In an excellent book “5 Key Lessons From Top Money Managers”, the author, Scott Kays, interviewed Andy Stephens of Artisan Mid-Cap Fund. The following is a summary of Stephens’s investment philosophy.
“Security Selection"*
Acquire companies with reliable cash flows. Look for firms that possess structural competitive advantages capable of protecting those cash flows from competition. A structural competitive advantage can be a dominant market share, a proprietary asset, low-cost producer status, or a defensible brand.* Calculate the present value of a corporation's future cash flows to determine its fair market value. Try to buy the business at a sizable (ideally at least 40 percent) discount to its value.* Buy companies just prior to the start of their profit cycles, looking for firms that are experiencing internal and/or external changes. Internal changes include such things as a new management team, a big acquisition or divestiture, a major restructuring, or a new product launch. External changes include new technologies and regulatory events.
Portfolio Allocation*
Maintain a garden-a portion of the portfolio that includes small positions in stocks that meet your requirements but have not yet entered their profit cycles.* Increase your positions in companies as they begin their profit cycles and move them to your crop-that part of the portfolio where you take bigger positions in firms that have proven their abilities to meet your growth expectations.* When a stock reaches your target price or its profit cycle begins to decelerate, reduce or eliminate your position in it-harvest it.* Do not time the market; always remain fully invested.* Reduce the size of your crop and increase the size of your garden to lower your risk during economic downturns when profit cycles are sparse.* Do not overconcentrate in a single sector of the market.”
Saturday, July 12, 2008
About FCCBs, GDRs and ADRs
Foreign Currency Convertible Debenture -
A type of convertible bond issued in a currency different than the issuer's domestic currency. In other words, the money being raised by the issuing company is in the form of a foreign currency. A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock.These types of bonds are attractive to both investors and issuers. The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock. (Bondholders take advantage of this appreciation by means warrants attached to the bonds, which are activated when the price of the stock reaches a certain point.) Due to the equity side of the bond, which adds value, the coupon payments on the bond are lower for the company, thereby reducing its debt-financing costs.
A Global Depository Receipt or Global Depositary Receipt
(GDR) is a certificate issued by an international bank which can be subject of worldwide circulation on capital markets. GDRs are emitted by banks, which purchase shares of foreign companies and deposit it on the accounts. Global Depository Receipts facilitate trade of shares, especially those from emerging markets. Prices of GDRs are often close to values of related shares.
An American Depositary Receipt
(ADR) is how the stock of most foreign companies trades in United States stock markets.Each ADR is issued by a U.S. depositary bank and represents one or more shares of a foreign stock or a fraction of a share. If investors own an ADR they have the right to obtain the foreign stock it represents, but U.S. investors usually find it more convenient to own the ADR. The price of an ADR is often close to the price of the foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares.Depositary banks have numerous responsibilities to the holders of ADRs and to the non-U.S. company the ADRs represent. The largest depositary bank is The Bank of New York.Individual shares of a foreign corporation represented by an ADR are called American Depositary Shares (ADS).The level of compliance to be shown by the company, with the laws of the country where its ADRs or GDRs are traded will depend on the type of float it decides to have. Whether it just wants its stock just to be available to the foreign investors or whether it wants to raise money from foreign shores etc., will decide the depth of the compliance levels. The government came with a scheme during 1992/1993 to allow the Indian Corporate Sector to have access to the Global Capital Markets through issue of Foreign Currency Convertible Bonds (FCCBs)/Equity Shares under the Global depository Mechanism.The guidelines were liberalized from time to time and the recent initiatives are listed below:1. Pricing guidelines for Indian listed companies FCCB/ADR/GDR were brought in alignment with SEBI's guidelines on domestic capital issues. 2. Unilisted companies issuing FCCB/ADR/GDRs are now required to have prior or simultaneous listing in domestic stock exchange(s). 3. Unlisted companies, which have issued ADR/GDR/FCCB, now required to list in domestic market by 31 March 2006. However, unlisted companies which had accessed FCCBs, ADR/GDRs in terms of guidelines at 22 May 1998 and are not making profit, be permitted to comply with listing condition on the domestic stock exchanges within three years of having started making profit. However, no fresh issues of FCCBs, ADR/GDRs by such companies will be permitted without listing first in the domestic exchanges. 4. In order to rationalise the ADR/GDR guidelines further, Government exempted the companies, going in for an offering in the domestic market and a simultaneous or immediate follow on offering (within 30 days of domestic issue) through ADR/GDR issues wherein GDRs/ADRs are priced at or above the domestic price, from the requirement of the revised pricing guidelines. 5. Unlisted Indian companies, which had issued FCCBs, ADRs/GDRs prior to 31 August 2005 and are not making profit are also permitted to sponsor such issues against existing shares and are permitted to comply with listing conditions on the domestic stock exchanges within three years of having started making profits.
Book Building
Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand discovery. It is a process used for marketing a public offer of equity shares of a company. It is a mechanism where, during the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The process aims at tapping both wholesale and retail investors. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria. The Process: * The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'. * The Issuer specifies the number of securities to be issued and the price band for orders. * The Issuer also appoints syndicate members with whom orders can be placed by the investors. * Investors place their order with a syndicate member who inputs the orders into the 'electronic book'. This process is called 'bidding' and is similar to open auction. * A Book should remain open for a minimum of 5 days. * Bids cannot be entered less than the floor price. * Bids can be revised by the bidder before the issue closes. * On the close of the book building period the 'book runner evaluates the bids on the basis of the evaluation criteria which may include - o Price Aggression o Investor quality o Earliness of bids, etc. * The book runner and the company conclude the final price at which it is willing to issue the stock and allocation of securities. * Generally, the number of shares are fixed, the issue size gets frozen based on the price per share discovered through the book building process. * Allocation of securities is made to the successful bidders. * Book Building is a good concept and represents a capital market which is in the process of maturing. Guidelines for Book BuildingRules governing book building is covered in Chapter XI of the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines 2000. BSE's Book Building System* BSE offers the book building services through the Book Building software that runs on the BSE Private network. * This system is one of the largest electronic book building networks anywhere spanning over 350 Indian cities through over 7000 Trader Work Stations via eased lines, VSATs and Campus LANS.* The software is operated through book-runners of the issue and by the syndicate member brokers. Through this book, the syndicate member brokers on behalf of themselves or their clients' place orders. * Bids are placed electronically through syndicate members and the information is collected on line real-time until the bid date ends. * In order to maintain transparency, the software gives visual graphs displaying price v/s quantity on the terminals. Initial Public OfferingsCorporates may raise capital in the primary market by way of an initial public offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. This Initial Public Offering can be made through the fixed price method, book building method or a combination of both. In case the issuer chooses to issue securities through the book building route then as per SEBI guidelines, an issuer company can issue securities in the following manner: a. 100% of the net offer to the public through the book building route. b. 75% of the net offer to the public through the book building process and 25% through the fixed price portion. c. Under the 90% scheme, this percentage would be 90 and 10 respectively.
IFRIC issues Interpretation on construction of real estate
July 2008:
The International Financial Reporting Interpretations Committee has issued an Interpretation, IFRIC 15 Agreements for the Construction of Real Estate. IFRIC 15 standardises accounting practice across jurisdictions for the recognition of revenue by real estate developers for sales of units, such as apartments or houses, 'off plan' – that is, before construction is complete.
Observations about IFRIC 15:
Fundamental issue. The fundamental issue is whether the developer is selling goods – the completed apartment or house – or is selling a service – a construction service as a contractor engaged by the buyer. Revenue from selling goods is normally recognised at delivery. Revenue from selling services is normally recognised on a percentage-of-completion basis as construction progresses. IFRIC 15 provides guidance on how to determine whether an agreement for the construction of real estate is within the scope of IAS 11 Construction Contracts or IAS 18 Revenue and, accordingly, when revenue from the construction should be recognised.
IAS 11 or IAS 18? An agreement for the construction of real estate is a construction contract within the scope of IAS 11 only when the buyer is able to specify the major structural elements of the design of the real estate before construction begins and/or specify major structural changes once construction is in progress (whether it exercises that ability or not). If the buyer has that ability, IAS 11 applies. If the buyer does not have that ability, IAS 18 applies.
If IAS 18, service or goods? Even if IAS 18 applies, the agreement may be to provide construction services rather than goods. This would likely be the case, for instance, if the entity is not required to acquire and supply construction materials. If the entity is required to provide services together with construction materials in order to perform its contractual obligation to deliver real estate to the buyer, the agreement for the sale of goods under IAS 18.
Implications of IFRIC 15. The main expected change in practice is a shift for some entities from recognising revenue as construction progresses to recognising revenue at a single time – at completion upon or after delivery. Agreements that will be affected will be mainly those currently accounted for in accordance with IAS 11 that do not meet the definition of a construction contract as interpreted by the IFRIC and do not transfer to the buyer control and the significant risks and rewards of ownership of the work in progress in its current state as construction progresses.
IFRIC 15 is effective for annual periods beginning on or after 1 January 2009 and must be applied retrospectively.mail to me at casatbirgill@gmail.com for bare act of IFRIC 15
IFRIC guidance on hedge of an investment in a foreign operation
July 2008: The International Financial Reporting Interpretations Committee has issued an Interpretation, IFRIC 16 Hedges of a Net Investment in a Foreign Operation. Currently, practice has diverged as a result of differing views on which risks are eligible for hedge accounting under IAS 39.
IFRIC 16 clarifies three main issues:
Whether risk arises from (a) the foreign currency exposure to the functional currencies of the foreign operation and the parent entity, or from (b) the foreign currency exposure to the functional currency of the foreign operation and the presentation currency of the parent entity's consolidated financial statements.
IFRIC 16 concludes that the presentation currency does not create an exposure to which an entity may apply hedge accounting. Consequently, a parent entity may designate as a hedged risk only the foreign exchange differences arising from a difference between its own functional currency and that of its foreign operation.
Which entity within a group can hold a hedging instrument in a hedge of a net investment in a foreign operation and in particular whether the parent entity holding the net investment in a foreign operation must also hold the hedging instrument.
IFRIC 16 concludes that the hedging instrument(s) may be held by any entity or entities within the group.
How an entity should determine the amounts to be reclassified from equity to profit or loss for both the hedging instrument and the hedged item when the entity disposes of the investment.
IFRIC 16 concludes that while IAS 39 must be applied to determine the amount that needs to be reclassified to profit or loss from the foreign currency translation reserve in respect of the hedging instrument, IAS 21 must be applied in respect of the hedged item.
IFRIC 16 is effective for annual periods beginning on or after 1 October 2008 and may be applied prospectively.
Mail to me at casatbirgill@gmail.com for bare act of IFRIC 16
IFRIC 16 clarifies three main issues:
Whether risk arises from (a) the foreign currency exposure to the functional currencies of the foreign operation and the parent entity, or from (b) the foreign currency exposure to the functional currency of the foreign operation and the presentation currency of the parent entity's consolidated financial statements.
IFRIC 16 concludes that the presentation currency does not create an exposure to which an entity may apply hedge accounting. Consequently, a parent entity may designate as a hedged risk only the foreign exchange differences arising from a difference between its own functional currency and that of its foreign operation.
Which entity within a group can hold a hedging instrument in a hedge of a net investment in a foreign operation and in particular whether the parent entity holding the net investment in a foreign operation must also hold the hedging instrument.
IFRIC 16 concludes that the hedging instrument(s) may be held by any entity or entities within the group.
How an entity should determine the amounts to be reclassified from equity to profit or loss for both the hedging instrument and the hedged item when the entity disposes of the investment.
IFRIC 16 concludes that while IAS 39 must be applied to determine the amount that needs to be reclassified to profit or loss from the foreign currency translation reserve in respect of the hedging instrument, IAS 21 must be applied in respect of the hedged item.
IFRIC 16 is effective for annual periods beginning on or after 1 October 2008 and may be applied prospectively.
Mail to me at casatbirgill@gmail.com for bare act of IFRIC 16
TREKKING IN THE MOUNTAINS
Spring was in the air. The flowers in the valley and on the mountain were in full bloom. A man decided to go for a trek to the top of the mountain.The young man filled up his haversack and strapped it on to his back. He started his trek uphill, whistling a merry tune to himself. The spring in his step matched the spring in the air. He walked up slowly but surely. Every now and then he stopped to admire the flowers and the trees. Everything around him looked so happy. He stopped to feed the squirrels and the birds. He took out his packed lunch and ate it; he threw some tidbits to the rabbits too. A stray dog ventured near him, whining. The man noticed that the dog was bleeding. It had hurt its leg. He took out his first aid kit and carefully reached out for the poor mongrel. He washed the wound and dressed it up.The man continued his trek up the mountain. He met some village children on the way. He gave them some toffees and chatted with them. They skipped along with him and showed him the best path to take. They showed him the rarest species of mountain undergrowth that only the locals know of. The children plucked wild berries off the trees and offered them to the man. He was wary of eating them, lest they are poisonous, but seeing the children eat, he ate them too. He went on further uphill, till he reached the top. The lovely spruce trees looked rich and green. The pine cones looked like nuggets of gold hanging on the trees. The air was cool and pure. He basked in the sun for a while.As the sun went down he realized that it was time to go back. He started his descent. Half way down, he slipped and fell. He yelped in pain as his ankle got twisted. He was all alone. Now what? He applied some balm to his ankle and tied it up, but he just couldn?t walk. He realized that he may have to spend the night there. Just then he saw the stray dog looking at him. He saw the bandage that he had earlier applied to him. The dog seemed to understand that the man needed help. He licked the foot of the man and then limped away. Some time later the dog was back, followed by a group of children. The children recognized him as the toffee-man.Together, the children helped him to hobble back, all the way down the mountain.His little acts of kindness and love had won him enough friends to help him when he was making his descent. So too it is in life. It is important to be nice to people on our way up for we may need them on our way down.
Golden Quote
“If you CANNOT be a pensil to write anyone’s Happiness, But try atleast to be a NICE RUBBER to to erase Everyone’s Sorrows……..”
CONGRATULATION TO CA'S
“Accepting every victory with a humble heart and every defeat with a gracious mind is the best way to live in this world”
CONGRATULATION TO THE FOLLOWINGS ON BECOMING CHARTERED ACCOUNTANT:-
1. CA BHUVAN GOYAL
2. CA CHAMAN LAL GOYAL
3. CA VIKAS KAPAHI
4. CA MANIT KAUR (40 TH RANK)
5. CA VISHAL AGGARWAL
6. CA POOJA RANI
7. CA HEMANT
8. CA VIVEK SAWHNEY
9. CA ABHISHEK KASHYAP
10. CA AKHIL CHOPRA
11. CA RAGHAV (10TH RANK)
12. CA SHUKHVINDER SINGH
13. CA RICHA SAINI
14. CA HARPREET KAUR
15. CA SANDEEP SYAL
16. CA GURVINDER
17. CA ABHASH KUMAR
18. CA NITYA GUPTA
19. CA ANURAG VERMA
20. CA VIHSAL PURI
21 CA DIVYA SHARMA
22 CA ESHA
23 CA CHITRA ANAND
24 CA AMIT SOOD
25 CA NARESH KUMAR
CONGRATULATION TO FOLLLOWINGS ALSO FOR PASSING THE GROUP:-
1. ANKIT WALIA -2ND GROUP
2. DEEPAK KUMAR WADHAWAN -2ND GROUP
3. RISHU MAGGO -2ND GROUP
4. ASHUTOSH -1ST GROUP
5. VIKAS CHANDEL -1ST GROUP
“defeat is not when you fall down, It is when you refuse to get up!.....”
“JAB WE MET CA “ IS WITH ALL :-
“The movement you think of giving up ,think of the reason you Held so long ……..Do or Die is an old saying ,Do it before you die is the latest ….”
TO ALL OTHERS WHO COULD NOT PASS , “JAB WE MET CA” GROUP IS WITH THEM
DO NOT WORRY. PLEASE APPLY FOR REVALUATION WHICH IS THE RIGHT OF EVERY STUDENT AND START STUDING AGAIN .PLEASE ANALYSE WHERE WAS LACKING AND TRY TO IMPROVE THAT I KNOW MANY FRIENDS OF MINE WHO COULD NOT CLEAR THE LAST EXAM BUT HAD CLEARED THIS EXAM WITH THE EXCELLENT RECORD. IF ANY MEMEBER NEEDS ANY HELP ON ANY TOPIC/STUDY MATERIAL “JAB WE MET CA” GROUP IS BEHIND THEM TO HELP ON ANY TOPIC.
“If the path is beautiful, let us not ask where it leads…..And if the destination is beautiful, Let us not ask how is the Path .”
Keep Walking…………
Please visit http://www.jabwemetca.blogspot.com/ regularly to keep youself updated.
I BELIEVE INVESTMENT IN THE KNOWLEDGE IS THE BEST INVESTMENT.
WITH REGARDS
CA SATBIR SINGH
NOTE :-IF ANY CORRECTION/ADDTION IS NEEDED IN THE ABOVE DATA PLEASE LET ME KNOW.
CONGRATULATION TO THE FOLLOWINGS ON BECOMING CHARTERED ACCOUNTANT:-
1. CA BHUVAN GOYAL
2. CA CHAMAN LAL GOYAL
3. CA VIKAS KAPAHI
4. CA MANIT KAUR (40 TH RANK)
5. CA VISHAL AGGARWAL
6. CA POOJA RANI
7. CA HEMANT
8. CA VIVEK SAWHNEY
9. CA ABHISHEK KASHYAP
10. CA AKHIL CHOPRA
11. CA RAGHAV (10TH RANK)
12. CA SHUKHVINDER SINGH
13. CA RICHA SAINI
14. CA HARPREET KAUR
15. CA SANDEEP SYAL
16. CA GURVINDER
17. CA ABHASH KUMAR
18. CA NITYA GUPTA
19. CA ANURAG VERMA
20. CA VIHSAL PURI
21 CA DIVYA SHARMA
22 CA ESHA
23 CA CHITRA ANAND
24 CA AMIT SOOD
25 CA NARESH KUMAR
CONGRATULATION TO FOLLLOWINGS ALSO FOR PASSING THE GROUP:-
1. ANKIT WALIA -2ND GROUP
2. DEEPAK KUMAR WADHAWAN -2ND GROUP
3. RISHU MAGGO -2ND GROUP
4. ASHUTOSH -1ST GROUP
5. VIKAS CHANDEL -1ST GROUP
“defeat is not when you fall down, It is when you refuse to get up!.....”
“JAB WE MET CA “ IS WITH ALL :-
“The movement you think of giving up ,think of the reason you Held so long ……..Do or Die is an old saying ,Do it before you die is the latest ….”
TO ALL OTHERS WHO COULD NOT PASS , “JAB WE MET CA” GROUP IS WITH THEM
DO NOT WORRY. PLEASE APPLY FOR REVALUATION WHICH IS THE RIGHT OF EVERY STUDENT AND START STUDING AGAIN .PLEASE ANALYSE WHERE WAS LACKING AND TRY TO IMPROVE THAT I KNOW MANY FRIENDS OF MINE WHO COULD NOT CLEAR THE LAST EXAM BUT HAD CLEARED THIS EXAM WITH THE EXCELLENT RECORD. IF ANY MEMEBER NEEDS ANY HELP ON ANY TOPIC/STUDY MATERIAL “JAB WE MET CA” GROUP IS BEHIND THEM TO HELP ON ANY TOPIC.
“If the path is beautiful, let us not ask where it leads…..And if the destination is beautiful, Let us not ask how is the Path .”
Keep Walking…………
Please visit http://www.jabwemetca.blogspot.com/ regularly to keep youself updated.
I BELIEVE INVESTMENT IN THE KNOWLEDGE IS THE BEST INVESTMENT.
WITH REGARDS
CA SATBIR SINGH
NOTE :-IF ANY CORRECTION/ADDTION IS NEEDED IN THE ABOVE DATA PLEASE LET ME KNOW.
Friday, July 11, 2008
PROPER ACCOUNTING FOR INTEREST ON INCOME TAX REFUND
PROPER ACCOUNTING FOR INTEREST ON INCOME TAX REFUND IS REQUIRED TO AVOID PENALTY- Analysis of judgment of Madras high Court and related issues.
Interest u/s 244A
The assessee is entitled to claim and get refund of excess taxes paid with interest thereon under section 244A. Thus the claim of interest and right to receive it is a statutory right of the assessee. The interest u/s 244A (or any other provision of I.T. Act prior to insertion of section 244A) is paid by your own A.O., therefore it is always in his knowledge, and one should not try to avoid disclosure of the same as income. The accountants and tax return preparers should also take reasonable care to reconcile the account of TDS and other advance taxes, orders and intimations received, refund received etc. to check that tax paid and interest paid is properly adjusted, the amount of refund received against advance tax and TDS is adjusted properly and interest received on refunds is taken as income.
Practical aspects
In practice we find that many times, the returns are processed, refund is allowed but without any interest. Sometimes refund is granted and interest is calculated up to that date. However, refund is actually given to the assessee quite late. Sometimes we find that cheques are written but they are not dispatched and the cheques are sent to assessee when assessee approaches or complains about non-receipt of refund and in such circumstances though actually refund is quite late, the amount of interest is not updated. Therefore, in respect of interest receivable from the Income-tax Department mostly people account for the same on actual receipt basis. This is because in spite of assessee's right to receive a refund with interest, the assessee is not sure to the period up to which interest will be allowed and the amount on which refund will be allowed. The variation in amount of refund claimed and refund actually granted may take place for several reasons like( a) Variation in the amount of income returned and the income assessed ( b) Variation in amount of tax and interest payable (c) Variation in amount of income tax, interest, penalty etc. which the assessing officer may impose in some other years and adjust the demand against the refund receivable by the assessee. Therefore, the assessee cannot always be sure about the amount of interest receivable. Accordingly, many of assessees consider the amount of interest actually received as income.
In some cases it is noticed that the cheque for refund is sent by the A.O. however the amount of refund is not as per claim. It is lesser but no reason is given, no computation or intimation of computation has been provide- the assessee has got only cheque. In such a case it may not be possible for the assessee to ascertain whether only principal amount against some TDS certificates has been allowed and refunded or some interest has also been granted. For example suppose assessee submitted TDS certificates of Rs.80000/- and claim for refund was of Rs.40000/-. The A.O. sends only cheque of Rs.25000/- that is lesser by Rs.15000/- than amount of claim. No computation is provided. It may be that the A.O. has denied credit for some TDS certificate for Rs.15000/- and did not allow any interest. Or it may be that credit for TDS certificate is denied for Rs.20000/- and interest is allowed Rs.5000/- in respect of credit allowed. Or there may be a case that tax liability is ascertained at a higher amount. Therefore, unless the A.O. provides details, the assessee will not be in a position to ascertained, whether, any interest has been allowed or not? In such a case the assessee may approach the A.O. and obtain the intimation / calculation sheet. In case of need application for rectification and further refund of principal amount and / or interest can be made. Amount of interest actually received should be shown as income.
Failure to account for / disclose the interest actually received is really very serious - and is in nature of concealment of income:
In case the assessees do not disclose the amount of interest received from Income-tax Department, this will amount to concealment of income and the assessee should not take a risk of even mistake in this regard because the Income-tax Department had paid the interest and if it is not disclosed by the assessee, the department has its own information and can assess the income without there being any need of annual return or other information from other sources. Therefore, one must be very careful to properly account for and disclose the interest received as income.
Recent case before Madras High Court
In the case of CIT v. Thirupathy Kumar Khemka and another, [2007] 291 ITR 122(Mad), the assessee did not disclose the amount of interest in the income of a.y. 1996-97. In respect of interest u/s 244A of the Income-tax Act, 1961 granted for the assessment year 1993-94 and certain credits in a savings bank account. The assessing officer made addition for both the sums and consequently penalty u/s 271(1)(c) was also imposed for concealment of income and furnishing of inaccurate particulars of income. On appeal the Commissioner (A) confirmed the penalty in relation to addition of interest u/s 244A granted by the Department but deleted the penalty in respect of addition relating to unexplained credit in savings bank account. The order of the CIT(A) was upheld by the Tribunal.
It appears that the department did not prefer appeal in respect of penalty deleted in respect of savings bank account otherwise that appeal most probably would have been heard together with the assessee's appeal in respect of the penalty confirmed by the Tribunal in relation to Interest u/s 244A.
From the judgment reported, it appears that the department granted the interest u/s 244A. However, it is not clear whether the amount of interest was actually received by the assessee or not and what are the reasons that the entry of interest received (which was substantial amount) from income tax department was omitted or wrongly accounted for and income was also not included in computation sheet of income. The assessee has not offered any explanation for the mistake or omission in accounting and computation. The explanation offered by the assessee's counsel, as per reported judgment is:
"the explanation offered by the assessee's representative that they had no intention to conceal the above-mentioned income but the omissions were due to oversight."
Naturally this is very vague and general explanation which could not be accepted by the revenue and therefore, the penalty was levied. It appears that even before the High Court any further reason or circumstances causing mistake or omission in accounting of interest income or including the same in income statement were not pointed out. Merely pleading that there was no intention to avoid tax is not enough. The assessee could have improved his case by:
a. pointing out facts, circumstances, and reasons for omission,
b. pointing out the persons on whom assessee relied, and who failed in performing their duty in properly preparing accounts, reconciling advance tax lying in assets side, refund received, interest received etc.
c. Steps taken to properly disclose income when the mistake came to notice. At the time of hearing for assessment, what stand was taken by the assessee to rectify clerical mistake.
d. Whether the cheque for refund was received without any intimation about calculations of refund granted and interest allowed.
However, unfortunately it appears that no submission was made on the above aspects.
Therefore, in absence of any cognate reason for the omission the high Court also confirmed penalty. The high court also held that in such a case mens rea is not necessary. The fact is that an income was earned and it was not disclosed without any possible reason for failure to disclose the same.
It seems that there is some lacking in the factual position and arguments before the Tribunal and high Courts, as to the non-inclusion of substantial amount of interest amounting to Rs.10.53 lakhs in one case and Rs.7.65 lakhs in another case. It may be due to credit in wrong head - may be in the account of TDS itself because may be the refund was lower than claim of refund or the amount lying in advance tax and TDS accounts and assessee's accountant acted carelessly and credited full amount of income tax department's cheque in advance tax account, considering that it is entirely towards TDS and other taxes paid, or due to non receipt of calculation with refund voucher/ cheque. The facts are not clear, and therefore, it is up to the assessee to find out real reason for such omission and the person responsible for such omission, so that a case of appeal or review can be made out.
Whether, accrued interest on refund claimed should be accounted for:
As per present provisions of section 145 the assessee can adopt either mercantile system or cash system of accounting. In case of cash basis, interest actually received will be offered to tax. However, in case of mercantile system of accounting the question arises is whether the assessee should estimate amount of interest accrued till the last day of the previous year and include it in income? In this regard we need to refer to section 145 relevant portion of which reads as follows:
Method of accounting.
145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
(2) xxxx
(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in Section 144.
The provisions of section 145 will be applicable to interest earned on income tax refund either under the head income from business or profession (if TDS is from such income) or under the head 'other sources' if refund arises from TDS on income falling under the head income from house property, income from other sources etc. Therefore, in all situations interest on income tax refunds needs to be accounted for as per accrual unless cash system of accounting is followed.
The general rule is that interest accrues from day to day. However, can we say that in case of refund on excess income tax paid, this rule will not apply? Can we say that interest on income tax refund is dependent on several factors and conclusion of the order by the A.O. Therefore before that there is no accrual of income?
Applying the general rule, and particularly in view of judgment of Madras High Court ,discussed in this write-up, it will be safer to calculate interest receivable as per law based on claim for refund made and account for the same as income to avoid chances of addition being made by the A.O and penalty for non discloser of interest on income tax refund claimed.
Contingencies:
There are several contingencies in respect of refund and interest like the A.O. may disallow interest even on some flimsy grounds which assessee cannot perceive, additions and disallowance can be made, even on flimsy grounds - which are usual in case of scrutiny assessment, AO may reject some TDS certificates even on flimsy grounds or without giving any reason, the A.O. may not at all allow interest ( this is general practice particularly in small refunds because the I.T. Department is almost sure that for small amount of interest the assessee would not start proceedings.
In view of contingencies, in case a policy to account for interest on income tax refund on receipt basis is adopted, then a disclosure should be made.
About the Author: -
DEV KUMAR KOTHARI
dkkothari3067@dataone.in
B.Com, Grad.CWA,ACS ,FCA.Add: Tollygunge Head P.O., Kolkata- 700 033. Ph. 2424 9834/ 3067
Dated: - June 15, 2008
Interest u/s 244A
The assessee is entitled to claim and get refund of excess taxes paid with interest thereon under section 244A. Thus the claim of interest and right to receive it is a statutory right of the assessee. The interest u/s 244A (or any other provision of I.T. Act prior to insertion of section 244A) is paid by your own A.O., therefore it is always in his knowledge, and one should not try to avoid disclosure of the same as income. The accountants and tax return preparers should also take reasonable care to reconcile the account of TDS and other advance taxes, orders and intimations received, refund received etc. to check that tax paid and interest paid is properly adjusted, the amount of refund received against advance tax and TDS is adjusted properly and interest received on refunds is taken as income.
Practical aspects
In practice we find that many times, the returns are processed, refund is allowed but without any interest. Sometimes refund is granted and interest is calculated up to that date. However, refund is actually given to the assessee quite late. Sometimes we find that cheques are written but they are not dispatched and the cheques are sent to assessee when assessee approaches or complains about non-receipt of refund and in such circumstances though actually refund is quite late, the amount of interest is not updated. Therefore, in respect of interest receivable from the Income-tax Department mostly people account for the same on actual receipt basis. This is because in spite of assessee's right to receive a refund with interest, the assessee is not sure to the period up to which interest will be allowed and the amount on which refund will be allowed. The variation in amount of refund claimed and refund actually granted may take place for several reasons like( a) Variation in the amount of income returned and the income assessed ( b) Variation in amount of tax and interest payable (c) Variation in amount of income tax, interest, penalty etc. which the assessing officer may impose in some other years and adjust the demand against the refund receivable by the assessee. Therefore, the assessee cannot always be sure about the amount of interest receivable. Accordingly, many of assessees consider the amount of interest actually received as income.
In some cases it is noticed that the cheque for refund is sent by the A.O. however the amount of refund is not as per claim. It is lesser but no reason is given, no computation or intimation of computation has been provide- the assessee has got only cheque. In such a case it may not be possible for the assessee to ascertain whether only principal amount against some TDS certificates has been allowed and refunded or some interest has also been granted. For example suppose assessee submitted TDS certificates of Rs.80000/- and claim for refund was of Rs.40000/-. The A.O. sends only cheque of Rs.25000/- that is lesser by Rs.15000/- than amount of claim. No computation is provided. It may be that the A.O. has denied credit for some TDS certificate for Rs.15000/- and did not allow any interest. Or it may be that credit for TDS certificate is denied for Rs.20000/- and interest is allowed Rs.5000/- in respect of credit allowed. Or there may be a case that tax liability is ascertained at a higher amount. Therefore, unless the A.O. provides details, the assessee will not be in a position to ascertained, whether, any interest has been allowed or not? In such a case the assessee may approach the A.O. and obtain the intimation / calculation sheet. In case of need application for rectification and further refund of principal amount and / or interest can be made. Amount of interest actually received should be shown as income.
Failure to account for / disclose the interest actually received is really very serious - and is in nature of concealment of income:
In case the assessees do not disclose the amount of interest received from Income-tax Department, this will amount to concealment of income and the assessee should not take a risk of even mistake in this regard because the Income-tax Department had paid the interest and if it is not disclosed by the assessee, the department has its own information and can assess the income without there being any need of annual return or other information from other sources. Therefore, one must be very careful to properly account for and disclose the interest received as income.
Recent case before Madras High Court
In the case of CIT v. Thirupathy Kumar Khemka and another, [2007] 291 ITR 122(Mad), the assessee did not disclose the amount of interest in the income of a.y. 1996-97. In respect of interest u/s 244A of the Income-tax Act, 1961 granted for the assessment year 1993-94 and certain credits in a savings bank account. The assessing officer made addition for both the sums and consequently penalty u/s 271(1)(c) was also imposed for concealment of income and furnishing of inaccurate particulars of income. On appeal the Commissioner (A) confirmed the penalty in relation to addition of interest u/s 244A granted by the Department but deleted the penalty in respect of addition relating to unexplained credit in savings bank account. The order of the CIT(A) was upheld by the Tribunal.
It appears that the department did not prefer appeal in respect of penalty deleted in respect of savings bank account otherwise that appeal most probably would have been heard together with the assessee's appeal in respect of the penalty confirmed by the Tribunal in relation to Interest u/s 244A.
From the judgment reported, it appears that the department granted the interest u/s 244A. However, it is not clear whether the amount of interest was actually received by the assessee or not and what are the reasons that the entry of interest received (which was substantial amount) from income tax department was omitted or wrongly accounted for and income was also not included in computation sheet of income. The assessee has not offered any explanation for the mistake or omission in accounting and computation. The explanation offered by the assessee's counsel, as per reported judgment is:
"the explanation offered by the assessee's representative that they had no intention to conceal the above-mentioned income but the omissions were due to oversight."
Naturally this is very vague and general explanation which could not be accepted by the revenue and therefore, the penalty was levied. It appears that even before the High Court any further reason or circumstances causing mistake or omission in accounting of interest income or including the same in income statement were not pointed out. Merely pleading that there was no intention to avoid tax is not enough. The assessee could have improved his case by:
a. pointing out facts, circumstances, and reasons for omission,
b. pointing out the persons on whom assessee relied, and who failed in performing their duty in properly preparing accounts, reconciling advance tax lying in assets side, refund received, interest received etc.
c. Steps taken to properly disclose income when the mistake came to notice. At the time of hearing for assessment, what stand was taken by the assessee to rectify clerical mistake.
d. Whether the cheque for refund was received without any intimation about calculations of refund granted and interest allowed.
However, unfortunately it appears that no submission was made on the above aspects.
Therefore, in absence of any cognate reason for the omission the high Court also confirmed penalty. The high court also held that in such a case mens rea is not necessary. The fact is that an income was earned and it was not disclosed without any possible reason for failure to disclose the same.
It seems that there is some lacking in the factual position and arguments before the Tribunal and high Courts, as to the non-inclusion of substantial amount of interest amounting to Rs.10.53 lakhs in one case and Rs.7.65 lakhs in another case. It may be due to credit in wrong head - may be in the account of TDS itself because may be the refund was lower than claim of refund or the amount lying in advance tax and TDS accounts and assessee's accountant acted carelessly and credited full amount of income tax department's cheque in advance tax account, considering that it is entirely towards TDS and other taxes paid, or due to non receipt of calculation with refund voucher/ cheque. The facts are not clear, and therefore, it is up to the assessee to find out real reason for such omission and the person responsible for such omission, so that a case of appeal or review can be made out.
Whether, accrued interest on refund claimed should be accounted for:
As per present provisions of section 145 the assessee can adopt either mercantile system or cash system of accounting. In case of cash basis, interest actually received will be offered to tax. However, in case of mercantile system of accounting the question arises is whether the assessee should estimate amount of interest accrued till the last day of the previous year and include it in income? In this regard we need to refer to section 145 relevant portion of which reads as follows:
Method of accounting.
145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
(2) xxxx
(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in Section 144.
The provisions of section 145 will be applicable to interest earned on income tax refund either under the head income from business or profession (if TDS is from such income) or under the head 'other sources' if refund arises from TDS on income falling under the head income from house property, income from other sources etc. Therefore, in all situations interest on income tax refunds needs to be accounted for as per accrual unless cash system of accounting is followed.
The general rule is that interest accrues from day to day. However, can we say that in case of refund on excess income tax paid, this rule will not apply? Can we say that interest on income tax refund is dependent on several factors and conclusion of the order by the A.O. Therefore before that there is no accrual of income?
Applying the general rule, and particularly in view of judgment of Madras High Court ,discussed in this write-up, it will be safer to calculate interest receivable as per law based on claim for refund made and account for the same as income to avoid chances of addition being made by the A.O and penalty for non discloser of interest on income tax refund claimed.
Contingencies:
There are several contingencies in respect of refund and interest like the A.O. may disallow interest even on some flimsy grounds which assessee cannot perceive, additions and disallowance can be made, even on flimsy grounds - which are usual in case of scrutiny assessment, AO may reject some TDS certificates even on flimsy grounds or without giving any reason, the A.O. may not at all allow interest ( this is general practice particularly in small refunds because the I.T. Department is almost sure that for small amount of interest the assessee would not start proceedings.
In view of contingencies, in case a policy to account for interest on income tax refund on receipt basis is adopted, then a disclosure should be made.
About the Author: -
DEV KUMAR KOTHARI
dkkothari3067@dataone.in
B.Com, Grad.CWA,ACS ,FCA.Add: Tollygunge Head P.O., Kolkata- 700 033. Ph. 2424 9834/ 3067
Dated: - June 15, 2008
DECLARATION UNDER SECTION 58A
CARE REQUIRED IN MAKING DECLARATION UNDER SECTION 58A OF THE COMPANIES ACT, 1956 TO AVOID ADDITION UNDER SECTION 68 OF THE INCOME TAX ACT.
Declaration under section 58A of the Companies Act, 1956:
Section 58A of the Companies Act, 1956 governs acceptance of deposits by companies. Some deposits are exempted, subject to declaration as to own funds. In this write-up we are concerned with declaration made by a depositor who is in case of private company
a) Any Director of private company,
b) Any relative of a Director of private company, (recently added)
c) Any member of the company, ('member' substituted for 'shareholder')
And in case of a limited company is a Director of the company at the time of making the deposit with the company.
The deposits of money made by such persons with the company are not considered as a public deposit, if it is out of own funds and not from borrowing. This is vide exemption granted vide Rule 2 (b) (ix) of the Companies (Acceptance of Deposits) Amendment Rules, 2004 which was recently amended vide Notification dated 12.3.2004 (2004) 120 Company Cases 79 (St.). Vide this amendment; the scope of eligible persons has been extended to a relative of Director of private limited companies. And restriction has been made so as to entitle only 'members', as against any 'shareholder' to be an eligible person in case of private company who can make deposit out of own funds without attracting restrictions applicable to public deposits.
DECLARATION NECESSARY FOR EXEMPTION:
The condition for exemption from being treated is that the eligible person being the director, relative of the director or a member, as the case may be, give declaration in writing, at the time of making deposit to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting (loan or deposit of money) from others.
The restriction is on accepting or borrowing money from others, therefore, money withdrawn from capital account of proprietary concern or partnership firm will not be money received from others hence can be given to the company with a declaration. However, suppose the proprietary concern or partnership firm has already used capital contributions for business purposes, and on the day of withdrawal by the proprietor or the partner the concern borrow money from others, then inference may be drawn that the money deposited by the director, relative of director or member is out of borrowed funds and the proprietary concern or the firm has been used as a tool or conduit to give impression that the money belongs to the depositor.
Similarly money withdrawn from bank account on overdraft facility against fixed deposit made by director, relative of director or member as the case may be cannot be considered as own money as it has been borrowed from the bank against over draft facility. The transaction of making fixed deposit and obtaining loan by way of over draft facility being two different transactions.
Section 68 of the Income-tax Act, 1961:
As per section 68, any sum found credited in the books of account of the assessee can be deemed to be income if the assessee is unable to explain the source and nature of the same satisfactorily. Being well known popular provision, an elaborate discussion is not made for sake of brevity. To establish that any sum found credited in the books of account and credited, as a loan, advance, deposit, or gift from any person is not income, the assessee is required to establish the source and nature of the sum so found credited. For that purpose not only the identity but also capability of the person who made such loan, deposit, advance, or gift is also required to be established to the satisfaction of the Assessing Officer.
A WRONG DECLARATION MAY ATTRACT SECTION 68 OF I.T.ACT:
Suppose, by mistake a declaration as to own fund has been made by the director, relative of director or member, as the case may be then such declaration may go against the assessee and the borrowing may be deemed as income- For instance in case the Assessing Officer of the director, relative or member as the case may be, comes to know that a declaration as to 'own fund' has been given to the company or the company has not treated the amount as public deposit, leading to an inference of own fund, or he obtain copy of declaration and then on scrutiny of books of account he find that the money has been given out of borrowed funds by the director, relative or member. The A.O. may draw the conclusion that the amount of deposit is out of undisclosed income of the declarant and therefore the borrowings shown in his books of account are bogus or the lenders are just name lenders and therefore he may treat the amount of those borrowings as undisclosed cash credit and treat the same as income under Section 68 of the Income Tax Act, 1961 because the assessee himself has admitted or declared that he made deposit out of 'own fund.
Besides such addition under section 68 of the Income-tax Act, 1961 the exempted deposit shall no longer be an exempted one, but will be treated as public deposit. Therefore, the purpose of declaration will fail, and may lead to violation of deposit Rules and the declarant, the company, and any officer including director may be liable to penalty and prosecution under The Companies Act, read with relevant rules for making false declaration, violating deposit rules etc.
CONCLUSION
Care should be taken while giving declaration as to own fund and it should not be taken in a mechanical and routine manner without verifying the exact position in the books of accounts of the declarant. As the case of deposits received by company will be generally in house transaction related with director, relative or member, it would always be advisable to reconfirm from the director, relative or member (in practice from their accountant) to recheck the personal cash book and ensure that the declaration is correct.
About the Author: -
DEV KUMAR KOTHARI
dkkothari3067@dataone.in
B.Com, Grad.CWA,ACS ,FCA.Add: Tollygunge Head P.O., Kolkata- 700 033. Ph. 2424 9834/ 3067
Dated: - June 13, 2008
Declaration under section 58A of the Companies Act, 1956:
Section 58A of the Companies Act, 1956 governs acceptance of deposits by companies. Some deposits are exempted, subject to declaration as to own funds. In this write-up we are concerned with declaration made by a depositor who is in case of private company
a) Any Director of private company,
b) Any relative of a Director of private company, (recently added)
c) Any member of the company, ('member' substituted for 'shareholder')
And in case of a limited company is a Director of the company at the time of making the deposit with the company.
The deposits of money made by such persons with the company are not considered as a public deposit, if it is out of own funds and not from borrowing. This is vide exemption granted vide Rule 2 (b) (ix) of the Companies (Acceptance of Deposits) Amendment Rules, 2004 which was recently amended vide Notification dated 12.3.2004 (2004) 120 Company Cases 79 (St.). Vide this amendment; the scope of eligible persons has been extended to a relative of Director of private limited companies. And restriction has been made so as to entitle only 'members', as against any 'shareholder' to be an eligible person in case of private company who can make deposit out of own funds without attracting restrictions applicable to public deposits.
DECLARATION NECESSARY FOR EXEMPTION:
The condition for exemption from being treated is that the eligible person being the director, relative of the director or a member, as the case may be, give declaration in writing, at the time of making deposit to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting (loan or deposit of money) from others.
The restriction is on accepting or borrowing money from others, therefore, money withdrawn from capital account of proprietary concern or partnership firm will not be money received from others hence can be given to the company with a declaration. However, suppose the proprietary concern or partnership firm has already used capital contributions for business purposes, and on the day of withdrawal by the proprietor or the partner the concern borrow money from others, then inference may be drawn that the money deposited by the director, relative of director or member is out of borrowed funds and the proprietary concern or the firm has been used as a tool or conduit to give impression that the money belongs to the depositor.
Similarly money withdrawn from bank account on overdraft facility against fixed deposit made by director, relative of director or member as the case may be cannot be considered as own money as it has been borrowed from the bank against over draft facility. The transaction of making fixed deposit and obtaining loan by way of over draft facility being two different transactions.
Section 68 of the Income-tax Act, 1961:
As per section 68, any sum found credited in the books of account of the assessee can be deemed to be income if the assessee is unable to explain the source and nature of the same satisfactorily. Being well known popular provision, an elaborate discussion is not made for sake of brevity. To establish that any sum found credited in the books of account and credited, as a loan, advance, deposit, or gift from any person is not income, the assessee is required to establish the source and nature of the sum so found credited. For that purpose not only the identity but also capability of the person who made such loan, deposit, advance, or gift is also required to be established to the satisfaction of the Assessing Officer.
A WRONG DECLARATION MAY ATTRACT SECTION 68 OF I.T.ACT:
Suppose, by mistake a declaration as to own fund has been made by the director, relative of director or member, as the case may be then such declaration may go against the assessee and the borrowing may be deemed as income- For instance in case the Assessing Officer of the director, relative or member as the case may be, comes to know that a declaration as to 'own fund' has been given to the company or the company has not treated the amount as public deposit, leading to an inference of own fund, or he obtain copy of declaration and then on scrutiny of books of account he find that the money has been given out of borrowed funds by the director, relative or member. The A.O. may draw the conclusion that the amount of deposit is out of undisclosed income of the declarant and therefore the borrowings shown in his books of account are bogus or the lenders are just name lenders and therefore he may treat the amount of those borrowings as undisclosed cash credit and treat the same as income under Section 68 of the Income Tax Act, 1961 because the assessee himself has admitted or declared that he made deposit out of 'own fund.
Besides such addition under section 68 of the Income-tax Act, 1961 the exempted deposit shall no longer be an exempted one, but will be treated as public deposit. Therefore, the purpose of declaration will fail, and may lead to violation of deposit Rules and the declarant, the company, and any officer including director may be liable to penalty and prosecution under The Companies Act, read with relevant rules for making false declaration, violating deposit rules etc.
CONCLUSION
Care should be taken while giving declaration as to own fund and it should not be taken in a mechanical and routine manner without verifying the exact position in the books of accounts of the declarant. As the case of deposits received by company will be generally in house transaction related with director, relative or member, it would always be advisable to reconfirm from the director, relative or member (in practice from their accountant) to recheck the personal cash book and ensure that the declaration is correct.
About the Author: -
DEV KUMAR KOTHARI
dkkothari3067@dataone.in
B.Com, Grad.CWA,ACS ,FCA.Add: Tollygunge Head P.O., Kolkata- 700 033. Ph. 2424 9834/ 3067
Dated: - June 13, 2008
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