(Fortnightly inputs for professionals and executives) Volume II Part 4 February 25, 2013
Volume II Part 4 February 25, 2013
One person company in the Companies Bill, 2012 T. N. Pandey - “There are a number of clauses which, by their very nature, cannot apply to OPCs.” Class action suits: An introduction in Companies Bill Dr S. Chandrasekaran - “The new provision is an eye opener not only for corporates but also to auditors and consultants associated with companies.” Personal penalty in Service Tax Dr Sanjiv Agarwal - “In certain cases, the Department seeks to impose personal penalty on the partners.” Chiselling Chidambaram Dr B. Yerram Raju - “The FM may have to relook at the option for increasing the non-tax revenues.” Case laws update V. K. Subramani - “The claim of assessee that club membership fee is deductible as revenue expenditure, was allowed.” Budget expectations of business heads
(Cover: ‘Budget’ by Bimbadhar Mishra)
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Volume II Part 4 February 25, 2013 2 Business Advisor
One person company in the Companies Bill, 2012: Not likely to be popular
T. N. Pandey The Companies Bill, 2012, as passed by the Lok Sabha, has provision for One Person Company (OPC) in the Indian context. In clause 3 of the Bill, in Chapter-II titled ‘Incorporation of Company and matters incidental thereto’ some matters relating to OPC stated are: 3(1)(c) A company may be formed for any lawful purpose by(a) xx xx xx xx xx xx xx xx xx xx xx (b) xx xx xx xx xx xx xx xx xx xx xx (c) one person, where the company to be formed is to be One Person Company that is to say, a private company, by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration. A number of provisos have been added to the clause concerning OPC which are to the following effect:
Proviso -I Provided that the memorandum of One Person Company shall indicate the name of the other person, with his prior written consent in the prescribed form, who shall, in the event of the subscriber’s death or his incapacity to contract become the member of the company and the written consent of such person shall also be filed with the Registrar at the time of incorporation of the One Person Company along with its memorandum and articles. Provided further that such other person may withdraw his consent in such manner as may be prescribed. Provided also that the member of One Person Company may at any time change the name of such other person by giving notice in such manner as may be prescribed. Provided also that it shall be the duty of the member of One Person Company to intimate the company the change, if any, in the name of the other person nominated by him by indicating in the memorandum or otherwise within such time and in such manner as may be prescribed, and the company shall intimate the Registrar any such change within such time and in such manner as may be prescribed. Provided also that any such change in the name of the person shall not be deemed to be in alteration of the memorandum. 3 Business Advisor
Proviso-II Proviso-III Proviso – IV
Proviso – V
Volume II Part 4 February 25, 2013
These provisos show the detailed nature of compliances (some of which would be known when the Rules are published by the Government) that would be required to be complied with in respect of incorporation aspect only by OPC. In the context of holding of Annual General Meetings (AGMs), clause 96 provides that OPC shall not be required to hold AGMs in accordance with the provisions of clause 96 of the Bill. Because of this, other clauses concerning AGMs will not apply to OPCs. But such a provision impliedly means that where exclusionary clauses have not been included, such provisions shall be applicable to such companies. Actually, there are a number of clauses, which by their very nature cannot apply to OPCs like issue of prospectus, share capital/ debenture and other issues concerning share capital, voting rights, transfer and transmission of shares, provision in regard to acceptance of deposits from public, registration of changes, maintenance of register of members etc. filing of annual returns, passing of resolutions, payment of dividend provisions, detailed provisions concerning accounts and audit, Directors and their numbers, There are a number independent directors meetings, remuneration of directors, provisions concerning inspections of clauses which, by and investigations, mergers, amalgamations, their very nature, compromises arrangements, acquisitions, cannot apply to oppression and mismanagement, valuation OPCs. and valuers, winding up/ liquidation/ liquidators, sick companies, NCLT and Special Courts, exhaustive provisions concerning penalties and prosecution, adjudication etc. But there is no mention in Bill that clauses relating to these will not apply in cases of OPCs. Such companies are likely to be non-starter because of the following reasons: [i] No study regarding the relevance of such companies in the Indian context has been made though there had been number of studies concerning the companies legislation in the past. Only in Dr J. J. Irani’s report, a brief reference to OPCs was made by mentioning it as one of the companies while classifying the companies into various categories and making the following suggestions regarding the characteristics of such companies as: (a) OPC may be registered as a private company with one member and may also have at least one director… (For the full issue, subscribe at http://bit.ly/ShriMagz)
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Case laws update Focus: Business deductions
V. K. Subramani Are the items contained in section 35D(2)( c )(iv) illustrative? In CIT v. Ashok Leyland Ltd (2012) 75 DTR (Mad) 305 the assessee claimed expenditure in connection with issue of shares. The issue before the court was whether the share issue expenses claim could be limited to those expenses which are mentioned in section 35D(2)(c)(iv). The court answered in the affirmative and held that the expenditure claim is limited to those expenses only. The sub-clause (iv) of clause (c) to section 35D(2) speaks about underwriting commission, brokerage and charges Depreciation need not be for drafting, typing, printing and adjusted for the purpose of advertisement of the prospectus, in ascertaining the capital of connection with the issue, for public subscription, of shares in or the partners for payment of debentures of the company. interest. However, it was held as illustrative in CIT v. Shree Synthetics 162 ITR 819 (MP). A binding precedent that the items contained therein alone are eligible for amortisation could be found in Adar Tex Products case (314 ITR 38 (Mad)). Is the depreciation not adjusted in the books deducted for computing net worth of the partners for the purpose of interest on capital? In Sri Venkateswara Photo Studio v. Asst. CIT (2013) 81 DTR (Mad) 448 it was held that there is a marked difference in the treatment of payment of interest on partners’ capital and salary for the purpose of granting deduction under section 40(b). For the purpose of payment of salary under section 40(b) the ‘book-profit’ has to be computed as per the provisions contained in Chapter IV-D of the Act. Whereas for the purpose of payment of interest on capital there is no mandate that the depreciation not given effect in the books are to be notionally adjusted for arriving at the capital of the partners. Thus the court held that depreciation need not be adjusted for the
Volume II Part 4 February 25, 2013 5 Business Advisor
purpose of ascertaining the capital of the partners for payment of interest allowable under section 40(b). Are the items of income taxable under the head ‘other sources’ credited to P&L account considered for allowance of working partner salary under section 40(b)? In Mohd. Serajuddin & Brothers v. CIT (2012) 80 DTR (Cal) 46 it was held that section 40(b) nowhere provides the method of accounting for the purpose of computing net profit being only from business and not from other sources. It held that there cannot be a separate method of accounting for ascertaining net profit or book-profit. Even where the income from other sources is included in the profit and loss account, to ascertain the net profit qua book-profit for computation of the remuneration to the partners, those incomes cannot be discarded/ excluded. The court held that sections 30 to 43D provide for various deductions but none of these sections provide for exclusion of items not falling in computation of profits and gains from business or profession. Is the outstanding balance due to suppliers taxable under section 41(1) when there is no confirmation from the suppliers?
In CIT v. Shri Vardhman Overseas Ltd (2012) 343 ITR 408 (Del) the assessee disclosed about 9 sundry creditors for whom the balances were outstanding for the past four years. The whereabouts of the creditors were not known to the assessee. The Assessing Officer treated all the unconfirmed creditors as income under section 68. The tribunal held that the addition could not be made under section 68 as these were not credits during that year. It held that section 41(1) applied by CIT(A) was incorrect as there was no cessation of liability. The court held that the assessee had not unilaterally written back its liabilities to profit and loss account. The balance sheet of the assessee disclosed the liability as subsisting on the closing date. The fact that the liability has been disclosed in the balance sheet amounts to acknowledgment of debt in favour of the creditors for the purposes of section 18 of the Limitation Act, 1963. The court accordingly held that outstanding amounts in spite of being not confirmed could not be taxed under section 41(1). Is the corporate membership fee paid to club deductible as revenue expenditure?
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The Assessing Officer treated all the unconfirmed creditors as income under section 68.
In CIT v. Groz Beckert Asia Ltd (2013 – ITA No.366 of 2008) decided on 24.01.2013 the assessee paid Rs 6 lakh towards corporate membership of Golf Club, Chandigarh and Rs 16,945 towards service and facilities availed during the relevant assessment year. The claim of revenue expenditure of the assessee was negatived by the Assessing Officer, whereas the CIT (Appeals) called for remand report and later admitted the claim. The tribunal affirmed the findings recorded by the CIT (Appeals) and upheld the claim of the assessee. The matter went to High Court in which the precedent in the case of Majestic Auto Ltd had been decided in favour of the Revenue by the Division Bench. Though there is a contrary decision to hold the membership fee as revenue expenditure in Otis Elevator Co India Ltd v. CIT (1992) 195 ITR 682 (Bom) the Division Bench concurred with the judgment of the Kerala High Court in the case of Framatone Connector OEN Ltd v. Dy. CIT (2006) 294 ITR 559 which was in favour of the Revenue. The Full Bench analysed all the precedents and finally held that the judgment of the Division Bench in Majestic Auto Ltd’s case was not a correct interpretation of the expression ‘capital The claim of assessee expenditure’ and thus overruled the said judgment. In result, the claim of assessee that club membership that club membership fee is deductible as fee is deductible as revenue expenditure, was allowed.
revenue expenditure, was allowed.
Is non-compete fee eligible for depreciation?
In Asst. CIT v. Real Image Tech (P) Ltd (2009) the assessee paid Rs 187.95 lakh towards non-compete fee which was claimed as revenue expenditure and was disallowed by the revenue. The tribunal held that the definition of intangible assets in Explanation 3 to section 32 contains the expression ‘any other business or commercial rights of similar nature’; and, applying the doctrine of ejusdem generis, it held that the assessee is eligible to claim depreciation on non-compete fee. The Delhi High Court in Sharp Business System v.CIT (2012) 79 DTR (Del) 329 had held that non-compete fee is not a revenue expenditure; and since there is no alienable right it is not eligible for depreciation as well. However, while rendering the judgment (on 06.11.2012), the Delhi High Court did not consider the apex court decision in the case of SMIFS Securities Ltd (2012) 348 ITR 302 (SC) (decided on 22.08.2012). Thus the decision of the Delhi High Court, with respect, requires reconsideration. (V. K. Subramani is Chartered Accountant, Erode)
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Budget expectations of business heads
Abhijit Chaudhari, Director, GATEFORUM Achal Bakeri, Chairman & MD, Symphony Ltd Aditya Bafna, Executive Director, Shree Shubham Logistics Ltd Alok Sanghi, Director, Sanghi Industries Ltd Anand Sundaresan, Managing Director, Schwing Stetter Anirudh Dhoot, President – CEAMA & Director, Videocon Ankur Bhatia, ED, Bird Group and CII National Committee on Civil Aviation ARKS Srinivas, Director, Vanguard Business School and CEO, VistaMind Ashwin Ajila, Founder & MD, iNurture Education Solution Pvt Ltd Avijit Nanda, CEO, TimesofMoney Bani Anand, MD, Hairline International Hair Clinic Bhim Yadav, Chairman & MD, Falcon Realty Services Pvt Ltd Chandrajit Banerjee, Director General, CII Chetan Tamboli, Chairman & MD, Steelcast Ltd D. K. Aggarwal, CMD, SMC Investments & Advisors Ltd D. R. Dogra, MD & CEO, CARE Ratings & Research Dr Sujit Chatterjee, CEO, Dr L H Hiranandani Hospital Gaurav Aggarwal, Founder & CEO, Savaari Car Rentals Gaurav Gupta, Raj Nagar Developers Associations & Director, S. G. Estates Gaurav Wadhawani, Co-founder, Credit Sudhaar Harsh Trehan, MD, Trehan Home Developers Jyoti Prakash Gadia, Managing Director, Resurgent India Kamlesh Patel, Chairman, Asian Granito India Ltd Khushru Jijina, Managing Director, Indiareit Fund Advisors Pvt Ltd Kunj Bansal, CIO, Sanlam India Investments Lalit Thakkar, MD-Institution, Angel Broking Laurent Dhaeyer, Managing Director, Ogone Asia and EBS
Volume II Part 4 February 25, 2013 8 Business Advisor
Manoj Goyal, CMD, KDP Buildwell Pvt Ltd Narasimha Nayak, Director - Finance and Administration, Ajuba Solutions P. Balendran, Vice-President, General Motors India P. Venkatesh, Director - Innovation, Maveric Systems Pramoud Rao, MD & Promoter, ZICOM Electronics Security Systems Ltd Prof Hardayal Singh, Dean, School of Inspired Leadership R. K. Arora, Chairman & MD, Supertech Ltd Ramakant Jha, Director, GIFT City Ramana Akula, CFO, Pearson India Ravi Saxena, Founder & MD, Wonderchef Home Appliances S. Sundararaman, Partner, Haribhakti & Co Sanjay Rastogi, Director, Saviour Builders Pvt Ltd Santhosh Kumar, CEO, DZigns Architecture Interior Shree Narayan Sabharwal, Business Head, Simba Toys India Shubhra Mohanka, Director, Solid Solar Suraj H. Asrani, COO, Cornerstone Properties Susnato Sen, Practice Head – Infrastructure, Tata Strategic Management Group T. Muralidharan, MD, TMI e2E Academy V. Raman Kumar, Chairman, Aeries Group Vinodh Sharma, Executive Director, The Pasta Bar Veneto Vishal Dhupar, MD-Asia South, NVIDIA Ashish Khera, Finance Director-Global Applications and India region, CSC Kiran Murthi, CEO, www.getiitBazaar.com Mahender Arora, CMD, Terra Group Rahangdale, Director, happytoconnect.com Subhash Saraf, Chartered Accountant Rayomand Dastur, EVP, Shapoorji Pallonji Real Estate Srinivasan Gopalan, CFO, The Wadhwa Group
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Abhijit Chaudhari, Director, GATEFORUM The industry is growing at a fast pace and we expect government to come up with such a Bill which can benefit the people as well as educational and training organisations. The government should promote higher education and at the same time, improve the overall quality of education. We expect this time Union Budget to increase the financial scholarship from Rs 8000 to Rs 12000 in the M.Tech /ME programs, in order to encourage more students to pursue these courses. They should plan to allocate more resources to research and development in the country. We also would want the government to allocate more resources to improve the IT infrastructure in the country so that more students can access elearning programs, leading to an overall improvement in quality of higher technical education.
Achal Bakeri, Chairman & MD, Symphony Ltd This year’s budget is likely to focus on increasing disposable income in the hands of middle-class and cutting deficit. Government is concerned about higher deficit, higher inflation and declining economic growth. Though the government has initiated some reforms, the actual impact of the same would be known only after implementation of those reforms without any roll-back. We expect government to continue with these reforms in the interest of industry and economy. Last year, the government raised excise duty, which impacted the sales of air coolers. The government also gave concessions and exemptions to solar power projects for encouraging the consumption of energy-saving devices. We expect government to extend these exemptions to air cooler industry as well this year. This would enhance the demand of air coolers which are low energy products and environment friendly compared to air conditioners.. (For the full issue, subscribe at http://bit.ly/ShriMagz)
Volume II Part 4 February 25, 2013
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
Volume II Part 4 February 25, 2013
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 25, 2013 Volume II Part 4 February 25, 2013 12 Business Advisor