusefor non-compliance under law. However, in actualpractice, there can be no doubt that interpretingand understanding the Income-tax Act, 1961, thecomplex language of its sections and innumerableprovisos is highly cumbersome. Further, for properappreciation of the income-tax law, inter-linkingand combined reading of sections along with therelevant rules is an essential pre-requisite, whichis, undoubtedly, an onerous task. This complexityis observed universally and is not restricted to theIndian income-tax law alone. No wonder that evenAlbert Einstein, the renowned Physicist, admittedThe hardest thing in the world to understand isthe income-tax .Simplification of law is, therefore, of utmostimportance, and it is very imperative that thelanguage of law must be comprehendible on a plainreading. It is with this primary aim that the DirectTaxes Code Bill, 2009 was released last year. Whilethis objective of the Direct Taxes Code (DTC) iscommendable, the problem, however, lies in someof the controversial changes proposed in the basicconcepts, like the presumptions being drawnagainst a taxpayer with regard to intimation andnotice, shifting of burden of proof to the tax payer,introduction of General Anti Avoidance Rules(GAAR) giving unrestricted and sweeping powersto those in charge of tax administration etc. Theseproposals would result in gross inequity, whichcan never be the aim and intent of a wellformulated statute.Reverting to the objective of simplification, thedegree to which the same can be achieved byintroduction of DTC depends on the manner andthe extent to which effect is given to the opinionsof the various classes of assessees, chambers of

commerce and the public at large. Therefore,bringing out a Revised Discussion Paper (RDP) onDTC on 15th June, 2010 in response to thesuggestions received from different quarters,

including the general public, is a step in the rightdirection. The RDP addresses the major issues onwhich various stakeholders have given their views.Some of the critical changes proposed in the DTChave been reversed, at least partially, in the RDP,for example, restoration of MAT on book profits asagainst MAT on gross value of assets proposed inthe DTC, continuation of EEE on specified savingsinstruments as against the earlier proposal of EETon all instruments, restoration of exemption limitson terminal benefits like gratuity, voluntaryretirement compensation, application of domesticlaw or DTAA, whichever is more beneficial ratherthan whichever is later, levy of wealth tax only onspecified unproductive assets etc. An overviewof these proposals and their probable effects followin the ensuing paragraphs.Restoration of MAT on book profitsThe DTC had proposed an asset-based calculationof MAT. Though this was a good way to encourageoptimal utilisation of assets, there was a possibilityof some companies showing reduced value of assets in their books of accounts to pay a lowertax. Thus, the asset-based calculation of MAT mayhave thrown open a new avenue for tax evasion.Further, the proposed MAT levy may have resultedin discouraging investments in highly gearedprojects or projects with long gestation periods.In order to avoid such practical difficulties andunintended consequences when MAT is computedon the basis of gross value of assets, the RDPproposes to continue MAT computation withreference to book profit. The RDP, however, doesnot provide for carry forward of credit for MATpaid on book profits nor does it specify the rate of

*The author is Sr. Assistant Director, ICAI


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DIRECT TAXES CODE

MAT or the manner of computation of book profit.Only when these issues are clarified, the overalleffect can be determined.EEE to continue on select savings instrumentsThe EEE method of taxation is proposed to berestored on specified savings instruments keepingin mind the difficulties that could arise on accountof implementation of EET in the absence of a socialsecurity system in place. The EEE method of taxation would continue for Government ProvidentFund (GPF), Public Provident Fund (PPF) andRecognised Provident Funds (RPFs) and thepension scheme administered by Pension FundRegulatory and Development Authority. Approvedpure life insurance products and annuity schemeswill also be subject to EEE method of tax treatment.Further, it is proposed to continue EEE for the fullperiod of the investments in all eligible savingsinstruments made before the date of implementation of the Code, in line with theprinciple of promissory estoppel. It is indeed arelief that these exceptions have been provided,so that a person can avoid undue tax burden duringhis old age by investing in instruments which arecovered under EEE.However, all other instruments would be subjectto EET method of tax treatment. EET need notnecessarily be viewed as a negative proposal in

toto. One of the positive aspects of EET is that it isexpected to bring in awareness to makeinvestments with a purpose of creating wealth andnot merely to save tax. Under EEE regime, taxconsiderations assume undue importance infinancial planning, which may adversely affect theoverall return on investment. For instance,sometimes, money is borrowed at higher rates toinvest in tax saving instruments. In some cases,housing loans have been taken without consideringthe potential income that the property couldgenerate. The transition to EET, albeit partially,

may lessen such practices.Exemption limits on retirement benefits restoredThe proposal to introduce Retirement BenefitsAccount Scheme is now being dropped. Employerscontribution to an approved provident fund,superannuation fund and New Pension Schemewithin the limits prescribed shall not be consideredas salary in the hands of the employee. Further,retirement benefits like gratuity, VRScompensation, commuted pension and leaveencashment received by an employee at the timeof superannuation will be exempt subject tospecified monetary limits.

However, no exemption has been proposed forleave travel concession and house rent allowance.These areas also deserve some relaxation in theform of partial or complete exemption. Further, nostandard deduction is proposed to be introduced,thereby the gross salary will continue to be taxed.Taxation of real income from house propertyTaxation of notional rent is proposed to be doneaway with and consequently, if a house is keptvacant, notional rent from such property wouldnot be subject to tax. Gross rent will be nil in caseof a house property which is not let out. However,this proposal might have the effect of encouragingpeople to keep their houses vacant instead of lettingthem out, thereby leading to a situation of non-availability of houses for occupation.In case of let-out house property, the gross rent willbe the amount of rent received or receivable for thefinancial year. Gross rent will not be computed at apresumptive rate of 6% of the ratable value or costof construction/acquisition, as originally proposedin the DTC. This amendment in the RDP hasrectified the inequity which would have otherwisebeen created between newly constructed houses (forwhich the cost would be high) and the housesconstructed earlier at a lower cost.The RDP has also restored the deduction onaccount of interest on capital borrowed for

acquisition or construction of such house property(subject to a limit of Rs.1.5 lakh) in case of anyone house property, which has not been let out, of an individual or HUF. However, such deductionwould now be allowed from the gross total incomeand not as a deduction under the head Incomefrom house property.These are welcome proposals as income fromhouse property would now be based on realincome, i.e., based on a persons ability to pay,rather than notional income. Further, therestoration of exemption for interest would help

in giving a fillip to the real estate industry.Capital gains taxation scheme revampedIn the DTC, it was proposed to abolish STT andremove exemption in respect of LTCG on sale of listed equity shares or units of an equity orientedmutual fund. The entire scheme of taxation of capital gains has been revamped in the RDP.The RDP proposes to compute capital gains arisingfrom transfer of an investment asset, being equityshares of a company listed on a recognized stockexchange or units of an equity oriented fund,which are held for more than one year from theend of the financial year in which they are


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acquired, after allowing a deduction at a specifiedpercentage of capital gains without any indexation.Also, the proposal in the DTC to abolish STT isbeing dropped. STT is proposed to be calibratedbased on the revised taxation regime for capitalgains and flow of funds to the capital market.The RDP, however, does not specify the exactpercentage of deduction or the rates of STT, in theabsence of which it is not possible to determinethe impact of the proposal.For taxation of capital gains arising from transferof investment assets held for more than one year(other than listed equity shares or units of equityoriented funds), the base date for determining thecost of acquisition is proposed to be shifted from1.4.1981 to 1.4.2000. The capital gains will becomputed after allowing indexation on this raisedbase. The proposal to introduce Capital GainsSavings Scheme on EET basis for capital gainsarising on assets sold after holding for more thanone year has now been dropped. Indexation is,therefore, the only benefit available in respect of such long term capital gains.It has been clarified that the income of ForeignInstitutional Investors (FIIs) from purchase andsale of securities would be chargeable as capitalgains to eliminate litigation regarding whether thesame is to be taxed as business income or capital

gains. Further, the capital gains of FIIs would notbe subject to TDS and the FIIs would be requiredto pay advance tax in line with the current practice.Tax treatment of NPOs clarifiedThe RDP has clarified the tax treatment of NPOs,including public religious trusts and partlycharitable and partly religious trusts. Public religioustrusts would be exempt if they satisfy certainconditions. One such condition is the applicationof the funds entirely for public religious purposes.It is not clear whether public religious purposeswould encompass public charitable purposes also,

since it might be practically difficult to apply theentire funds for purely religious purposes.Partly religious and partly charitable institutionswill also be considered as NPOs, if they areregistered under the Code. Exemption would beavailable in respect of their income from publicreligious activity, provided they fulfill all theconditions stipulated for public religious trusts.In addition, separate books of account andseparate financial statements should bemaintained in respect of religious and charitableactivities. Further, the trust deed/memorandumof the institution should contain a clause

specifying the application of its gross receiptsin a pre-determined ratio between charitable andreligious activities. This condition deservessome relaxation since it would not be practicallypossible to pre-determine the ratio forapplication of gross receipts between charitableand religious purposes.The RDP also proposes to retain the phrasecharitable purpose instead of permitted welfareactivity as originally proposed, for the purpose of maintaining continuity and minimizing litigation.In the DTC, it was proposed that there would beno exemption for accumulation of income anddeduction will be available only for applicationduring the financial year. It is now proposed inthe RDP that 15% of the surplus or 10% of grossreceipts, whichever is higher, can be carried forwardto be used within three years from the end of therelevant financial year. The RDP also proposes abasic exemption limit, and only the surplus in excessof such limit would be subject to tax@15%. Theseproposals have been introduced to provide thenecessary relaxation for NPOs.Exemption to existing SEZ units for the unexpiredperiod under the CodeThe scope and the period of profit linked deductionsare not proposed to be extended, since they havethe effect of transferring profits from a taxable entity

to a non-taxable entity. However, under the DTC,there are specific provisions for protecting suchdeduction for the unexpired period in the case of SEZ developers. The RDP, therefore, proposes asimilar provision to protect profit linked deductionsof units already operating in SEZs for the unexpiredperiod. The problem which needs to be sorted outis the non-availability of benefit under the Code inrespect of units which become operational after thedate of implementation of the Code.Place of effective management to determine theresidential status of a company incorporated

outside IndiaUnder the DTC, a foreign company will be treatedas resident in India if, at any time in the financialyear, the control and management of its affairs issituated wholly or partly in India (as against therequirement of being situated wholly in Indiaunder the present Income-tax Act, 1961).This requirement has been modified in the RDP,taking into consideration the plethora of suggestions on this issue. The RDP now proposesthat a company incorporated outside India will betreated as resident in India if its place of effectivemanagement is situated in India.

DIRECT TAXES CODE


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Place of effective management of the companymeans-(i) the place where the board of directors of the

company or its executive directors, as the casemay be, make their decisions; or

(ii) in a case where the board of directors routinelyapprove the commercial and strategicdecisions made by the executive directors orofficers of the company, the place where suchexecutive directors or officers of the companyperform their functions.

However, these criteria for determining residentialstatus would also lead to extensive litigation,especially on account of clause (ii) of the definition.It may not be rational to consider the place wherethe officers of the company perform their functionsas the place of effective management of the company.Controlled Foreign Corporation (CFC) provisions arealso proposed to be introduced, as an anti-avoidancemeasure, to provide that the passive income, earnedby a foreign company controlled directly or indirectlyby a resident in India, which is not distributed toshareholders would be deemed to have beendistributed. Accordingly, it would be taxable in Indiain the hands of resident shareholders as dividendreceived from the foreign company.It is very crucial to introduce safe harbor rules fornon-applicability of CFC provisions, if certain

parameters are fulfilled, like, for instance, if passiveincome is within a certain percentage of totalincome, or a certain percentage of passive incomeis distributed.DTAA or Domestic Law, whichever is morebeneficial, to applyUnder the DTC, it was proposed that in case of aconflict between the provisions of a treaty and theprovisions of the Code, the one that is later in pointof time shall prevail. However, this provision wasnot in consonance with the principles enunciatedby OECD and the Vienna convention. This would

have also significantly increased the uncertaintiesfaced by foreign investors in India.The RDP, therefore, clarifies that the domestic lawor the DTAA, whichever is more beneficial to thetaxpayer, shall prevail. However, DTAA will nothave preferential status over the domestic lawwhen the GAAR or CFC provisions are invoked orwhen Branch Profits Tax is levied.Restoration of scheme of wealth-tax in line withthe Wealth-tax Act, 1957The scheme of taxation of wealth, as proposed in theDTC, has been modified in the RDP and wealth-tax isproposed to be levied largely on the same lines as

provided in the Wealth-tax Act, 1957. Consequently,wealth-tax would be leviable only on specifiedunproductive assets. All taxpayers except non-profitorganizations would be subject to wealth-tax.Here again, the threshold limit and rate of tax havenot been specified, making it difficult to determinethe impact of the proposed change.Safeguards for invoking GAAR proposedAs per the proposed GAAR provisions, everyarrangement for tax mitigation would not be liableto be categorised as an impermissible avoidancearrangement. The GAAR provisions would beattracted only in a case where an arrangement,apart from obtaining a tax benefit for the assessee,also falls within the ambit of any one of the fourconditions i.e. it is not at arms length or itrepresents misuse or abuse of the provisions of theCode or it lacks commercial substance or it isentered or carried on in a manner not normallyemployed for bona-fide business purposes.The RDP proposes certain safeguards for invokingGAAR provisions, namely, the issuance of guidelines by CBDT providing for thecircumstances for invoking GAAR, thespecification of a threshold limit, above whichalone GAAR provisions will be invoked and theavailability of the forum of Dispute ResolutionPanel (DRP) when GAAR provisions are invoked.

However, the threshold limit has not been specifiedin the RDP. The threshold limit for invoking GAARshould be fixed at a high level so thatinconsequential transactions and small assesseesare not subject to rigors of GAAR. Also, the onusof proving that an arrangement has been made withan intention of obtaining tax benefit should be onthe revenue authorities invoking GAAR provisions.Balancing the twin objectives of Simplicity andEquity An essential prerequisiteThere are several other critical issues concerningpenalty, prosecution, service of notice, revision of

other orders, determination of arms length price,search and seizure, survey, branch profits tax, etc.,arising out of the provisions of the Code, which havenot been dealt with in the RDP. However, it hasbeen specifically mentioned in the RDP, that all suchissues will be considered while finalizing the Billfor introduction in Parliament. It is, therefore, hopedthat these issues will be resolved to a great extentin the revised Bill to be presented in the Parliament.The Code, in its final form, should strike a finebalance between simplicity and equity. It is veryimportant that the principle of equity does not takea back seat merely for the sake of simplicity.

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Authority for Advance Rulings AARCA. Ruchika Bhatia

In order to provide the facility of ascertaining theincome-tax liability of a non-resident, to plan theirincome-tax affairs well in advance and to avoidlong drawn and expensive litigation, a scheme of Advance Rulings has been introduced in Chapter

XIX-B of the Income-tax Act, 1961. A non-residentor certain categories of resident can obtain bindingrulings from the Authority on question of law orfact arising out of any transaction/proposedtransactions which are relevant for thedetermination of his tax liability.Uniqueness of the Indian Authority for AdvanceRulings (AAR)

Unlike the AARs in othernations where the rulingsare given by RevenueOfficials, in India theAAR is a quasi-judicialbody chaired by a retiredjudge of the SupremeCourt.Unlike the rulings of theAARs in other nationswhich are of non bindingcharacter, in India therulings are binding on both the applicant andthe income tax authorities.The binding nature of the rulings eliminates

long drawn out litigation process.Composition of the AuthorityAs per section 245-O, the Central Government shallconstitute, an authority for giving advance ruling,which consists of:(a) a Chairman, who is a retired Judge of the

Supreme Court;(b) an officer from the Indian Revenue Service,

who is qualified to be a member of CBDT;(c) an officer of the Indian Legal Service, who is

qualified to be an Additional Secretary to theGovernment of India.

Who can seek Advance Ruling [Section 245N(b)]1. Non-resident applicants: Any non-resident

person, whether individual, company, firm,association of persons or other bodycorporates, can make an application forseeking an advance ruling in regard to his/itstax liability. The applicant should be a nonresident in the year relating to which theadvance ruling is sought.

2. Resident applicants: A resident can also makean application, in relation to a transactionwhich has been undertaken or is proposed to

be undertaken by him with aNon-resident applicant, onany question of law or factspecified in the application.3. Specified Category of resident applicants: Aresident falling withinnotified categories [PublicSector undertakings (PSU)]may seek determination ordecision by the Authority inrespect of an issue relating tocomputation of total incomewhich is pending before anyIncome-tax Authority or the

Appellate Tribunal and such determination ordecision shall include the determination ordecision of any question of law or fact relatingto such computation of total income exceptdetermination of Fair Market Value of anyproperty. A PSU, however, before theapplication is admitted under section 245(2)have to obtain the clearance from theCommittee on Disputes (COD).

Questions on which Advance Ruling can be sought The advance ruling can be sought on any questionof law or fact specified in the application inrelation to a transaction which has beenundertaken, or is proposed to be undertaken, bythe non-resident applicant.

The contributor is Executive Officer, ICAI

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The advance ruling can besought on any question of law

or fact specified in theapplication in relation to atransaction which has been

undertaken, or is proposed tobe undertaken, by the non-

resident applicant.


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Important cases1. Monte Harris v. CIT (1996) 218 ITR 413 (AAR)

The applicant, is a citizen of the USA,employed in India by Verifone India PrivateLimited. The applicant has been inemployment in India since April 1, 1994, withVerifone India Private Limited, making him aresident for the year 1994-1995 as per section6(1) of the Act. Section 245N stipulates thatonly a non-resident can make an applicationto the AAR.The Authority for Advance Ruling held thatthe term previous year must be construedas the year preceding the financial year andnot the assessment year. In the present case,though the applicant is resident in India inthe financial year 1994-95 during which theapplication has been made, he was non-resident in India during the immediatelypreceding financial year, i.e., 1993-94. Theapplication is, therefore, maintainable.

2. Meenu Sahi Mamik (2006) 287 ITR 514 (AAR)The applicant, a resident of Netherlands,wants to establish a manufacturing unit forformulation of pharmaceuticals in partnershipwith her husband, in the State of HimachalPradesh. B, a resident company would like

to outsource production to the proposedmanufacturing unit. The applicant soughtruling of the Authority on the question of exemption under section 80-IC, with regardto direct business procured by it, andprocessing charges.The Authority for Advance Ruling held thatsince de facto control and management of thefirm would be with the applicants husbandin India, the firm could not be said to be anon-resident entity. The application was heldto be not maintainable.

3. Dell International Services India Pvt. Ltd.(2008) 305 ITR 37(AAR)Indian company making payment to a foreigncompany seeking ruling on the question of TDS to be made.

4. McLeod Russel India Ltd (2008) 299 ITR 79(AAR)Indian company purchasing shares fromforeign company can apply for rulingregarding tax liability of the foreign companyon capital gains on such transaction undersection 245N(b)(ii).

Questions precluded from Advance RulingsUnder section 245N of the Income-tax Act, 1961,certain restrictions have been imposed on theadmissibility of application. These restrictions areas follows:(a) The Authority cannot allow any application

where the question raised is already pendingin the applicants case before any income taxauthority, the Appellate Tribunal, or any court.

(b) The Authority may not entertain questionsrelating to the determination of fair marketvalue of any property, movable or immovableor

(c) The Authority will not allow any applicationif it relates to a transaction designed primafacie for the avoidance of income tax

Important cases1. Mustaq Ahmed (2007) 293 ITR 530 (AAR)

The applicant made a claim for exemptionunder the provisions of the Act for the firsttime in the revised return subsequent to filingof the application before AAR seeking rulingon issue of said claim for exemption.The Authority for Advance ruling held that inorder to decide whether the question raisedin application is already pending before theincome-tax Authority crucial point of time tobe taken into account is date on which theapplication was filed before the AAR and it ison that date, that factual position as regardsthe pendency of question has to be decided.The application filed after original return butbefore revised return cannot be construed tobe a design for avoidance of income-tax, so asto reject the application under section 245R(2).

2. Airport Authority of India (2008) 299 ITR 102(AAR)The applicant sought advance ruling in respectof its obligation to deduct tax under section

195 in connection with contracts entered intoby it with a US based company calledRaytheon Company. However, the question of Raytheon Companys liability to pay incometax in India was already pending before theincome-tax appellate authority. The applicantargued that it was Raytheon Companysliability under the provisions of the Act, readwith DTAA entered into between India andUS that was under consideration with theappellate authority and not the question of taxdeduction at source specifically.The Authority for Advance Ruling held that

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while the issues were inter-related they werenot identical, the application was maintainable.

3. Instrumentarium Corporation, (2005) 272 ITR 499 (AAR)The applicant was a tax resident of Finlandand had a fully owned Indian subsidiary, towhom it granted interest free loan. It soughtruling from the AAR on the applicability of sections 92 to 92F of the Act with respect tothe said transaction.The Authority Advance Ruling rejected theapplication under section 245R(2) as thequestion raised involved determination of fairmarket value (arms length price).

Application for Advance Ruling1. The applicant may seek advance ruling by

making an application to the Authority in theprescribed form (in quadruplicate)Form No. 34C Applicable for a non-residentapplicantForm No. 34D-Applicable for a resident havingtransactions with a non - residentForm No. 34EApplicable for notifiedcategories of residents (Public SectorUndertakings)

2. The application including the documentsannexed thereto shall be signed in the mannerindicated in the prescribed form. Where aperson signing the application and otherdocuments claims to have been dulyauthorising to do so, the application mustinclude a power of attorney, authorising himto sign and an affidavit setting out theunavoidable reasons which entitle him tosign it.

3. The application should be accompanied by afee of Rs. 2,500 (Rupees Two Thousand FiveHundred) through a bank draft drawn infavour of the Authority for Advance Rulings

payable at New Delhi.Procedure on Receipt of Application1. On receipt of application, one copy of the

application is sent to the jurisdictionalCommissioner of Income tax (CIT).

2. The application is rejected only after givingthe applicant an opportunity of being heard.

3. The Authority may, after examining theapplication and the records called for, eitherallow or reject the application.

4. If no objection to admission application isadmitted without formal hearing and date isfixed for hearing on merits Applicant as well

as the CIT are heard either in person orthrough authorised representative.

5. The proceedings before the Authority are notopen to public. Accordingly, only theapplicant/authorized representative canremain present during such proceedings.

6. The Applicant cannot urge or be heard insupport of any additional question not set forthin the application filed before the AAR.

Applicability of the AAR Ruling1. The advance ruling pronounced by the

Authority is binding on:the applicant in respect of the transaction inrespect of which the ruling had been soughtwho had sought itOn the Commissioner and the revenue

authorities subordinate to him, in respectof the applicant who had sought and thetransaction in relation to which it hadbeen sought

2. Thus, the pronouncement of AAR is not a judgement in rem but a judgment in personam.

3. For other transaction and other parties theruling has a persuasive value.

4. The ruling is binding as long as there is nochange in law or facts on the basis of whichthe advance ruling was pronounced.

Appeal against Advance Ruling1. The ruling is binding on the assessee as well

as the department.2. No specific provision for appeal against the

Ruling is provided in the Act.3. However, the applicant/department can invoke

the writ jurisdiction of the High Courts underArticle 226 and 227 and extraordinaryjurisdiction of the Supreme Court underArticle 136 of the constitution.

Withdrawal of ApplicationAs per section 245Q(3) of the Income-tax Act, the

applicant may withdraw his application within 30days from the date of filing the application,thereafter only with the leave of the Authority.Time limit for pronouncing the rulingAs per section 245R(6) of the Income-tax Act, theAuthority is requires to pronounce its advanceruling in writing within six months of the receiptof a valid application.Significant IssuesE-Commerce1. Factset Research Systems Inc. (2009) 317 ITR

169 (AAR )Whether subscription fees received by a

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foreign company from the licensee (customer)for providing database containing financialand economic information of companiesworldwide is taxable as royalty? HeldThe Authority for Advance Ruling held thatthe subscription fees received by the applicantfrom the licensee (user of the database) didnot fall within the scope of clause (v) of Explanation 2 to section 9(1)(vi) of the Actdealing with royalty.

Permanent Establishment 1. Cal Dive Marine Construction (Mauritius)

Ltd. (2009) 315 ITR 334Whether permanent establishment exists,where a foreign company renders servicesthrough a fixed place of business in India

which is maintained only for few days (15days)?The AAR held that as per Article 5(2)(i) of Agreement for Avoidance of Double Taxationbetween India and Mauritius, a construction,installation or assembly project cannot betreated as a permanent establishment unlessit continues for a period of more than ninemonths. Hence, the applicant could not be saidto have set up a permanent establishmentin India.

2. Cushman and Wakefield (2008) 305 ITR 208Whether the referral fee received by theapplicant from CWI can be characterized asbusiness income?Where the non-resident referred potentialcustomers desirous of obtaining real estateconsultancy to Indian company and receivedreferral fee on each completed transaction, itwas held that referral fees was not businessincome, royalty or fees for technical services.

3. Golf in Dubai (2008) 306 ITR 374Whether any income arises to a non-resident

person from the sponsorship money receivedfor organising a sporting event in India, taxableas business income?The AAR held that it could not be said that byorganizing and conducting golf tournamentsin India for a weeks duration withoutrepetition thereof the applicant had carried onbusiness through a fixed place within themeaning of article 5(1).

4. Pintsch Bamag (2009) 318 ITR 190Whether the sub-contractor in Indiaconstituted permanent establishment for theforeign company in India.

The AAR held that the sub-contractor wasindependent and it could not be concludedthat the business of the applicant was beingcarried on through the sub-contractorsworkshop. Therefore, it did not constitute apermanent establishment.

5. Invensys Systems Inc USA (2009) 317 ITR 438Whether payments under the cost allocationagreement was taxable?The AAR held that the many or most of theservices were clearly managerial in nature;they were not really technical or consultancyservices. Hence it would not be taxable as theapplicant did not have a permanentestablishment in India.

Fee for Technical Services/Royalty

1. Intertek Testing Service (2008) 307 ITR 418Whether an Indian company, subsidiary of aUK company providing testing and inspectionservices to its Indian and group affiliates asper global management services agreement(GMSA) will be taxable?The AAR held that on a broad analysis themajority of the services catalogued were in thenature of technical or consultancy services,but most of them did not make available tothe applicant technical knowledge,experience, skill, know-how, etc., possessedby the provider of the services.

Miscellaneous Issues1. Geoconsult ZT Gmbh (2008) 304 ITR 283

It was held that where a Joint venture was toprovide project consultancy services, theninspite of the fact that work was allotted tothe members of the Joint venture and therewas separate billing and members had separatebank accounts and each member had borneits own costs and expenses, it would be taxedas Association of persons for the reason thatthe Joint venture had meeting of minds of members, common design and commonpurpose.

2. Hyosung Corporation (2009) 314 ITR 343It was held that the foreign company and L&Tcould not be treated as an association of persons as none of the stipulations in thecontract gave rise to the formation of an AOPin the matter of the execution of the contractwhich was a mere collaboration and overallresponsibility assumed by the applicant for thesuccessful performance of the project.

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ACADEMIC UPDATES

Joint Podcast on Fair Value Project

The International Accounting Standards Board(IASB) and the Financial Accounting StandardsBoard (FASB) have posted a podcast to introducethe proposed measurement uncertainty analysisdisclosure. The proposal in the IASBs ExposureDraft Measurement Uncertainty AnalysisDisclosure for Fair Value Measurements isidentical to the proposed measurementuncertainty analysis disclosure in the FASBsExposure Draft Fair Value Measurements andDisclosures.

Circular No. CIR/DNPD/ 5 /2010 dated 30-07-2010: Options on USD-INR Spot RateThis circular is issued in exercise of the powersconferred under Section 11 (1) of the Securitiesand Exchange Board of India Act 1992, read withSection 10 of the Securities Contracts (Regulation)Act, 1956 to protect the interests of investors insecurities and to promote the development of, andto regulate the securities market. It has now beendecided to permit introduction of options onUSD-INR spot rate on currency derivativessegment of Stock Exchanges.Product Design and Risk Management Framework for Options on USD-INR Spot Rate1. Underlying: US Dollar Indian Rupee (US$-

INR) spot rate.2. Type of Option: Premium styled European

Call and Put Options.3. Trading Hours: 9 a.m. to 5 p.m.4. Size of the Contract: US$ 1000.5. Quotation: The premium would be quoted

in rupee terms. However, the outstanding

positions would be in USD terms.6. Available Contracts: Three serial monthly

contracts followed by three quarterlycontracts of the cycle March/June/September/ December.

7. Strike Price: Minimum of three in-the-money, three out-of the-money and one near-the-money strikes would be provided for allavailable contracts.

8. Settlement Mechanism: The contract wouldbe settled in cash in Indian Rupee.

9. Expiry / Last Trading Day: The expiry/last

Fair value measurement webinar

A webinar (short term used for web basedseminar) on proposed improvements to fair valueguidance is available on the IFRS website in theform of US FASB exposure draft. This FASBexposure draft is part of a joint project betweenthe IASB and the FASB that is in progress. Thewebinar is tailored for a general audience andintroduces the US exposure draft Fair ValueMeasurements and Disclosures.

(Source: www.ifrs.org and www.fasb.org. )

trading day for the options contract wouldbe two working days prior to the last workingday of the expiry month.

10. Settlement Price: The final settlement pricewould be the Reserve Bank Reference Rateon the date of expiry of the contracts.

11. Final Settlement Day: The options contractwould settle on the last working day(excluding Saturdays) of the contract month.

12. Exercise at Expiry: On expiry date, all openlong in-the-money contracts, on a particularstrike of a series, at the close of trading hourswould be automatically exercised at the finalsettlement price and assigned on a randombasis to the open short positions of the samestrike and series.

13. Initial Margin: The Initial Marginrequirement would be based on a worstscenario loss of a portfolio of an individualclient comprising his positions in options andfutures contracts on the same underlyingacross different maturities and across various

scenarios of price and volatility changes.14. Extreme Loss Margin: Extreme loss margin

equal to 1.5 percent of the Notional Value of the open short option position would bededucted from the liquid assets of the clearingmember on an on-line, real time basis.

15. Net Option Value: The Net Option Value is thecurrent market value of the option times thenumber of options (positive for long optionsand negative for short options) in the portfolio.

16. Calendar Spread Margin: A long currencyoption position at one maturity and a short

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Finance ACADEMIC UPDATES

option position at a different maturity in thesame series, both having the same strike pricewould be treated as a calendar spread.

17. Settlement of Premium: Premium would be

paid in by the buyer in cash and paid out tothe seller in cash on T+1 day.Position Limits for Participants in OptionsContract on USD-INR Spot Rate1. Client Level: The gross open positions of the

client across all contracts (both futures andoptions contracts) not to exceed 6 percent of the total open interest or USD 10 millionwhichever is higher.

2. Trading Member Level: The gross openpositions of the trading member across allcontracts (both futures and options contracts)not to exceed 15 percent of the total openinterest or USD 50 million whichever is higher.

3. Bank: The gross open positions of the bankacross all contracts (both futures and optionscontracts) not to exceed 15 percent of thetotal open interest or USD 100 millionwhichever is higher.

4. Clearing Member Level: No separate positionlimit is prescribed at the level of clearingmember.

Scenarios Used in Computation of Worst

Scenario Loss of a Portfolio of an IndividualClient Comprising His Positions in Options andFutures Contracts on the Underlying AcrossDifferent MaturitiesThe price range for generating the scenarioswould be 3.5 standard deviation and volatilityrange for generating the scenarios would be 3percent. While computing the worst scenario loss,it is to be assumed that the prices of futures of allmaturities on the underlying move up or downby the same amount. The maximum loss underany of the scenario is referred to in this circularas the Worst Scenario Loss.The complete text of the above circular can bedownloaded from:ht tp : / /www.sebi .gov. in /c i rcu la rs /2010/ cirdnpd52010.pdf

Significant notifications issued by the CentralBoard of Direct Taxes during the period01.07.2010 to 31.07.20101. Notification No. 48/2010 dated 9-07-2010

Notification of long-term infrastructurebonds by the Central Government,subscription to which would qualify fordeduction under section 80CCF of theIncome-tax Act, 1961Section 80CCF of the Income-tax Act, 1961provides that an assessee, being an individualor a Hindu Undivided Family, shall get adeduction of upto rupees twenty thousand

in computing his total income if hesubscribes to long-term infrastructure bondsas may be notified by the CentralGovernment for this purpose.Consequently, the Central Government has,vide this notification, specified the long-terminfrastructure bonds, subscription to whichwould qualify for deduction under section80CCF. Accordingly, subscription to long-term infrastructure bonds to be issued bythe Industrial Finance Corporation of India,

Life Insurance Corporation of India,

Infrastructure Development FinanceCompany Limited and a non-bankingFinance Company classified as anInfrastructure Finance Company by theReserve Bank of India would qualify fordeduction under section 80CCF. Further, thenotification also prescribes the otherconditions to be complied with, namely, thelimit on issuance, the tenure of the bond,mandatory requirement to furnish the PANto the issuer, yield of the bond and the end-use of proceeds and reporting or monitoringmechanism.

2. Notification No. 49/2010 dated 9-07-2010Manner of furnishing return of income bycompanies, firms and individuals and HUFssubject to tax audit Sub-rule (3) of Rule 12 of the Income-taxRules, 1962 lays down the manner of furnishing the return of income by differentpersons. Clause (a) of the proviso to sub-rule(3) of Rule 12 has been substituted vide thisnotification. Accordingly,(i) A company required to furnish the

return in Form ITR-6 shall furnish the

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ACADEMIC UPDATES

Income Tax

Income Tax

return for the assessment year 2010-11and subsequent assessment years

electronically under digital signature.(ii) A firm required to furnish the return inForm ITR-5 and to whom provisions of section 44AB are applicable, shallfurnish the return electronically underdigital signature or by transmitting thedata in the return electronically andthereafter submitting the verification of the return in Form ITR-5.

(iii) An individual or HUF required tofurnish the return in Form ITR-4 and towhom provisions of section 44ABare applied, shall furnish the returnfor the assessment year 2010-11

and subsequent assessment yearselectronically under digital signature

or by transmitting the data in thereturn electronically and thereaftersubmitting the verification of thereturn in Form ITR-5.

3. Notification No. 59/2010 dated 21-07-2010Cost Inflation Index Financial year 2010-11NotifiedThe Central Board of Direct Taxes (CBDT) hasnotified the cost inflation index for thefinancial year 2010-11 as 711.The complete text of the above notifications

are available at website of the Income-TaxDepartment ( www.incometaxindia.gov.in )

Area Notification No. Amendment Effect of amendment Excise 26/2010 CE Amended the CENVAT Credit CENVAT credit of any duty

(NT) dated Rules, 2004. Fourth proviso to specified in sub-rule (1) of rule29.06.2010 rule 3(4) inserted. 3 cannot be utilized for payment

of the Clean energy cess.27/2010 CE Amended the CENVAT Credit The provisions of sub-rule (1) to(NT) dated Rules, 2004. Clause (iv) to (4) of rule 6 are not applicable

01.07.2010 rule 6(6) inserted. in a case where the excisablegoods are removed withoutpayment of duty for the use of foreign diplomatic missions orconsular missions or careerconsular offices or diplomaticagents in terms of the provisionsof Notification No. 6/2006- CE dated 01.03.2006 .

Area Circular No. Issue ClarificationService tax 126/08/2010 Whether service tax is leviable It is clarified that the Primary

ST dated on the underwriting commission Dealers registered with the RBI10.08.2010 received by the primary dealers (as opposed to registration with

for the auction of Government the Securities Exchange BoardSecurities? of India) deal in Government

Securities, issued by the RBI onbehalf of the Government of India,as a part of the CentralGovernments market borrowingprogram. Therefore, service taxliability does not arise onUnderwriting Fee or UnderwritingCommission received by theprimary dealers during the courseof the dealing in GovernmentSecurities.

The complete text of above notifications and circulars are available at www.cbec.gov.in

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(I) The Companies Act, 1956

The Ministry of Corporate Affairs has issued new versions of Form 1, Form 1AA, Form 4, Form 15,

Form 20A, Form 20B, Form 22, Form 22B, Form 23, Form 23AA, Form 25C, Form 44, Form 49, Form 52,Form 61, Form DD-B, Form I-Cost Audit Report and Form 67 effective from 1 st August, 2010 .

Further, with effect from 8th August, 2010 , stamp duty payable on Form No. 1, Memorandum of Association, Articles of Association and Form No. 44 in respect of State of Himachal Pradesh , shouldbe compulsorily paid electronically at the time of their e-filing through MCA portal.

For further details refer www.mca.gov.in

(II) SEBI Act, 1992

(i) The market regulator SEBI through Circular CIR/IMD/FIIC/ 9/2010 dated August 06, 2010drastically reduced the amount that a single such entity can invest in Government and corporatepapers in order to attract FIIs in the debt market as under:

Previous Limit New Limit

For Government debt Ceiling on investment by a ` 10,000 crore ` 100 croresingle FII in government debtAmount of government debt ` 250 crore ` 50 crorewhich an FII can bidMinimum tick size ` 100 crore ` 50 crore

For Corporate debt Ceiling on investment by a ` 10,000 ` 1,000single FII in corporate debtAmount of corporate debt ` 250 crore ` 50 crorewhich an FII can bidMinimum tick size ` 100 crore ` 50 crore

(ii) The SEBI in its Board Meeting on 4 th August, 2010 amended the format of shareholding patternand its filing frequency for listed entities as under:(a) The companies shall file shareholding pattern as per Clause 35 one day prior to the date of

listing, which shall be uploaded on the website of exchanges before commencement of trading.(b) whenever the change exceeds +/- 2% of the paid up share capital of the company post a

corporate event, the companies shall file revised shareholding pattern with the stock exchangeswithin 10 days from the date of such change in the capital structure.For further details refer www.sebi.gov.in

(III) The Insurance Act, 1938

The Insurance Regulator IRDA on 28 th July, 2010 issued Grievance Redressal Guidelines whichwould be implemented with effect from 1 st August, 2010. According to these guidelines, everyinsurer shall have a system and a procedure for receiving, registering and disposing of grievancesin each of its offices. Any failure on the part of insurers to follow the procedures and time-framesmentioned in the guidelines would attract penalties by the concerned authority.

For further details refer www.irda.gov.in

All above amendments will not be applicable for November-2010 examinations .

Corporate Laws

Corporate Laws ACADEMIC UPDATES


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Business Law The Object of the Employees Provident Funds &Miscellaneous Provisions Act, 1952 is to provide

some provision for the future of the industrialworker after he retires or for his dependants incase of his early death. Accordingly the Act, 1952provides for schemes relating to the institution of

provident funds, pension fund and deposit-linked insurance fund for employees in factories andother establishments. These schemes providelong term protection and security to the employeeand after his death to his family members, andtimely advances including advances duringsickness and for the purchase/ construction of adwelling house during the period of membership. The three schemes are:

Employees Provident Fund Scheme,1952,

Employees Deposit Linked InsuranceScheme,1976,

Employees Pension Scheme,1995

Of the aforesaid three schemes EmployeesDeposit Linked Insurance Scheme, 1976 wasamended recently by the Government by way of passing Employees Deposit Linked Insurance

(Amendment) Scheme, 2010. In this modifiedscheme, the Government has increased theexisting limit of employees deposit linked

Fund or in the provident fund exempted undersection 17 of the Act, as the case may be, in

relation to any employee, is the sum total of contributions by the employee and the employer,due for and up to the relevant period, whetherpaid or unpaid in the Fund or in the Fund or inthe provident fund exempted under section 17of the Act, as the case may be, together withinterest thereon, shall be included.

Computation of 12 months: The period of twelvemonths for calculation of benefits under thisscheme shall be computed backwards from themonth preceding the month in which death of

the member occurs. Whereas in the case of a part-time employee who was a member of the Fund orof a provident fund exempted under section 17of the Act, as the case may be, while serving inmore than one factory or establishment thequantum of benefit under this scheme shall bedetermined with reference to the average of theaggregate balance in all his accounts in the Fundor of a provident fund exempted under section17 of the Act, as the case may be, during thepreceding twelve months.

The new EDLI scheme is illustrated in thefollowing table:

ACADEMIC UPDATES

The new EDLI scheme thus ensures the nomineesto get an insurance amount up to the prescribedlimit after the death, apart from the accumulatedEPF amount. This benefit of EDLI is available onlyto the nominees of members who are employedat the time of death. Death during a period of unemployment does not entitle the nominee forinsurance benefits.

Balance as per the PF % of entitlement as per the Maximum Ceiling Amount new EDLI scheme receivable

` 50,000 Full value of the balance ` 50,000 ` 1,00,000 ` 50,000 + 40% of the balance ` 70,000 ` 2,00,000 ` 50,000 + 40% of the balance ` 1,10,000 but restricted

to ` 1,00,000 only as per theceiling fixed by the new scheme

insurance (EDLI) amount from ` 60,000 to ` 1 lakh.The new scheme provides that the EDLI amountis equal to the average balance of your PF in the

last 12 months or the overall balance, whicheveris less. But if the balance exceeds ` 50,000, yournominee will get ` 50,000 plus 40% of the excessbalance up to a total of ` 1 lakh.

Average Balance : The average balance in the

Business Law


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A recent trend catching up with worlds leadingIT firm is Green Computing. Green Computingrefers to the principle of using computingresources efficiently. The goals are to reduce theuse of hazardous materials, maximize energyefficiency during the products lifetime, andpromote recyclability or biodegradability of defunct products and factory waste. Suchpractices include the implementation of energyefficient Central Processing Units (CPUs), serversand peripherals as well as reduced resourceconsumption and proper disposal of electronicwaste (e-waste).

The need and realization for sustainability incomputing arises from the realization that firmneed to give to the society, and adopt BusinessPractices which look beyond instant profits, totheir long term survival. With the huge growthin use of computing devices in the past-decade,a lot of electricity is being consumed byComputers, Laptops, PDAs and other Gadgets. At

the same time, with rapid outdating, these devicescreate problems of waste disposal and recycling.

The working habits of computer users andbusiness can be modified to minimize adverseimpact on the global environment. Some of thesteps that can be taken are:

1. Adopt virtualization concepts where eachserver is divided into multiple virtualmachines that run different applications

providing more cost effective and greenerenergy efficient computing by increasingserver utilization rates.

2. Use Cloud computing which is an internet-based computing where shared resources,software and information are provided tocomputers on demand while allowingsignificant workload shift. This reduces thenetworking equipment and makes systemsless power consuming and compact.

Information Technology ACADEMIC UPDATES

Green Computing3. Use more-efficient processor that consumes

less watts.

4. Setting the power options of computer toswitch to sleep mode when user is notworking on the system.

5. Flat Panel monitors use less energy thantraditional CRT monitors.

6. Small hard disk drive often consumes lesspower than physically larger drive.

7. Use recycled content paper and prints only

those things which we need to be printedwith two-sided printing option.

8. Buy energy star computers and Servers.

Throughout the globe, many government agencieshave implemented standards and regulations thatencourage green computing. A lot of initiativeshave voluntarily come forward from the industryworldwide. A few being -

Climate Severs Computing Initiative (CSCI)was started in 2007.

Green computing Impact-organization(GCIO) was formed in 2008 by a group of Global-minded IT executive.

Green Electronic Council (GEC) was foundedin 2005.

Green Grid is global consortium which wasfounded in 2007.

However in India, there has been no direct-regulator initiative to face this issue. The IndianIndustry still lags behind in terms of voluntaryinitiatives on green computing. A few large firmslike Infosys, Wipro and TCS have been takingsustainability initiatives to reduce their water andenergy consumptions. It is expected that GreenComputing will gain a lot more prominence innear future with a tightening regulatory scenarioand pressure from civil society.


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CASE LAWS

Legal Decisions Income Tax1. Can the penalty under section 271(1)(c) be imposed

where the assessment is made by estimating the net profit at a higher percentage applying the provisionsof section 145?CIT v. Vijay Kumar Jain (2010) 325 ITR 0378(Chhattisgarh)In this case, the Assessing Officer levied penaltyunder section 271(1)(c) on the basis of addition madeon account of application of higher rate of net profitby applying the provisions of section 145, consequentto rejection of book results by him.On this issue, the High Court held that the particularsfurnished by the assessee regarding receipts in therelevant financial year had not been found inaccurateand it was also not the case of revenue that theassessee concealed any income in his return. Thus,penalty could not be imposed.The High Court placed reliance on the ruling of theSupreme Court in CIT v. Reliance Petroproducts P. Ltd.(2010) 322 ITR 158, while considering the applicabilityof section 271(1)(c). In that case, the Apex Court hadheld that in order to impose a penalty under thesec-tion, there has to be concealment of particulars of income of the assessee or the assessee must havefurnished inaccurate particulars of his income. Whereno information given in the return is found to beincorrect or inaccurate, the assessee cannot be heldguilty of fur-nishing inaccurate particulars.

2. In determining the period of holding of a capitalasset received by a partner on dissolution of firm,can the period of holding of the firm be taken intoaccount?P. P. Menon v. CIT (2010) 325 ITR 122 (Ker.)The assessee was a partner in a firm, which owned ahospital building and land. The firm was dissolvedand the entire assets including the hospital buildingand land were taken over by the assessee. Theassessee sold the hospital building and the landwithin three days of dissolution. He, however,claimed that the period of holding should be reckoned

by including the period when he was a partner of the firm. He contended that since the total periodhas more than 36 months, the capital gain was to betreated as a long-term capital gain.The High Court held that the benefit of taking thecost of acquisition as the cost to the previous ownerunder section 2(42A) read with section 49(1)(iii)(b)can be availed only if the dis-solution of the firmhad taken place at any time before April 1, 1987. Inthis case, the firm was dissolved on April 15, 2001and therefore the benefit of these sections was notavailable to the assessee. Therefore, the period of holding of the asset by the assessee in this case wasonly from the date of dissolution of the firm. Since

the assessee sold the property within three days of acquiring the same, the gains have to be treated asshort-term capital gain.

3. Can the amount incurred by the assessee forreplacing the old mono sound system in its cinematheatre with a new Dolby stereo system be treatedas revenue expenditure?CIT v. Sagar Talkies (2010) 325 ITR 133 (Karn.)On this issue, the High Court observed held that theassessee had provided certain amenities to itscustomers by replacing the old system with a bettersound system and by introducing such system; theassessee had not increased its income in any way.The assessee installed dolby stereo system insteadof repairing the existing old stereo system. This hadnot benefited the assessee in any way with regard tothe total income since there was no change in theseating capacity of the theatre or increase in the tariff rate of the ticket. In such a case,, the expenditure onsuch change of sound system could not be consideredcapital in nature.

4. Can the interest payable by the assessee company onloan availed from the directors for the purchase of an asset be added to the cost of acquisition of theasset while computing long term capital gain, wherethe resolution to pay interest has been passed afterthe date of sale?CIT v. Sri Hariram Hotels P. LTD (2010) 325 ITR 136(Karn.)The assessee borrowed loans from some of itsdirectors and purchased an immovable property inorder to put up a hotel building. However, the projectdid not materialize on account of various reasons.Ultimately, the assessee sold the property. Whilefiling the return, it claimed the interest paid to thedirectors on the loan borrowed from them in orderto purchase the property as cost of acquisition forcomputation of the capital gain. The AssessingOfficer disallowed the claim made by the assessee,but the Tribunal allowed it.

The main contention of the Revenue was that it wasafter the sale of property that a resolution was passedby the company to pay the interest to the Directors,and as such, there was no liability for the company topay the interest as on the date of sale.The High Court, dismissing the appeal, held thatsince the property had been purchased out of theloans borrowed from the directors, any interest paidthereon had to be included while calculating the costof acquisition of the asset.Note: In this case, it has been established that thedate of passing resolution for payment of interest isnot relevant since interest generally starts accruingas soon as the loan is taken.


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INTERVIEW

Q. How do you feel beingfirst/second rank holder in thefinal examinations? How doyou visualise your success?

A. Securing the first rank in a course that haslargely been recognised as the most difficultcourse is indeed an overwhelming andhumbling experience. When I saw the result,I was literally on top of the world! Rankingfirst in PE-2 had built up expectations amongfamily and peers, which I had to live up to.So the excitement was mingled with a hugesense of relief!

This success is indeed an importantmilestone in my professional career. Things

look bright and suddenly I am flooded withoptions. However, if not substantiated andregularly supported with exemplaryperformance at work, the glory fades awaysoon! So, this success inspires me to put inmy best in all future endeavours and be loyalto the profession that has given me thisrecognition!

Q. How did you prepare for the examinations?What were the various component of yourplan?

A. I had to attend office regularly and the workhours were long. But I never used that as anexcuse for myself. I started with theorysubjects on weekends giving three to fourhours on an average. I tried using every sparehour I could manage. I got study leave 4months before exams and then I went on tostrategise my study plan.

I had a broad monthly schedule, which wasbroken down to weekly allocation of timings

per subject, on to per day preparation, sliced

downright to hourly basis. By February end,I had familiarised myself with all the eightsubjects once, and then I started withrevision. I followed a balance approach- eachsubject was equally important and there wasno scope of laxity in any.

However, even though the arduous studyschedule, I never compromised on sleep andthere was time for leisure as well.

Q. What are your views on the articleshiptraining? What way the training has helpedyou in your learning and examinations?

A. I completely oppose the view that articleshiphinders in studying process. I have taken somuch from my articleship and applied to mystudies.

I did my training in Audit and Taxation. Beingclued on to the practical aspects of theseareas, studying the course theoretically wasnot very difficult. I was able to understandthe concepts better and retain and reproducethem effectively during exams.

Further, the challenge we face each day atwork makes one strong mentally andprepares us to handle difficult situations thatmay arise. I followed the strategy that if clientdeadlines can be accomplished within twohours, so can a chapter- you just have to makeeffective use of time.

Q. Please tell us about the contribution of studymaterials, students newsletter, suggestedanswers and revision test papers in yoursuccess.

A. I referred to the study material for some of my subjects. For others, even if I was studyingfrom some reference books, the studymaterial had the final word in case of any

confusion. Students newsletter kept us

INTERVIEW A set of questions were asked to Sanjhi Agrawal, the topper of CA Final

(New Course) Examination-May 2010. The questions and their responses areincluded in these pages.

Sanjhi AgrawalNew Delhi, Ist Rank, CA Final,May 2010


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INTERVIEW

updated with the recent amendments andapplicability of the same. It was extremelyimportant to browse through each edition.

I also went through the revision test papersaround 15-20 days before exams to analysewhere I stand and what I need to work on.

Q. How have your family members and friendshave contributed to your success?

A. My family and friends have contributed in abig way towards my achievement.

This feat would not have been possiblewithout the incessant support of my parents.They were my source of strength- the reason

I kept going. They were my guide, my mentorand I feel its more of their achievement thanmine.

Q. Why did you choose CA as a career? Havingpassed the examinations what prospects yousee for yourself?

A. A number of my family members areChartered Accountants. Although there wasno pressure from them to take up CA, thefamily environment was conducive for thesame. I used to find the course challengingand exciting and had a keen interest insubjects like accounts and taxation.

Having qualified, there are a host of opportunities that await. Ranging fromemployment to own practice, there aremultiple avenues to be explored beforefinalising one.

Q. Do you think that the present students of chartered accountancy lack in generalmanagement and communication skills?What should they do to improve these skills?

A. The examination-oriented approach followedby Chartered Accountancy students doesplay a role in limiting the overalldevelopment as a professional. Excessivestress is laid upon coaching classes andmugging up the course and other aspects thatcomplete a professional are convenientlyignored.

By and large, I feel that CA students lack goodcommunication and presentation skills. They

may know the theory well but face achallenge when it comes to practicalapplication and general management.However, such is usually not the case with

students who pursue their articleshipdiligently. The kind of exposure/training thata student gets during articleship hones thesofter skills and makes him/her poised to facethe challenges that lie ahead.

Further, though I have not yet completed theGMCS course conducted by the Institute, Ihave heard that if taken seriously, the samecan be extremely beneficial to the students.The way the course is structured enablesstudents to overcome the challenges theyface when it comes to communication andpresentation skills.

Q. What challenges are being faced by achartered accountant today? How do youintend to overcome them?

A. As highlighted above, CA students usuallystruggle with communication and generalmanagement skills and this is where MBAsoverpower us. Even though CAs aretechnically more sound, MBAs are givenpreference in the industry. However, if wecan overcome this challenge, the tables canbe turned!

Q. And finally, what advice you would like togive to the other chartered accountancystudents?

Pursue your articleship diligently. It is anextremely important part of the CA courseand you cannot become an able professionalwithout practical training.

There is no substitute for hard work, zeal andpassion to excel!

The course is voluminous, the pressures arehigh. Only the ones who manage to keep theircool can manage to succeed.

Excessive reliance on coaching classesshould be avoided. You can definitely takeguidance for subjects youre not comfortablewith, but following the crowd in takingcoaching for all subjects is an incorrectapproach.


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I. General Comments :(1) Conceptual clarity is lacking in almost all the subjects, for

which intense learning of the study material is the solution.(2) The major areas of deficiency noticed in most subjects were

lack of systematic and logical approach and analyticalthinking.

(3) The performance displayed lack of knowledge of Accounting Standards, Standards on Auditing andcorporate and other laws, the outcome of which reflectedin poor results.

(4) Candidates have not been able to apply the AccountingStandards properly. The level of knowledge at the Finallevel requires the candidates to have application skills, butthey have failed to live up to this expectation.

(5) Solutions to practical problems have not been given in theprescribed format with suitable working notes in thesubject of Financial Reporting.

(6) Candidates lacked knowledge of specialized areas of StrategicFinancial Management such as swaps, arbitrage, etc.

(7) In the subject of Corporate and Allied Laws, theperformance in the allied laws was not satisfactory,displaying poor comprehension of the provisions of thevarious Acts. The answers were also not supported withcase laws, wherever necessary.

(8) The presentation of answers was also very poor in manycases. The major deficiencies were -(i) not starting the answer to a new question on a fresh

page;(ii) answering the different sub-parts of the questions in

different places instead of answering the same one

after the other;(iii) leaving blank pages in between the answers;(iv) writing the question number outside the margin,

which is intended for answers;(v) not marking the questions answered in the cover page

inspite of specific instructions to do so;(vi) very poor handwriting;(vii) lack of expression;(viii) spelling mistakes; and(ix) grammatical mistakes.

II. Paper-Wise Specific Comments :PAPER 1 : FINANCIAL REPORTING

Question 1. (a) Most of the candidates were not able to applythe provisions of AS 11 The Effects of Changes in ForeignExchange Rates correctly, and were hence, not able to answerthe question . Few among them did not treat the forwardcontract as speculative and failed to compute the amount of profit for the contract.(c) Some candidates wrongly computed the borrowing coststo be capitalized as 16.5 crores (13% of Rs. 150 crores ie.Rs.19.5 crores less income from temporary investment Rs. 3.5crores) instead of Rs. 13 crores (Interest paid Rs. 16.5 croresless Rs. 3.5 crores).(d) Many candidates were not aware of the provisions of Accounting Standards Interpretation (ASI) 5 and erred increation of deferred tax liability and the corresponding chargeto profit and loss account.Question 2. (b) Most of the candidates failed to understand

the provisions of AS 30 Financial Instruments: Recognitionand Measurement. They failed to calculate the value of loaninitially to be recognized and amortized cost for the subsequent

years. Consequently, they could not give the required journalentries.Question 3. Many candidates considered O as Subsidiary of W instead of an Associate of W. Few erred in apportionmentof profits between pre-acquisition and post-acquisition whichresulted in wrong computation of goodwill, minority interestand consolidated reserves for the purpose of consolidatedbalance sheet of W. The answers exhibited inadequateknowledge of AS 21 Consolidated Financial Statements andAS 23 Accounting for investment in Associates in ConsolidatedFinancial Statements.Question 4 . Some of the candidates did not compute the correctamount of purchase consideration and the correct number of shares issued by Bat Ltd. to Cat Ltd. and consequently, could

not prepare balance sheet after merger.Question 5 . Many candidates could not arrive at the correctamount of future maintainable profit and weighted averageannual profit and therefore, they erred in valuation of goodwill.Question 6. (a) Majority of the candidates could not determinethe value of brand under potential earning model.(b) Few candidates were not able to calculate the correctamount of depreciation and replacement reserve underreplacement cost basis.

PAPER - 2 : STRATEGIC FINANCIAL MANAGEMENTQuestion 1. (a) The following common errors were noted inthe answer of candidates.(i) Most of the candidates could not calculate NPV for best

and worst case scenarios.(ii) Some candidates could not understand the concept of

probable NPV.(b) Most of the candidate except a few have exhibited lack of knowledge of put and call options.(c) Being a theoretical qu

Documents

ICAIseptember2010-students Newsletter36P