business advisor - february 10, 2013 - preview

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Volume II Part 3 February 10, 2013 1 Business Advisor

BusinessAdvisor

(Fortnightly inputs for professionals and executives)

Volume II Part 3 February 10, 2013
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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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Disclaimer: "Management and editors do not necessarily agree with the

views of the authors in their articles and of the readers in their letters,

and of the query editors in their replies. The editors, authors and / or

publishers shall not be responsible for any kind of result generated out

of any action taken on the basis of suggestions, etc., made in any of the

write ups, interviews contained in any part of the magazine or for any

error, omission, commission to any person, whether subscriber or

otherwise. The copyright of all the materials printed herein including

articles, queries and replies etc., rests with the publishers".
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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

quite contrary to the

position in other countries

of the world like the US,

Germany, and France,

where the well-to-do have

urged the respective

Governments to tax them

more because they can

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

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Here, despite the maximum tax

rate being 30.90% for individuals,

non-corporate assesses, and

corporates, the average rate of tax

on such entities, because of

numerous exemptions and

concessions, gets reduced by

nearly 25% or so.
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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 thecourt. 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

Disputes Act and hence it held that any

compensation paid under statute would

necessarily be treated as allowableexpenditure.

In the absence of expansion of industrial

undertaking, expenses towards issue of

shares is not deductible

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 heldthat 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 capitalexpenditure.

Amount paid to employees bonus trust does not satisfy the

requirement of section 43B

Any compensation

paid under statute

would necessarily be

treated as allowable

expenditure.


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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 paymentthus 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 thefirm 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

he received salary as a partner of the firm

but in a different capacity. Even though the

recipient is a karta of the HUF the amount

paid to the partner as a working partner isdeductible if the conditions contained in

section 40(b) are satisfied.

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 ofgoods 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

The issue before the

court was whether

the working partner

salary paid to partnerrepresenting a HUF is

deductible in terms of

section 40(b).


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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 waswhether the payment made is to be

amortised under section 35AB and

the facts of the case relate to

assessment year 1993-94. The court

held that the amount paid for

acquiring know-how is the decisive

test and since the payments were

made for acquiring know-how, it iseligible for amortisation as per

section 35AB.

However, section 32 treats know-

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) 329the 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 non-

compete 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

The court held that the

amount paid for acquiring

know-how is the decisive

test and since the

payments were made for

acquiring know-how, it is

eligible for amortisation as

per section 35AB.


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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) 40the 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

reasonable payment test even though the

company is owned and controlled by the

trustees of the trust and their family members.

Interest on borrowed capital

In CIT v. Harrisons Malayalam Ltd (2012) 76

DTR (Ker) 335the 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 nocommercial expediency for making such interest-free advance. The interest

on borrowed capital hence was disallowed.

(V. K. Subramani is Chartered Accountant, Erode)

The assessee paid

rent to a trust in

which the directors

of the company

were also trustees.


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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 roll-

out GST. While the committee set up by the Finance Ministers on GST isnow 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 theskilled 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 toincrease 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 turnreduce 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 investmentand 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. Currentlythat 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/herunaccounted 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 theinternational 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

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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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Published by:Shrinikethan, Chennai http://bit.ly/ShriMap

Edited by:D. Murali http://bit.ly/dMurali http://bit.ly/TopTalk

February 10, 2013
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