SERVICE TAX ON BOOK ADJUSTMENTS

SERVICE TAX TO BE IMPOSED ON BOOK ADJUSTMENTS

Finance Act, 2008 has amended section 67 w.e.f. 10.5.2008 so as to include any amount debited or credited in the books of account within the scope of the term, 'gross amount charged' where transaction of taxable service is with associated enterprises including transactions in suspense account.

Transactions between associated enterprises

Transactions between associated enterprises would attract service tax even when there are only entries in the books of accounts and no money is actually exchanged. With the amendment made by Finance Act, 2008, associated enterprises will have to pay service tax on the basis of accruals instead of actual cash inflow / outflow, though there is no system of tax on accrual basis in service tax. For transactions between associated enterprises, any amounts debited or credited to books of accounts would be the basis for levy of service tax as such book entries will be included in the 'gross amount charged'. Thus, for such enterprises, book adjustments will also become basis for levy of service tax which was earlier based on actual receipts.
No service tax would be payable for such book adjustments in the following cases-
transactions are not between associated enterprises.
· transactions does take place between associated enterprises but they do not relate to any taxable service.
· associated enterprise does not render taxable services exceeding Rs. 10 lakh in aggregate, i.e., falling under small service provider exemption scheme.
· Service is otherwise exempt under any rules, notifications etc.
· Transactions between associated enterprises not involving services but relating to sale or other commercial transactions.

Book Adjustments

It is necessary to know what is meant by books and adjustment to understand this provision.
In business, the books most frequently referred to are the books of account in which business transactions are recorded. Books of account are normally considered to be legal documents. Books of account contain various accounts (say, debtors and creditors). Such accounts mean an account or register of debt or credit in a book. A "book account" means a book containing a statement in detail of the transactions between parties, including prices, made contemporaneously with the transaction, and entered in a book.
Adjustment in finance and accounts means to correct figures or make allowances for charges, credits etc. It involves alteration in debit or credit balances by way of allowances or charges posted in an account by means of debit or credit notes. It is a process of adjusting financially the sums due or owed. Such adjustments are done by way of adjusting entries by way of journal entries without directly affecting the cash flows. Such adjustments are absolutely legal and an universally accepted accounting practice.
According to Dictionary of Accounting Terms, adjustment means -
increase or decrease to an account resulting from an adjusting journal entry. For example, the accrual of wages at year-end will cause an increase in both salary expense and salary payable.
changing an account balance because of some happening or event. For example, a customer who returns merchandise ill receive a credit adjustment to the account.

Suspense Account

According to Black's Law Dictionary, 8th edition 2004, 'suspense account' means temporary record used in book keeping to track receipts and disbursements or an uncertain nature until they are identified and posted in the appropriate ledgers and journals. A suspense account does not appear in a final financial statement. It is a useful tool when, for example, a lump-sum receipt or expenditure must be broken down to match several transactions before posting.
Suspense accounts are accounts of transactions which being impossible to enter in the normal books of accounts in a regular way for one reason or the other are thus required to be held in suspense for the time being. Suspense account is a temporary account that records part of a transaction before complete analysis of that transaction, or that records sums to correct errors.
In banking, it is an expression where a person whose money is held in suspense is entitled to withdraw it any moment he likes, though he neither gets a pass book nor is entitled to draw any cheques or to be paid interest in respect of the amount. Commissioner of Income Tax v. K.R.M.T.T. Thiagaraja Chetty & Co., AIR 1952 Mad 305, 322.
In common parlance, it means an account in which the amount is held in deposit in favour of the person who remitted it and may be refunded in future, if the same is not appropriated or utilised for the purpose for which it was remitted. (LIC v. Prassana Devaraj, 1994 (2) KLT 541 at 545)
The expression 'suspense account' in the common parlance, means an account in which the amount is held in deposit in favour of the person who remitted it and may be refunded in future, if the same is not appropriated or utilised for the purpose for which it was remitted. LIC of India v. Prasanna Devraj, (1995) 82 Comp cases 611, 616 (Ker).
Suspense account is a temporary account in which entries of credits or charges are made until then proper disposition can be determined. Entries in suspense accounts are generally transitional. It is an account used temporarily to any doubtful receipts and disbursements or discrepancies pending their analysis and permanent classification.

Departmental Clarification on Book Adjustments

CBEC has clarified as follows in respect of levy of service tax on transactions between associated enterprises vide Circular No. 334/1/2008-TRU dated 29.2.2008
"6.1 Service tax is levied at the rate of 12% of the value of taxable services (section 66). Section 67 pertaining to valuation of taxable service for charging service tax states that value shall be the gross amount charged for the service provided or to be provided and includes book adjustment. As per rule 6 of the Service Tax Rules, 1994, service tax is required to be paid only after receipt of the payment.
6.2 It has been brought to the notice that the provision requiring payment of service tax after receipt of payment are used for tax avoidance especially when the transaction is between associated enterprises. There have been instances wherein service tax has not been paid on the ground of non-receipt of payment even though the transaction has been recognized as revenue/expenditure in the statement of profit and loss account for the purpose of determining corporate tax liability.
6.3 As an anti-avoidance measure, it is proposed to clarify that service tax is leviable on taxable services provided by the person liable to pay service tax even if the amount is not actually received, but the amount is credited or debited in the books of account of the service provider. In other words, service tax is required to be paid after receipt of payment or crediting/debiting of the amount in the books of accounts, whichever is earlier. However, this provision is restricted to transaction between associated enterprises. This provision shall also apply to service tax payable under reverse charge method (Section 66A) as taxable services received from associated enterprises. For this purpose section 67 and rule 6(1) are being amended.
6.4 The term 'associated enterprise' has the same meaning as assigned to it in section 92A of the Income Tax Act, 1961. It is a relative concept i.e. an enterprise is an associated enterprise when it is viewed in relation to other enterprises. This concept is used in the Income Tax Act for applying transfer pricing provisions. An enterprise which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise is considered as associated enterprise. It also covers an enterprise in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.
6.5 Section 92A(2) of the Income Tax Act specifies various situations under which two enterprises shall be deemed to be associated enterprises. Enterprise means a person who is engaged in the provision of any services of any kind. For details, relevant provisions of Income Tax Act may be referred to."

Charge of Service Tax

Section 66 of Finance Act, 1994 is the charging section and section 68 is the collection section for the purpose of service tax. While service is levied on the basis of section 66, based upon rendering of taxable service as stated in section 65(105) of the Finance Act, 1994, service tax is payable on the basis of service tax collected by the provider of taxable service from the recipient of service. It is the receipt of gross amount which is taxed irrespective of whether it is received before, during or after rendering of taxable service. Service tax is also payable on advance payments against which service has yet to be rendered or performed. The payment of gross amount could be in cash or by way of cheque, draft, credit card, transfer, debit or credit notes or any book adjustment . Service tax is payable for the month or quarter ,as the case may be by fifth day of the month following the end of month or quarter.
However, in respect of associated enterprise, payment of service tax shall be based on book adjustments as per amendment made by Finance Act, 2008 (to be enacted ). Transactions between associated enterprises would attract service tax even when there are only entries in the books of accounts and no money is actually exchanged. With the amendment made by Finance Act, 2008, associated enterprises will have to pay service tax on the basis of accruals instead of actual cash inflow/outflow, though there is no system of tax on accrual basis in service tax. For transactions between associated enterprises, any amounts debited or credited to books of accounts would be the basis for levy of service tax as such book entries will be included in the 'gross amount charged'. Thus, for such enterprises, book adjustments will also become basis for levy of service tax which was earlier based or actual receipts.

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About the Author: -
Dr. Sanjiv Agarwal

FCA, FCS, ACIS(UK)

MONEY CHANGING ACTIVITIES

SERVICE TAX ON MONEY CHANGING ACTIVITIES

Amendment by Finance Act,2008
As per Finance Act 2008 amendments, w.e.f. 16.5.2008 banking and other financial services will now include purchase or sale of foreign currency, including money changing services provided by banking companies etc., and also by foreign exchange brokers or any authorised dealer in foreign exchange or an authorized money changer other than bank.
Accordingly, all money changing transactions undertaken by banks, forex brokers and money changes shall be subject to levy of service tax .The transactions could be between banks (service providers) and their customers, banks and their branches, one bank and other bank or between banks and Reserve Bank of India.
Erstwhile provisions
Prior to 16.5.2008 Finance Act, 2008 activities or transactions of purchase or sale of foreign exchange currency and money changing were not covered under scope of service tax based on logic given in Board circular. CBEC Circular No 96/7/2007 -ST dated 23.8.2007 also clarified that service tax is not leviable on money changing activities as it would not fall under foreign exchange broking. Finance Act,2008 has amended the definition of banking and other financial service u/s 65(12) to include purchase and sale of foreign exchange including money changing service provided by authorized money changers or dealers into service tax net.
Forex broking vis a vis money changing
Service tax on forex broking is already a taxable service w.e.f. 1.7.2003 and Finance Act, 2008 has amended the definition of banking and financial services to include money changing transactions also. Now, service tax will be levied on purchase or sale of foreign currency, including money changing, provided by an authorized dealer in foreign currency or an authorised money changer, in addition to a foreign exchange broker. An explanation has been added to the effect that explicit mention of the consideration for the services provided in relation to purchase or sale of foreign currency is not relevant for the purpose of levy of service tax. Taxable services [sections 65(105)(zzk) and 65(105)(zm)] has also been amended suitably. With these amendments, services provided in relation to purchase or sale of foreign currency by a foreign exchange broker, money changer and authorised dealer of foreign exchange shall also be leviable to service tax
In a typical money changing, the currencies of different countries are exchanged at the prevailing rates which change almost every hour. However, in case of a pure purchase and sale transaction, the net difference would imply trading margin and not a consideration for rendering a service, but it will be now subject to levy of service tax.
Foreign exchange brokers provide services as an intermediary in relation to purchase or sale of foreign currency on a commission/brokerage basis. Purchase or sale of foreign currency is undertaken by foreign exchange broker and also by persons authorized under Foreign Exchange Management Act, 1999 to deal in foreign exchange and having licence issued by RBI. Such authorised persons are known as money changers or authorised dealers of foreign exchange. Services in relation to purchase or sale of foreign currency is, therefore, provided by foreign exchange broker, money changer and also authorised dealer of foreign exchange.
Scope of money changing business
At one point of time (vide Circular No 92/3/2007 dated 12.3.2007),Government it self had clarified that money changing and forex broking are two different activities and money changing is an activity of sale and purchase of foreign exchange at prevailing market rates. Now, Finance Act, 2008 has taxed money changing also as a taxable service
The activities undertaken by money changers will also involve levy of service tax on both limbs of transaction - buying and selling. If a money changer buys one dollar @ Rs.39 and sells same @Rs 40, he shall have to pay service tax on both transactions on gross value rather than or net margin of Rs 1. Also, it is not just hard currencies but since currency has not been defined in service tax provisions, if one takes definition of foreign currency from FEMA, it would also include traveler's cheques and other instruments of foreign currency. Again, there is no charity on this. Similarly international credit cards may also be subjected to service tax for foreign currency transactions .
Types of transactions
While transactions between banks and customers would be taxable, inter bank transactions too are commercial in nature and would therefore, be taxable. On transactions with Reserve Bank of India, there exists an exemption vide Notification No 22/2006-ST dated 31.5.2006. Taxable services provided or to be provided by any person to Reserve Bank of India or by Reserve Bank to any person are exempt. This would cover forex services also. For transactions amongst bank branches (intra bank), service tax will generally not be applicable on the ground that service can not be provided to self and there ought to be two parties- service provider and service receiver. In case of centralized registration of such branches, there is no question of levy of service tax but is case of branches having different service tax registrations, problem may arise but as a principle, there should not be levy of service tax on intra bank transactions. Since section 67 on valuation now is specific on inclusion of book adjustments (debits and credits) in value of service, there is a need for clarity on this aspect as well.
Valuation of money changing business
Foreign exchange broker indicates the consideration for the services provided (commission) explicitly. Whereas money changers/authorised dealers of foreign exchange providing same services may not necessarily indicate the consideration explicitly.
To enable determination of taxable value, where the consideration for the services provided in relation to purchase or sale of foreign currency is not explicitly indicated by the service provider, a method under rule 6(7B) of the Service Tax Rules, 1994 has been prescribed. As per this provision, the service provider has the option to pay service tax calculated at the rate of 0.25% of the gross amount of currency exchanged.
CBEC has also illustrated the taxability by way of the following illustration -
Illustration:
Buying rate : US$ 1 = Rs.38 // Selling rate : US$ 1 = Rs.40
(i) Purchase of US$ 100 by the service provider:
Gross amount of currency exchanged in rupees = Rs.3800 (Rs.38 x 100)
Service tax payable = Rs.9.5 (0.25% x 3800)
(ii) Sale of US$ 100 by the service provider:
Gross amount of currency exchanged in rupees = Rs.4000 (Rs.40 x 100)
Service tax payable = Rs.10 (0.25% x 4000)"
While one may accept its inclusion in service tax net, the levying of a flat rate of 0.25% on gross amount exchanged is devoid of any basis or logic. One fails to understand how this percentage has been arrived at. The rule states that if no consideration is mentioned, service tax will be leviable @ 0.25 % .
An example will make this difference clear-
Case A Case B

100 US dollars exchanged for Indian Rupees Rs. 4000 RS. 4000
Fee charged and mentioned on advice/ invoice 40 not mentioned (say @ 1%)
Service tax @ 12.36 % including cess Rs. 4.94 -
Service tax @ 0.25 % on Rs 4000 including cess -- Rs 10.30
Thus, the service tax liability is double the service payable in a normal course on the service component .
It can be said that since implications are severe as the business operates on a wafer thin margin basis, it would be advisable for banks and other service providers to charge a consideration explicitly on such transactions to avoid litigation and huge taxation. This could be a percentage of the amount of currency involved or fixed amount per transaction.

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About the Author: -
Dr.Sanjiv Agarwal

FCA, FCS, ACIS(UK)

Golden Quotes

Head sees unity as diversity whereas heart proves unity in diversity.

circle of competence

CONITNUED FROM YESTARDAY......
We also know Buffett’s discipline of operating only within his “circle
of competence.” Think of this circle of competence as the cumulative
history of your experience. If someone had successfully operated a certain
business within a certain industry for a decade or more, we would say
that person had achieved a high level of competence for the task at hand.
However, if someone else had only a few years’ experience operating a
new business, we could reasonably question that person’s level of competence.

So perhaps Buffett faces a dilemma. Within his circle of competence,
the types of stocks he likes to purchase are not currently selling at
discounted prices. At the same time, outside his circle of competence,
faster-growing businesses are being born in new industries that have yet
to achieve the high level of economic certainty Buffett requires. If this
analysis is correct, it explains why there have been no new large buys of
common stocks in the past few years

We would be foolish indeed to assume that because the menu of
stocks available for purchase has been reduced, Warren Buffett is left
without investment options. Certainly he has been active in the fixedincome
market, including taking a significant position in high-yield
bonds in 2002. He is alert for the periodic arbitrage opportunity as well,
but considering the amount of capital Buffett needs to deploy to make
meaningful returns, the arbitrage markets are perhaps not as fruitful as
they once were.

The basic ideas of investing are to look at stocks as businesses,
use market f luctuations to your advantage, and seek a margin
of safety. That’s what Ben Graham taught us. A hundred years
from now they will still be the cornerstones of investing.4
WARREN BUFFETT

TO BE CONTINUED TOMORROW.......

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FINANCIAL LITERACY

WHY FINANCIAL LITERACY IS IMPERATIVE??

Sub Heading : It helps you to make the most of the financial resources available

Financial literacy is the process by which investors improve their understanding of financial markets, products, concepts and risks. Through information and objective advice, they develop the skills and confidence to become more aware of financial risks and opportunities and make informed choices to improve their financial position.Financial education primarily relates to personal finance, which enables individuals to take effective action to improve overall well-being and avoid distress in financial matters.Financial literacy goes beyond the provision of financial information and advice. It is the ability to know, monitor, and effectively use financial resources to enhance the well-being and economic security of oneself, one’s family, and one’s business.

Why do we need financial literacy?
India is among the world’s most efficient financial markets in terms of technology, regulation and systems. It also has one of the highest savings rate in the world - our gross household savings rate, which averaged 19% of gross domestic product (GDP) between 1996-97 and 1999-2000, increased to about 23% in 2003-04 and has been growing ever since.While savings are more in India, where the savings are invested is a cause for concern. Investments by households have been more into either bank fixed deposits, risk-free government-backed securities and low-yielding instruments, or in non-financial assets. A majority of our households do not use modern financial markets. As per an RBI report, only 1.4% of household savings was invested in equity, mutual funds and debentures in 2003-04. Though this went up to about 4% in 2005-06, it is still very small.Unless the common person becomes a wiser investor and is protected from wrongdoings, wealth creation for the investor and the economy will remain a distant dream. We need to convert a country of savers into a nation of investors.Participation in modern finance throws up a number of questions and choices for households like:* Do you make household budgets?* How much do you need to save every month to meet all your financial goals? * How should you allocate your savings into various asset classes and among asset classes to various products? * How should you change your asset allocation pattern with age and circumstances?* What should be the basis of selecting a mutual fund house, insurance company, bank or lender?* Do you know there is a need for diversification of your investments to diversify risk?* What are the channels through which financial services are provided?
Which one should you use? Such questions and choices appear tough to even urban population not to talk of those in rural areas, where most of India’s population is. When it comes to financial solutions, investors tend to use thumb rules or seek advice from friends and relatives, which are often poor approximations compared to those that follow from a systematic process. If they get bad advice, their outcomes will be poor, and they will start to lose faith in the financial sector. A big improvement of financial knowledge of households is necessary so that they participate continuously in financial markets.Financial literacy plays a significant role in the efficient allocation of household savings and the ability of individuals to meet their financial goals. It also means the ability to seek sound financial adviceFinancial literacy has assumed greater importance in recent years as financial markets have become increasingly complex and the common man finds it very difficult to make informed decisions. Financial literacy is considered an important adjunct for promoting financial inclusion and ultimately financial stability. Both developed and developing countries, therefore, are focusing on programmes for financial literacy/education. In India, the need for financial literacy is even greater considering the low levels of literacy and the large section of the population, which still remains out of the formal financial set-up.To understand financial planning, a person should be financially literate to understand the importance of preparing household budgets, cash-flow management and asset allocation to meet financial goals. Everyone saves money for future needs but the approach is to save surplus money without preparing household budgets, without prioritising personal financial goals, without properly allocating investments in different asset classes and without understanding the real rate of return (after adjusting for inflation).Individuals make a wide array of financial decisions through their lifetime. Examples of such decisions include providing for children’s higher education, saving for retirement, managing credit wisely, budgeting, tax and estate planning, insurance, etc. Each of these decisions is prompted by the emergence of a need. To help consumers make informed decisions, financial education is very important.
“The writer is a certified financial planner & full member of FPSB India, and is currently working as academic & regional head (western region) with International College of Financial Planning, Mumbai. FPSB India relies on its members’ prudence, competence, and ethical standards to have submitted this write up in good faith in their personal respective capacity. The article and the views are those of the writer and do not represent that of FPSB India. Readers are advised to consult their professional financial planners for advice

Author : Madhu Sinha/DNAContent :
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PROFESSIONALISM..

As the slogan of our group is redifining Professionalism So i would like to put some light on Do,s And Donts of profissionalism
The Do's
Be eager for a challenge
Be yourself
Be open-minded
Be on time
Know the dress code
Observe and ask thoughtful questions
Treat everyone you meet with respect and professionalism
Understand that everyone makes mistakes
Carry a notebook with you at all times
Pay attention to the details
Be proactive
Show energy and interest
Set goals for yourself

The Don’ts
Let a bad day get you down
Take on more than you can handle
Pretend to know something you don’t
Have nothing to do
Ask everyone the same questions
Take yourself too seriously
Talk negatively about co-workers
Focus all of your attention on senior management
Bring your personal life into the office
Surf the web all day
Spend working hours on social networking sites or texting friends

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SOURABH SONI

SECRETATY

JAB WE MER CA

REDEFINING PROFESSIONALISM...

“ENJOY TODAY ,WAIT FOR BEAUTIFUL TOMORROW ”

FMP Vs FDRs

FMP Vs Bank FDRs
With the recent equity market volatility and rising inerest
rates, it is time to think and have an appropriate balance
between equity and fixed income instruments consistent
with one's risk profile and time horizon of the needs.
Fixed Maturity Plans (FMP)
FMPs are quite in fashion now a days - and they all tell
you they're going to save you a lot more tax than bank
fixed deposits (FDs). How?
FMPs are a kind of debt funds. Debt funds are simply
those that invest in debt securities - like Govt. securities,
corporate bonds, corporate rated deposits etc.
· Fixed Maturity Plans (FMPs) are debt funds that
have a fixed term - usually 3 to 15 months, and
· are closed ended, meaning you can only buy in an
NFO, not after that.
FMP Returns are not guaranteed, but usually indicative
returns are reached. Why? Because they buy products at
the same maturity level, and hold till maturity. So an FMP
now may say indicative returns are 10% for a 370 day
period, which involves them buying securities yielding
11% for the period, and holding till maturity. They charge
you about 1% as management fees, so the return to you
is 10%, pre tax.
Tax Advantage
Even if the interest rate goes up or down it doesn't change
the yield for them (since they don't sell or buy the
security). How do they give you lesser tax? Two ways :
1. Double indexation. The gains you make are indexed
over two years (typical indexation rates are 5% a year) so
that you make no gains according to the tax authorities.
That involves buying, say, in March of one year and
maturing in April of the next year. That gives you two
financial years (since years are April-March) of holding,
which means a typical indexation of 10%+ - so you make
10% or so on interest, and the government thinks you
made nothing because of two years of inflation, so you
pay no (or very little) tax.
2. Lower tax rate: All longer term debt fund dividends
are taxed at 12.5% for individuals versus FD interest
being at your marginal rate (say 30%). Note: short term
debt that involves money market and call money is
charged higher dividend rates. Also, capital gains for debt
funds held over a year is only 10% (without indexation)
or 20% with indexation.
Both these are significantly less taxing than FDs, where
the interest is added to your income and taxed at your
marginal rate.
Risk
What's risk with FMPs? Well, the interest rate is not fixed.
You never know how much you'll eventually get. Second,
there is usually some penalty for early liquidation (before
maturity) that can actually erode your capital. If they put
a 1.5% early exit load, and you want to exit in say a
month, the NAV may not have moved enough to cover the
exit load itself, so your capital also goes! This doesn't
happen with FDs.

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PRESIDENT
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REDEFINING PROFESSIONALISM......
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ITAT DECISIONS

Issue: Deduction u/s80IB in respect of housing
Project
Laukik Developers v. DCIT, circle-3, Thane (W) {105 ITD
657(Mum)}
In this case, assessee developed housing cum
commercial project in the A.Y.2002-2003. The tribunal
noted that local authority approved the project as
housing cum commercial project since it constructed
3,143 S.Ft. for shops in the project. Hence It did not
meet the condition as pure housing project and deduction
u/s80 IB was denied to the assessee. Even Tribunal
refused to allow proportionate deduction relating to the
residential area constructed for the reason that project
needs to be housing project only.
Issue:- Taxability of Goodwill
Alankar Business Corporation Ltd., v. DCIT, Company
Circle I(3)Chennai
{105 ITD 629(Chennai)}
The company entered into agreement to sell goodwill on
28-2-1999 and received the consideration. However it
was shown as advance payment in view of the fact that
other business was sold by agreement dated 27-7-1999
and the same was confirmed by the appropriate
authority later on. Hence “A” offered the capital gain on
sale of goodwill in the A.Y.2002-2003. The Dept did not
accept the contention and taxed it in the year of receipt of
amount. The Tribunal ruled that substance of the
agreement needs to be looked into and not the form of
agreement. The advance receipt of amount was
crystallized once other assets were sold hence assessee
has rightly offered the income in the year in which other
assets were sold.
Issue: Deductibility of expenses u/s14A
ACIT v. Tamil Nadu Silk Producers Federation Ltd.{105
ITD 623(Chennai)}
The Tribunal held that department can not deny
deduction of expenses incurred on income which is
eligible for deduction under chapter VI-A (Section 80A to
80U) in as much as such income goes in to computation of
total income thereafter deduction under chapter VIA is
allowed. Whereas Section 14A speaks about restriction
of expenses incurred in relation to exempt income that
does not go into the computation of total Income.
Issue: Maintainability of order u/s 263
Colorcraft Kashimira Ceramic Compound v.ITO ward-
4(4) Thane{105 ITD 599(Mum)}
In this case , the Tribunal observed that if CIT issued show
cause notice to invoke section 263 for any order being
erroneous and prejudicial to the interest of the revenue,
he ought to have passed order on the points covered in
the show cause notice. If he deviates from the show
cause notice and passes order on different issues, that
order is not sustainable under law.
However Tribunal endorsed the view of dept. that mere
supply of information by assessee would not debar CIT
for not exercising the provision of section 263 of the Act.
If A.O. did not make enquiry on the materials furnished
before him by the assessee in order to assess as to
whether the claim of the assessee is correct or not. The
CIT is empowered to pass order u/s 263 of the Act.
Issue: Rejection of books of Accounts u/s145 of
the Act
ITO, Ward 2(5),Rajkot v. Girish M. Mehta {105 ITD 585
(Rajkot)}
In his case, Tribunal held that before rejecting books of
accounts, depatment has to prove that accounts are
unreliable, incorrect or incomplete. When accounts are
regularly maintained in the ordinary course of business,
duly audited under the provisions of the Act and free from
any qualification from auditors , should be taken as
correct . If depatment needs to enhance the gross profit
margin , first it should need to satisfy the conditions of
section 145 with regard to specific defects in the
accounts . In the absence of any proof of the falsity or
defects in the accounts, department. can not make
addition on account of lower G.P. Margin declared by the
assessee.
Issue: Slump Sale u/s 50B, Disallowance of
Interest u/s14A
Zuari Industirs Ltd., v. ACIT, Circle-2, Margao{105 ITD
569(Mum)}
The Tribunal decided that net worth of undertaking in
case of slump sale can either be positive or nil in case of
liabilities exceeds depreciable values and book value of
other assets. The Members did not accept the contention
of department that negative net worth ought to be added
in the sale consideration in case of slump sale of
undertaking.
As regards disallowance of interest in view of investment
made in shares whose dividend income thereof is tax
free. The Tribunal held that onus is on the department. to
prove that any expenditure was incurred for earning tax
free income. If department can not prove by identifying
the nexus between the borrowed fund and investment
thereof in investment which generates tax free income,
the same can not disallowed u/s14A of the Act.
Issue: Deemed Dividend u/s 2(22)(e) of the Act.
ACIT. Circle I(1), Trichur v. Smt. Lakshmikutty Naryan
{105 ITD 558(Cochin)}
The tribunal observed that if there is an outflow of money
from the company to shares holders who holds more than
10% shares therein, and merely book entry is passed and
debited his accounts. In this event, there is no tax liability
with regard to deemed dividend u/s2 (22)(e) of the Act.
Issue: Speculation loss u/s73
ACIT, circle 4(3) Mumbai v. Sucham Fin.&Investment(I)
Ltd.{105 ITD 353(Mum)}
The “A” was engaged in the only business of purchase and
sale of shares. The” A” disclosed certain loss on trading of
shares where delivery was not taken and certain profit on
trading of shares where delivery was taken. The Tribunal
held that entire business will fall within the ambit of
explanation to section 73 of the Act. Therefore entire
profit and loss will be merged and resultant profit after
set off loss of non delivery based transaction will be liable
for taxation

FORM NO 16/16A

Clarification regarding new Form 16/ 16A
• Central Board of Direct Taxes had issued a
Notification vide S.O. 455 (E) dated 26th March, 2007
prescribing new Form No.16 and Form No.16A for
issuing TDS Certificate .
• One of the columns in each of these Forms requires
mentioning 'Acknowledgement Nos. in respect of all
Quarterly Statements of TDS under sub-section (3)
of section 200 as provided by TIN Facilitation
Centre or NSDL website'.
• It was pointed out that the deductor will not be able to
give the Acknowledgement No. in respect of
Quarterly Statements for the fourth quarter as the
TDS certificates 16 for TDS on salaries and 16A for
consolidated TDS certificate in respect of other TDS
payments are issued by 30th April whereas Quarterly
Statements for the last quarter, i.e. the fourth
quarter, are allowed to be furnished on or before 15th
of June.
• Now an explanation has been issued on April 25th
mentioning that
o Wherever fourth quarter return has been
submitted before issuing TDS certificate, the
same should be mentioned. The reason being
that fourth quarter return can be issued any time
after 1st April and 15th June is the last date.
o Wherever the same is not submitted, it is
suggested to mention “Not Available as the last
Quarterly Statement is yet to be furnished'
• The explanation however is silent about monthly TDS
certificate

SATBIR SINGH

PRESIDENT

JAB WE MET CA

REDEFINING PROFESSIONALISM......

MONEY MARKET

CONTINUED FROM YESTARDSY..........
Repurchase Agreements: Repurchase transactions, called Repo or Reverse Repo are
transactions or short term loans in which two parties agree to sell and repurchase the same
security. They are usually used for overnight borrowing. Repo/Reverse Repo transactions can
be done only between the parties approved by RBI and in RBI approved securities viz. GOI
and State Govt Securities, T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc. Under
repurchase agreement the seller sells specified securities with an agreement to repurchase the
same at a mutually decided future date and price. Similarly, the buyer purchases the securities
with an agreement to resell the same to the seller on an agreed date at a predetermined price.
Such a transaction is called a Repo when viewed from the perspective of the seller of the
securities and Reverse Repo when viewed from the perspective of the buyer of the securities.
Thus, whether a given agreement is termed as a Repo or Reverse Repo depends on which
party initiated the transaction. The lender or buyer in a Repo is entitled to receive
compensation for use of funds provided to the counterparty. Effectively the seller of the
security borrows money for a period of time (Repo period) at a particular rate of interest
mutually agreed with the buyer of the security who has lent the funds to the seller. The rate of
interest agreed upon is called the Repo rate. The Repo rate is negotiated by the counterparties
independently of the coupon rate or rates of the underlying securities and is influenced by
overall money market conditions.
Commercial Papers: Commercial paper is a low-cost alternative to bank loans. It is a short
term unsecured promissory note issued by corporates and financial institutions at a
discounted value on face value. They are usually issued with fixed maturity between one to
270 days and for financing of accounts receivables, inventories and meeting short term
liabilities. Say, for example, a company has receivables of Rs 1 lacs with credit period 6
months. It will not be able to liquidate its receivables before 6 months. The company is in
need of funds. It can issue commercial papers in form of unsecured promissory notes at
discount of 10% on face value of Rs 1 lacs to be matured after 6 months. The company has
strong credit rating and finds buyers easily. The company is able to liquidate its receivables
immediately and the buyer is able to earn interest of Rs 10K over a period of 6 months. They
yield higher returns as compared to T-Bills as they are less secure in comparison to these
bills; however chances of default are almost negligible but are not zero risk instruments.
Commercial paper being an instrument not backed by any collateral, only firms with high
quality credit ratings will find buyers easily without offering any substantial discounts. They
are issued by corporates to impart flexibility in raising working capital resources at market
determined rates. Commercial Papers are actively traded in the secondary market since they
are issued in the form of promissory notes and are freely transferable in demat form.
TO BE CONTINUED TOMORROW...........
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SATBIR SINGH
JAB WE MET CA
REDEFINING PRFOFESSONALISM.......