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Volume II Part 4 February 25, 2013 1 Business Advisor
BusinessAdvisor
(Fortnightly inputs for professionals and executives)
Volume II Part 4 February 25, 2013
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Volume II Part 4 February 25, 2013 2 Business Advisor
Contents
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 updateV. K. Subramani - The claim of assessee that club membership
fee is deductible as revenue expenditure, was allowed.
Budget expectations of business heads
(Cover:Budgetby Bimbadhar Mishra)
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Volume II Part 4 February 25, 2013 3 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 shallindicate the name of the other person, with his prior written consentin the prescribed form, who shall, in the event of the subscribersdeath or his incapacity to contract become the member of thecompany and the written consent of such person shall also be filed
with the Registrar at the time of incorporation of the One PersonCompany along with its memorandum and articles.
Proviso-II Provided further that such other person may withdraw his consent insuch manner as may be prescribed.
Proviso-III Provided also that the member of One Person Company may at anytime change the name of such other person by giving notice in suchmanner as may be prescribed.
ProvisoIV Provided also that it shall be the duty of the member of One PersonCompany to intimate the company the change, if any, in the name ofthe other person nominated by him by indicating in the
memorandum or otherwise within such time and in such manner asmay be prescribed, and the company shall intimate the Registrar anysuch change within such time and in such manner as may beprescribed.
ProvisoV Provided also that any such change in the name of the person shallnot be deemed to be in alteration of the memorandum.
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Volume II Part 4 February 25, 2013 4 Business Advisor
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,
independent directors meetings, remuneration
of directors, provisions concerning inspections
and investigations, mergers, amalgamations,
compromises arrangements, acquisitions,oppression and mismanagement, valuation
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 followingreasons:
[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. Iranis 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
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There are a number
of clauses which, by
their very nature,
cannot apply to
OPCs.
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Volume II Part 4 February 25, 2013 5 Business Advisor
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) 305the
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 courtanswered 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
for drafting, typing, printing and
advertisement of the prospectus, in
connection with the issue, for publicsubscription, of shares in or
debentures of the company.
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) 448it
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 ofinterest 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
Depreciation need not be
adjusted for the purpose of
ascertaining the capital of
the partners for payment of
interest.
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Volume II Part 4 February 25, 2013 6 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) 46it 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 to43D 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 cessationof 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?
The Assessing
Officer treated all
the unconfirmed
creditors as income
under section 68.
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Volume II Part 4 February 25, 2013 7 Business Advisor
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. Thetribunal 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 ofMajestic Auto Ltdhad 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 ofFramatone Connector OEN Ltd v. Dy.
CIT (2006) 294 ITR 559which 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 Ltds case was not a correct
interpretation of the expression capital
expenditure and thus overruled the said
judgment. In result, the claim of assessee
that club membership fee is deductible as
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)
329had 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 ofSMIFS 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)
The claim of assessee
that club membership
fee is deductible asrevenue expenditure,
was allowed.
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Volume II Part 4 February 25, 2013 8 Business Advisor
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, PresidentCEAMA & 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
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Volume II Part 4 February 25, 2013 9 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 HeadInfrastructure, 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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Volume II Part 4 February 25, 2013 10 Business Advisor
Education
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 e-
learning programs, leading to an overall improvement in quality of higher
technical education.
Air coolers
Achal Bakeri, Chairman & MD, Symphony Ltd
This years 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 lowenergy products and environment friendly compared to air conditioners..
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Volume II Part 4 February 25, 2013 11 Business Advisor
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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V l II P t 4 F b 25 2013 12 B i Ad i
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
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