Business Advisor

(Fortnightly inputs for professionals and executives) Volume II Part 3 February 10, 2013

Volume II Part 3 February 10, 2013

Business Advisor

Contents
Budget 2013-14: Time to tax the rich and super-rich more T. N. Pandey - A realistic approach will be adopted to generate revenue by placing more burden of tax on the super-rich. Resignation of directors: A new clause complicates Dr S. Chandrasekaran - A director who has resigned shall be liable even after his resignation for offences that occurred during his tenure. Goods and services tax: Agreement but no consensus yet Dr Sanjiv Agarwal - Ensure that GST is not twisted so much that it becomes handicapped before it starts to crawl. Inclusive growth, and missing goals Dr B. Yerram Raju - There are high-priced doctors in private clinics where even income-tax officers would not dare ask for receipt or insist on tax liability to be recorded scrupulously. Case laws update V. K. Subramani - Any compensation paid under statute would necessarily be treated as allowable expenditure. Budget expectations of business heads
(Cover: Animal spirits by Bimbadhar Mishra)

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Budget 2013-14: It is time to tax the rich and super-rich more

T. N. Pandey The budget time being around, demands have started surfacing for income-tax concessions, including from those, who are in sufficiently comfortable financial position, compared to large number of persons, nearly 30% of population living below the poverty line. According to the FM, 14.6 lakh people are having incomes exceeding Rs 10 lakh and they themselves and their trade, commerce and business associations champion their cases for tax benefits. The Finance Ministry gets flooded with such requests. This is Here, despite the maximum tax quite contrary to the rate being 30.90% for individuals, position in other countries non-corporate assesses, and of the world like the US, corporates, the average rate of tax Germany, and France, on such entities, because of where the well-to-do have urged the respective numerous exemptions and Governments to tax them concessions, gets reduced by more because they can nearly 25% or so. spare more. Responding to such sentiments, the Obama Government in the US, by 257-167 votes, the Republican majority in the House of Representatives, approved a Bill that will hike taxes on approximately 2% of the wealthiest Americans in the country with incomes over $400,000 ($4,50,000 for couples). The Democrats actually wanted hike on earnings over $2,50,000 a year with no reversal of a payroll tax, increase to finance social security, but this was not approved by the Republicans. About 77% of the US households will pay a larger share of income to Government as per approved proposals. Indian panorama The situation in India is quite opposite. Here, despite the maximum tax (For the full issue, subscribe at http://bit.ly/ShriMagz)
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Case laws update Focus: Business deductions

V. K. Subramani Closure of one line of business and payment of retrenchment compensation to workmen is deductible In CIT v. Black Pearl Hotels P Ltd (2012) 347 ITR 374 (Karn) the assessee carried on more than one business and the business of running hotel was closed down. Deduction in respect of payment of retrenchment compensation to retrenched staff was the issue before the court. The court held that the assessee had common management and common place of business. Accordingly, it held that retrenchment compensation as deductible expenditure. Further, the compensation was under the Industrial Any compensation Disputes Act and hence it held that any paid under statute compensation paid under statute would would necessarily be necessarily be treated as allowable expenditure. treated as allowable In the absence of expansion of industrial undertaking, expenses towards issue of shares is not deductible

expenditure.

In CIT v. Shasun Chemicals & Drugs Ltd (2012) 347 ITR 532 (Mad) the assessee incurred expenditure towards public issue of shares. The expenses were sought to be amortised under section 35D of the Act. The Court held that the company was started in 1976 and in the guise of expansion it had claimed public shares issue expenses in the financial year 1995. It was held that the expenditure should be incurred either before the commencement of the business or after the commencement of business in connection with extension of industrial undertaking or in connection with the setting up of a new industrial unit. There was no material on record to show that the expenses incurred were towards issue of shares and accordingly it was held that it cannot be called revenue expenditure and must be treated as capital expenditure. Amount paid to employees bonus trust does not satisfy the requirement of section 43B
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In CIT v. Shasun Chemicals & Drugs Ltd (2012) 347 ITR 532 (Mad) the assessee claimed deduction under section 36(1)(v) towards the bonus paid to the employees bonus trust consequent to labour unrest and dispute on quantum of bonus. It claimed that the amount actually paid as such complied with the requirements of section 43B. The court made reference to section 40A(9) and held that it would override section 43B. The payment thus made to the employees bonus trust was held as not eligible for deduction. Salary to working partner representing HUF is deductible In CIT v. Jugal Kishor & Sons (2012) 347 ITR 325 (All) a karta of the HUF was a partner in the firm in representative capacity. The issue before the court was whether the working partner salary paid to partner representing a HUF is deductible in terms of section 40(b). The court held that so far as the firm is concerned the partner is a partner and the fact of his representative capacity will not have any repercussions on the firm. A partner cannot be heard to say that The issue before the he received salary as a partner of the firm court was whether but in a different capacity. Even though the the working partner recipient is a karta of the HUF the amount salary paid to partner paid to the partner as a working partner is deductible if the conditions contained in representing a HUF is section 40(b) are satisfied. deductible in terms of

section 40(b).

Advance to suppliers if not deductible as bad debt it is deductible as business loss

In Mohan Meakin Ltd v. CIT (2012) 348 ITR 109 (Del) the assessee filed a revised return and made a fresh claim of deduction towards bad debt representing the amount given to various parties from whom supply of goods was sought. Since the recipients did not supply goods and were in bad shape financially, the amounts advanced were claimed as bad debt. The court held the advances given fell within the contemplation of the words laid out or expended wholly and exclusively for the purposes of business contained in section 37 and hence even if they are not deductible as bad debt, they are deductible as business loss under section 37. Provision for liability without debit to profit and loss account would not fall within the mischief of section 41(1) In CIT v. Siel Holdings Ltd (2012) 348 ITR 447 (Del) the assessee in pursuance of a scheme of arrangement approved by the High Court took all
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the assets and liabilities of a company. The tribunal factually found that in the year ending 31st March 2003 the value of investment was increased by Rs 50 lakh and a corresponding provision for contingency was created for Rs 50 lakh. The court held that the provision was not debited to profit and loss account by the erstwhile company. Accordingly, it was held that section 41(1) cannot be invoked for an entry not debited to profit and loss account. Part payment to acquire know-how which was not transferred and the deductibility of the amount paid In Drilcos (India) P Ltd v. CIT (2012) 348 ITR 382 (SC) the assessee entered into an agreement for transfer of know-how for an agreed consideration to be paid in three instalments. After the first instalment payment dispute arose between the parties and the agreement was cancelled. The assessee hence could not acquire the know-how. The issue before the court was whether the payment made is to be amortised under section 35AB and the facts of the case relate to The court held that the assessment year 1993-94. The court amount paid for acquiring held that the amount paid for acquiring know-how is the decisive know-how is the decisive test and since the payments were test and since the made for acquiring know-how, it is payments were made for eligible for amortisation as per acquiring know-how, it is section 35AB. However, section 32 treats knowper section 35AB. how as an intangible asset eligible for depreciation if it is acquired on or after 01.04.1998. Now in the present day context whether a part payment for acquisition of capital asset not acquired subsequently is deductible as revenue expenditure or not allowable, needs to be decided. Since the payment is meant for acquisition of capital asset, the amount paid will have to be treated as capital loss. Non-compete fee to joint venturer and deductibility In Sharp Business System v. CIT (2012) 79 DTR (Del) 329 the assessee paid Rs 3 crore to its previous joint venture partner who had 26% stake in the business. The amount was paid to keep the joint venturer out of the market for a period of seven years. It was held that the amount paid towards noncompete fee constituted capital expenditure. Yet another issue was whether the capital expenditure incurred for getting the joint venturer out of the said business is a capital asset and hence eligible for depreciation. The court
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eligible for amortisation as

held the non-compete agreement does not confer any exclusive right to the party for carrying on the business. By virtue of non-compete agreement there is no transfer. Accordingly, the court held that the assessee cannot claim depreciation on the said payment though it was categorised as capital expenditure. Payment to trust is not hit by section 40A(2) In Shankar Trading (P) Ltd v. CIT (2012) 76 DTR (Del) 40 the assessee paid rent to a trust in which the directors of the company were also trustees. There was a substantial revision of lease rent. The court held that a trust is neither a company, nor firm, nor HUF, nor an AOP within the meaning of section 40A(2)(b)(v). It held that the trustees or the beneficiaries have to come together and formed an association for a common purpose or to take a common action. Beneficiaries merely enjoy the benefits of the trust whereas the trustees have to administer the trust in terms of the trust deed. The trust is not an AOP within the meaning of section 40A(2) and the payment hence will not be liable for The assessee paid reasonable payment test even though the rent to a trust in company is owned and controlled by the trustees of the trust and their family members. which the directors

In CIT v. Harrisons Malayalam Ltd (2012) 76 DTR (Ker) 335 the assessee advanced Rs 4.42 crore to its sister concern, i.e. wholly owned subsidiary company, without charging interest. During the same year it availed loan of Rs 7.75 crore and claimed interest on borrowings. The court held that the assessee did not have its own funds to make such interest-free advance to its subsidiary. Every loan granted to the subsidiary company was preceded by the receipt of loan by the assessee. The court held that even if the assessees contention that the loans were granted from internal sources is accepted if such interest-free loans were not made at least to that extent it need not have borrowed from other entities to be paid with interest. There was a direct nexus between borrowings and advances which was established and the loan to subsidiary company was not for the purpose of assessees business and there was no commercial expediency for making such interest-free advance. The interest on borrowed capital hence was disallowed. (V. K. Subramani is Chartered Accountant, Erode)
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of the company were also trustees.

Interest on borrowed capital

Budget expectations of business heads

Khalid Isar, Country General Manager, Alibaba.com India Prithviraj Kothari, Director, Riddisiddhi Bullions Ltd Dr Dhairyasheel Savant Jitendra Hegde, MD, Biomedicon-Biorad Group Boman Irani, CMD, Rustomjee Pranab Datta, Chairman, Knight Frank India Lt Gen Rajender Singh (Retd), CEO, DLF Foundation Yashish Dahiya, Policybazaar.com Nirmal Singh, Founder & CEO, Wheebox Vijay Kedia, Managing Director, Kedia Securities P Ltd Chitty Babu, Chairman and CEO, Akshaya P Ltd Pankaj Bansal, Director, M3M India Amol Naikwadi, Joint MD, Indus Health Plus K. Vaitheeswaran, Founder and CEO, Indiaplaza Raj Sharma, MD, Best Property Deals Rajat Goel, CEO, Eye Q Super Speciality Eye Hospitals Samarjit Singh, MD, Indiahomes Rajesh Javalagi, AVP Finance, Accounts & Legal, Harbinger Jackie Matai, Co-founder, Aspri Spirits P Ltd Purushotama Reddy, VP Finance & Legal, Omega Healthcare
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Internet infrastructure
Khalid Isar, Country General Manager, Alibaba.com India In the forthcoming budget 2013-14, we hope to see the government taking initiatives in the following areas: Development of the Internet infrastructure A key area we are looking forward to is the development of the Internet infrastructure in the country for the benefit of small business. Government must take the initiative to ensure the reach of Internet in Tier II and Tier III cities and towns across the country. With 4G expected to roll out in mid-2013, we expect a drastic revolution to take place in terms of increase of Internet users in the upcoming year and beyond. National IT Policy In order to take advantage of Information and Communication Technology to aid with economic development, the Indian government last year proposed and approved the National IT Policy. Increased IT adoption can aid higher e-commerce enablement, providing the much needed impetus to exports by helping to remove barriers to global trade. Boost manufacturing and services sector We are also hopeful that the new proposed initiatives in the budget will boost the manufacturing and services sector, especially in the MSME sector. Roll-out GST Another promising initiative announced last Budget was a proposal to rollout GST. While the committee set up by the Finance Ministers on GST is now evaluating an alternate model, we would like to see a concrete proposal presented in the upcoming budget.

Gold
Prithviraj Kothari, Director, Riddisiddhi Bullions Ltd 1. Government had increased import duty on gold before the budget. The governments move to hike the customs duty from 4 to 6 percent will have a loud impact on the bullion sector. The hike sums up to around INR 60,000 (approx) per kilogram of gold. To be clear, with this duty
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hike a difference of 7 percent between the international and domestic price of the yellow metal is evident. Due to this, the increase in duty on the actual price of gold is being passed on to the retail consumers by the jewellers. This may also lead to rise of illegal channels and malicious activities with respect to importing gold and related products like jewellery etc., in the country. In turn, it will lead to an increase in unemployment among the skilled artisans of the country (around 1-2 million families depend on this sector to earn their livelihood) as well the businesses of local jewellers across the country. I expect that this budget will address this issue and a fixed duty structure will be levied. The extra revenue generated from the increased duty should be used by the government for creating new hallmarking centres, and research and development in the mining sector. Hallmarking for jewellery is a great move by the government. It will ensure customer satisfaction by purity assurance. For this, the current need is to increase the hallmarking centres at a faster pace so that the implementation is done in no time. Research and development is the key to the future of Indian bullion industry. India is rich in mines but R&D is so poor that we are hardly in position to extract much of its abundant resources. To be precise, the country produced and refined only 1-3 tonnes worth of gold. Thats less than 1% of the value of metallic mineral production in the country. On the other hand, China boosted its gold refining business after it gave companies a single-window clearance along with fiscal and infrastructure incentives which have put the industry on a fast-track and made it a pillar industry in many of the countrys gold producing areas. Chinas gold output increased 11.66 percent from a year earlier to hit a record high of 403.05 tonnes in 2012, confirmed by China Gold Association (Source: chinadaily.com.cn). This data showed that it is the largest producer for the sixth straight year. I feel that if R&D is carried out in an efficient way, production of the metal will increase. This will reduce dependency on imports and in turn help the government to increase the forex reserve. As the metal will be extracted locally, customers will be benefited pricewise, due to local production. I feel FDI is extremely important with regards to research and development. R&D is costly but with the help of FDI we can surely work out the way to get the most out of it. FDI will help in strengthening our rupee and in turn reduce the depreciation of our currency. 2. Most importantly, GST implementation is a must. If implemented, it is expected to provide a significant boost to investment and growth of the
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economy. GST will have a significant impact on almost all aspects of businesses operating in the country, including the supply chain, sourcing and distribution decisions, inventory costs and cash flows, pricing policy, accounting systems and transactions management. A flat 1% across India should be levied by the government, which would replace most indirect taxes currently in place. 3. Commodity exchange has now completed almost 9 years in India. Introduction of option product for this exchange is a must. Those who have the exposure should be given an opportunity. It will be a boon for a bullion trader and jeweller. By using this instrument they can hedge their future position and in a way provide the necessary risk cover. An investor will also be highly benefited from this instrument. He/she will get a chance to invest in a larger quantity of metal with a lower investment and reap benefits till the expiry date. 4. I understand that Government is thinking of introducing CTT tax, like the one in the equity market. CTT tax should not be charged on bullion dealers and jewellers, as it will only increase the metal price and in turn increase the price for the customers. It should be charged on to speculators only. 5. Gold deposit schemes are offered by banks in which investors deposit gold for a period of certain 3 years earning a fixed rate of interest. Currently that has been reduced to 6 months. The depository scheme that the banks and MFs are enjoying should also be allowed to corporate, working for bullion industry. It will help to increase the gold reserves and in turn benefit the customers willing to deposit their idle gold. The government should harness the existing reserve of gold in our country rather than turning towards imports and implementing this alarming hike on customs duty. Hiking the duty on imports will in no way curtail the demand, as the precious metal has always been regarded as one of the best investment options for social security. 6. Indian households have nearly 25,000 to 30,000 tonnes of gold. I expect that this budget would show an effective way to gain revenue by exporting it. I would suggest Government of India to introduce schemes like minimum tax scheme wherein an investor is charged minimum tax to convert his/her unaccounted gold into an accounted one. By this the government treasury will also increase and the idle gold can be put to use. The other scheme can be a VDS scheme (voluntary disclosure scheme) by which the gold /silver can be brought to the market.
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7. I expect an increase in gold loan scheme period to extend from 180 days to 360 days and LC tenure from 90 to 180 days. As of now gold loan is allowed up to 180 days, which implies that a jeweller has to rollover his/her position twice in a year and that in turns leads to increase in imports. If the loan period is extended to 360 days, one cycle of loan will be reduced. A direct effect will be reduction in imports. 8. Currently, NRIs are allowed to bring 1 kilo of gold while arriving in India. Earlier this was 10 kilos. I feel this cap should be raised back to the earlier levels or even more. This too will help in reduction of imports and reduce the forex pressure. 9. Indian Government does allow export of gold in the form of jewellery. Export of gold in form of bars etc. should be allowed through banks to avoid money laundering. Moreover, the exports should take place at the international market prices only (there is a value addition of 3%+, as per law, which should not be levied in this case). Once the exports from India are allowed, there will be a direct effect on gold price. Over the years, India has purely been an importer. With exports, I expect the international price would reduce by $100-200 and provide the necessary reduction in Indias current account deficit. On exporting gold, the refund of duty should take place in cash or licence form.

Healthcare
Dr Dhairyasheel Savant, Consultant Surgical Oncologist, and Reconstructive & Micro vascular Surgeon, Mumbai The healthcare industry is in dire need for a major boost. This has been necessitated due to Indias burgeoning population and longevity of the existing population. The need of the hour is to allocate adequate resources to urban as well as rural healthcare sectors to complement the existing infrastructure. The urban-rural divide in manpower shortage needs to be addressed with probable incentives for the human resources practising in the villages. Medical supplies need to be delivered efficiently to those in rural areas. This will also reduce the burden on the government hospitals in the cities (For the full issue, subscribe at http://bit.ly/ShriMagz)
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List of contributors to this issue

T. N. Pandey, Former Chairman, CBDT, Noida Dr S. Chandrasekaran, Chandrasekaran Associates, Delhi Dr Sanjiv Agarwal, Agarwal Sanjiv & Company, Jaipur Dr B. Yerram Raju, Regional Director, PRMIA, Hyderabad Bimbadhar Mishra, Andhra Bank, Hyderabad V. K. Subramani, Chartered Accountant, Erode

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Business Advisor

Budget expectations of business heads

Published by: Shrinikethan, Chennai http://bit.ly/ShriMap Edited by: D. Murali http://bit.ly/dMurali http://bit.ly/TopTalk February 10, 2013 Volume II Part 3 February 10, 2013 14 Business Advisor