GUIDANCE NOTE ON ACCOUNTING FOR DEPRECIATION IN COMPANIES

1. The Council of the Institute of Chartered Accountants of India has issued Accounting Standard (AS) 6 on ‘Depreciation Accounting’. This standard lays down general principles of accounting for depreciation applicable to all entities. As such, the Standard is applicable to companies also inmatters where there are no specific requirements under the Companies Act. AS 6 also provides that the statute governing an enterprise may provide the basis for computation of depreciation. In such a situation, the requirements of the statute have to be complied with. Thus, in case of companies, section 205 and 350 of the Companies Act, 1956, which govern provisions regarding charge of depreciation for the purpose of payment of dividends and computation of managerial remuneration, respectively, provide the basis for computation of depreciation. the Companies (Amendment) Act, 1988, has amended section 350, as a consequence to which rates of depreciation prescribed in Income-tax Act, 1961, and the Rules made thereunder are no more relevant as the aforesaid section now provides that the rates of depreciation applicable would be those prescribed in Schedule XIV, which has been inserted in the Act. This Guidance Note on Accounting for Depreciation in Companies is issued by the Research Committee in the context of the aforesaid sections of the Act as well as the Accounting Standard.

2. The Council of the Institute and its various committees have issued, from time to time, various pronouncements on the subject of accounting for depreciation, in particular reference to the corporate sector, which are listed below:
(a) Guidance Note on Provision for Depreciation [published in Compendium of Guidance Notes, Vol.I (2nd Edition)]
(b) Statement On Provision for Depreciation in Respect of Extra or Multiple Shift Allowance [Published in Compendium of Statements and Standards on Accounting, 1st Edition]
(c) Statement on Changes in the Mode Of Charging Depreciation in Accounts [Published as an Appendix in the Guide to Company Audit]
(d) Guidance Note on Accounting for Depreciation Consequent to Changes in Rates of Depreciation [Published in Compendium of Guidance Notes, Vol. II, 1st Edition]

This Guidance Note comes into effect in respect of accounting periods commencing on or after 1st April, 1980. Accordingly, the above Guidance Notes/Statements stand withdrawn from that date.

Methods of Charging Depreciation
3. Section 205 of the Companies Act, 1956, prescribes the methods of charging depreciation. The relevant extracts thereof are as follows:
“(2) … depreciation shall be provided either-
(a) to the extent specified in section 350; or
(b) in respect of each item of depreciable asset, for such an amount as is arrived at by dividing ninety five percent of the original cost thereof to the company by the specified period in respect of such asset; or
(c) on any other basis approved b y the Central Government which has
the effect of writing off by way of depreciation ninety five per cent of the original cost to the company of each such depreciable asset on the expiry of the specified period; or
(d) as regards any other depreciable, asset for which no rate of depreciation has been laid down by this Act or rules made thereunder, on such basis as may be approved by the Central Government by the general order published in the Official Gazette or by any special order in any particular case:
Provided that where depreciation is provided for in the, manner laid down in clause (b) or clause (c), then, in the event of the depreciable asset being sold, discarded, demolished or destroyed the written down value thereof at the end of the financial year in which the asset is sold, discarded, demolished or destroyed, shall be written off in accordance with the proviso to section 350.

(5) ‘Specified period’ in respect of any depreciable asset shall mean the number of years at the end of which at least ninety-five per cent of the original cost of the asset to the company will have been provided for by way of depreciation if depreciation were to be calculated in accordance with the provisions of section 350.”

4. Note No. 5(i) to Schedule XIV requires that depreciation method(s) used by the company shall be disclosed. Part II of Schedule VI requires that if no provision is made for depreciation, the fact that no provision has been made should be stated and the quantum of arrears of depreciation computed in accordance with section 205(2) of the Act shall be disclosed by way of a note. The Committee is of the view that the company should also disclose the method(s) by which the arrears of depreciation have been computed.
Adoption of different methods for different types of assets
5. A company may adopt more than one method of depreciation. Thus, it is permissible to follow different methods for different types of assets provided the same methods are consistently adopted from year to year in accordance with Section 205(2). Also, units in different geographical locations can follow different methods of depreciation provided the same are consistently followed.

Change in the method of providing depreciation
6. The depreciation method selected should be applied consistently from period to period. A change from one method of providing depreciation to another should be made only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise. When a change in the method of depreciation is made, depreciation should be recalculated in accordance with the new method from the date of the asset coming into use2. The deficiency or surplus arising from the retrospective recomputation of depreciation in accordance with the new method would be adjusted in the accounts in the year in which the method of depreciation is changed. In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency should be charged to the profit and loss account. In case the change in the method results in surplus, it is recommended that the surplus be initially transferred to the ‘Appropriations’ part of the profit and loss account and thence to General Reserve through the same part of the profit and loss account. Such a change should be treated as a change in accounting policy and its effects should be quantified and disclosed.

Relevant rates of depreciation for the purpose of preparation of accounts of a company
7. Section 205 of the Companies Act requires that no dividend shall be declared or paid by a company except out of the profits of the company arrived at after providing for depreciation in accordance with the provisions of sub-section 2 of that section. This sub-section allows the company to provide for depreciation either in the manner specified in Section 350 of the Act or in the alternative manners specified in that sub-section itself. Part II of Schedule VI further provides that if no provision for depreciation is made, the fact that no provision has been made shall be stated and the quantum of arrears of depreciation computed in accordance with Section 205(2) of the Act shall be disclosed by way of a note.

8. A question may arise as to whether it is obligatory on a company to provide for depreciation only on the basis mentioned in Section 205(2) read with section 350 and Schedule XIV of the Act or whether these bases can be considered as indicating the minimum depreciation which must be provided by the company, insofar as the accounts of the company are concerned and insofar as it is required to exhibit a true and fair view of the state of affairs of the company as on a given date and of the profit or loss for the year. New Company Registration

9.The Committee is of the view that in arriving at the rates at which depreciation should be provided the company must consider the true commercial depreciation, i.e., the rate which is adequate to write off the asset over its normal working life. If the rate so arrived at is higher than the rates prescribed under Schedule XIV the company should provide depreciation at such higher rate but if the rate so arrived is lower than the rates prescribed in Schedule XIV, then the company should provide depreciation at the rates prescribed in Schedule XIV, since these represent the minimum rates of depreciation to be provided. Since the determination of commercial life of an asset is a technical matter, the decision of the Board of Directors based on technological evaluation should be accepted by the auditor unless he has reason to believe that such decision results in a charge which does not represent true commercial depreciation. In case a company adopts the higher rates of depreciation as recommended above, the higher depreciation rates/lower lives of the assets must be disclosed as required in Note no. 5 of Schedule XIV to the Companies Act, 1956.

10. This view is supported by the Department of Company Affairs and it has clarified that “the rates as contained in Schedule XIV should be viewed as the minimum rates, and, therefore, a company will not be permitted to charge depreciation at rates lower than those specified in the Schedule in relation to assets purchased after the date of applicability of the Schedule. If, however, on the basis of bona fide technological evaluation, higher rates of depreciation are justified, they may be provided with proper disclosure by way of a note forming part of annual accounts3.

11. The Committee is, however, of the view that in respect of assets existing on the date of Schedule XIV coming into force, and where the company is following the Circular of the Department of Company Affairs bearing No.1/86, dated 21st May, 1986, whereby depreciation under straight line method was worked out based on depreciation rates in force under Income tax Act, 1961 and Rules made thereunder at the time of the acquisition of the asset, it would be permissible to the company to follow Circular no. 1/86, dated 21st May, 1986. An appropriate note will be required to be given in this regard.

12. Schedule XIV requires that where the concern has worked extra shift, the multiple or extra shift depreciation will have to be provided on the plant and machinery, wherever applicable. In this regard, various units/departments/mills/factories should be taken as separate concerns. In cases where depreciation has not been provided in respect of extra or multiple shift allowance, it will be necessary for the auditor to quality his report accordingly. An example of the qualification is given below:

“Depreciation in respect of extra or multiple shift allowance amounting to rupees …………. has not been provided which is contrary to the provisions of Schedule XIV to the Companies Act. This has resulted in the profit being overstated by Rs …………… and plant and machinery overstated by Rs …………..”

13. It has been argued that the SLM rates (corresponding to the WDV rates as per Schecule XIV) can be different than those prescribed under Schedule XIV, provided the company continues to determine the rates as provided under section 205. For instance, against the SLM rate of 11.31 (triple shift rate for general plant and machinery) prescribed in Schedule XIV, a company can charge depreciation at the rate of 10.56%. It may be mentioned that the rate of 11.31% has been determined on the basis of 8 years and 6 months or so of specified period whereas 10.56% is arrived at if 95% of the cost of the asset is divided by 9 years. It is argued that for calculating the SLM rates complete years have to be taken into account whereas the rates under Schedule XIV also take into account fractions of years.

14. The Committee is of the view that a company should provide SLM instead of holding the contention that fractions of years can be ignored. This view is supported by Department of Company Affairs, as per its Circular No. 2/89, dated March 7, 1989.
Applicability of the rates prescribed in Schedule XIV to assets existing on the date on which Schedule XIV
came into force.
15. Applicability of the rates prescribed in Schedule XIV to existing assets would depend upon whether the company has been charging depreciation on its assets as per the written down value method or the straight line method.

16. Where a company has been following the written down value method of depreciation in respect of its assets, the WDV rates prescribed in Schedule XIV should be applied to the written down value as at the end of the previous financial year as per the books of the company.

17. Where a company has been following the straight line basis of depreciation in respect of its assets the position prevailing at present is discussed hereunder.

18. In January, 1985, the Department of Company Affairs issued a circular dated 10.1. 1985 (enclosed as Annexure II). In this Circular, the Government recognised the need for recalculating the specified period consequent to changes in the income tax rates. For determining depreciation consequent upon changes in the income tax rates it recommended the following method:-
(i) As far as recomputation of specified period is concerned, the specified period be recomputed by applying to the original cost, the revised rate of depreciation as prescribed under Income-tax Rules.
(ii) As far as charge of depreciation is concerned depreciation be charged by allocating the written down value as per books over the remaining part of the recomputed specified period.

19. The Department of Company Affairs issued another Circular (No. 1/86 dated 21st May, 1986, enclosed as Annexure III) wherein it re-examined its earlier circular of 1985. The Department accordingly expressed its view that “once the ‘specified period’ was determined at the time of purchase of an asset in accordance with the procedure laid down under Section 205(5) read with Section 350 of the Companies Act with reference to the rates of depreciation under the Income-tax Act at that time and the amount of depreciation fixed under section 205(2)(b) of the Companies Act, the same need not be changed subsequently consequent on changes in the rates of depreciation in the Income-tax Act.” The Circular further stated that it was therefore “open to the companies to provide for depreciation under clause (b) of Section 205(2) of the Companies Act on the basis of rates of depreciation prescribed under Income tax Act and in force at the time of acquisition/purchase of the asset.”

20. In its Circular No. 2/89 dated March 7, 1989, the Department has reiterated that the companies which follow Circular No. 1/86 “may, therefore, continue to charge depreciation at the old SLM rates in respect of the already acquired assets against which depreciation has been provided in earlier years on SLM basis.”

21. The Committee is of the view that where a company is following the straight line method of depreciation in respect of its assets existing on the date of Schedule XIV coming into force, it would be permissible to apply the relevant SLM rates prescribed in the said Schedule on the original cost of the assets from the year of the change of rates.

22. The Committee is accordingly of the view that where a company has been following straight line method of depreciation in respect of its assets existing on the date of Schedule XIV coming into force, the following alternative bases may be adopted for computing the depreciation charge:
(a) Where a company follows the manner of charging depreciation recommended by the Department of Company Affairs in its Circular No. 1/85, it has to change its depreciation rates as follows :
(i) The specified period should be recomputed by applying to the original cost, the revised rate as prescribed in Schedule XIV;
(ii) depreciation charge should be calculated by allocating the unamortized value as per the books of account over the remaining part of the recomputed specified period.
(b) A company which follows the Circular No. 1/86, can continue to charge depreciation on straight line basis at old rates in respect of assets existing on the date on which the new provisions relating to depreciation came into force.
(c) SLM rates prescribed in Schedule XIV can be straightaway applied to the original cost of all the assets including the existing assets from the year of change of the rates.

23. A company which changes the rates of depreciation should make an appropriate disclosure in its accounts pertaining to the year in which the change is made.

Pro-rata depreciation

24. Note no. 4 in Schedule XIV to the Companies Act, 1956, prescribes that “where, during any financial year, any addition has been made to any asset, or where any asset has been sold, discarded, demolished or destroyed, the depreciation on such assets shall be calculated on a pro rata basis from the date of such addition or, as the case may be, up to the date on which such asset has been sold, discarded, demolished or destroyed”. The Committee is of the view that a company may group additions and disposals in appropriate time period(s), e.g., 15 days, a month, a quarter ete, for the purpose of charging pro rata depreciation in respect of additions and disposals of its assets keeping in view the materiality of the amounts involved.

25. Where the financial year of a company is more/less than 12 months, a question may arise as to whether the rates of depreciation prescribed in Schedule XIV are to be applied proportionately to the duration of the financial year of the company or the said rates are to be applied as flat rates irrespective of the duration of the financial year. It waybe argued that since sections 205 and 350 of the Companies Act, 1956, are in relation to the financial year, the rates prescribed in Schedule XIV are applicable in respect of the financial year of the company, irrespective of its duration. The Committee is, however, of the opinion that in view of the true and fair consideration of preparation of accounts, the rates of depreciation as per Schedule XIV should be applied proportionately taking into consideration the duration of the financial year.

Depreciation on low value items
26. Prior to the enforcement of the Companies (Amendment) Act, 1988, many companies used to follow the practice of writing off low value items in the year of acquisition, since such a write off was permitted under the Income-tax Act. The limit for such a write off was Rs. 5,000/-. Schedule XIV is, however, silent on this aspect. The Committee is of the view that the concept of materiality should be kept in mind while deciding the amounts to be written off in this regard. For instance, in small companies, the total write off on this basis may be a substantial figure, it may not, therefore, be proper to charge 100% depreciation on low value items. However, in large companies, where the value of assets is very high, it may be proper to charge 100% depreciation on low value items keeping in view the concept of materiality. The Committee recommends that the accounting policy followed by the company in this regard should be disclosed appropriately in the accounts. Income Tax Consultants

Computation of managerial remuneration — whether SLM rates given in Schedule can be used
27. The Department of Company Affairs, as per its circular no. 3\19\88 CL V, dated April 13, 1989, has stated that “For the purpose of determining net profits of any financial year the amount of depreciation required to be deducted in pursuance of clause (k) of sub section (4) of Section 349 read with Section 350 shall be the amount calculated as per the written down value method at the rate specified in Schedule XIV, on the assets as shown by the books of the Company at the end of the relevant financial year”. The Committee is of the opinion that the language of Section350 as it stands at present, does not permit the use of the Straight Line Method. The aforesaid section makes reference to ‘written down value of the assets’ indicating thereby that for the purposes of computation of managerial remuneration, only the WDV method can be used as the SLM rates, by definition, are applicable only to the original cost of the assets and not to the WDV of the assets.

Charging of depreciation in case of revaluation of assets
28. A question may arise, as to whether the additional depreciation provision required in consequence of revaluation of fixed assets can be adjusted against “Revaluation Reserve” which is created by a company by transferring the difference between the revalued figure and the book value of the fixed assets. Depredation is required to be provided with reference to the total value of the fixed assets as appearing in the accounts after revaluation. However, for certain statutory purposes e.g., dividends, managerial remuneration etc., only depreciation relatable to the historical cost of the fixed assets is to be provided out of the current profits of the company. In the circumstance, the additional depreciation relatable to revaluation may be adjusted against “Revaluation Reserve” by transfer to Profit and Loss Account. In other words, as per the requirements of Part II of Schedule VI to the Companies Act, the company will have to provide the depreciation on the total book value of the fixed assets (including the increased amount as a result of revaluation) in the Profit and Loss Account of the relevant period, and thereafter the company can transfer an amount equivalent to the additional depreciation from the Revaluation Reserve. Such transfer from Revaluation Reserve should be shown in the Profit and Loss Account separately and an appropriate note by way of disclosure would be desirable. Such a disclosure would appear to be in consonance with the requirement of Part I of Schedule VI to the Companies Act, prescribing disclosure of write-up in the value of fixed asset for the first five years after revaluation.

29. If a company has transferred the difference between the revalued figure and the book value of fixed assets to the “Revaluation Reserve” and has charged the additional depreciation related thereto to its Profit and Loss Account, it is possible to transfer an amount equivalent to accumulated additional depreciation from the revaluation reserve to the Profit and Loss Account or to the General Reserve provided suitable disclosure is made in the accounts as recommended in this guidance note.

30. The Revaluation Reserve is not available for payment of dividends. This view is also supported by the Companies (Declaration of Dividend out of Reserves) Rules, 1975. Similarly, accumulated losses or arrears of depredation should not be set off against Revaluation Reserve. However, the revaluation reserve can be utilised for adjustment of the additional depreciation on the increased amount due to revaluation from year to year or on the retirement of relevant fixed assets (as discussed in paragraphs 28 and 29 above respectively).

31. The revaluation of fixed assets is normally done in order to bring into books the replacement cost of such assets. This is a healthy trend as it recognises the importance of retaining sufficient funds through additional depreciation in the business for replacement of fixed assets. As such, it will be prudent not to charge the additional depreciation against revaluation reserve, though the charge of additional depreciation against revaluation reserve is not prohibited as discussed in paragraphs 28 and 29 above. The practice of not charging the additional depreciation against revaluation reserve would also give a more realistic appraisal of the company’s operations in an inflationary situation.

Hope the information will assist you in your Professional endeavors. For query or help, contact:   info@carajput.com or call at 011-43520194
Thanks
RJA Team
http://www.carajput.com;
E-Mail: info@carajput.com; singh.swatantra@gmail.com
Off: P-6/90 Connaught Circus, Connaught Place, New Delhi – 110001, India ,
India Member of AITC
Newsletter click here

     ANNEXURE I
                                                               Circular No.2/89
                                                              No.1/17/87-CL.V
Government of India
Ministry of Industry
Department of Company Affairs
ShastriBhavan, 5th Floor, ‘A’ Wing
Dr. R. P. Road
New Delhi-1, the 7.3.1989

To
All Chambers of Commerce & Industry.
Subject:    Clarification on the provisions relating to depreciation the Companies Act, 1956, as amended by the Companies (Amendment) Act, 1988.
Dear Sirs,
This Department has been receiving queries from different quarters on the subject mentioned above, from time to time, and, accordingly, the following clarifications are issued:-
(1) Date on which the new provisions relating to depreciation become effective:
The Companies (Amendment) Act, 1988 specifically provides that Schedule XIV shall be deemed to have come into force on 2-4-1987. The amended provisions of Section 205 and 350 of the Act have come into force on 15-6-1988 by virtue of the notification issued by this Department. A question, therefore, arises whether depreciation can be charged on assets on the basis of the rates provided m Schedule XIV for accounting year ending between 2nd April, 1987 and 14th June, 1988.
In view of the intention of the legislature behind the amendments in sections 205 and 350 of the Act, the amended provisions have come into force w.e.f 2-4-1987.
(2) Recomputation of specified period:
It is stated that in 1986, the Department had issued a circular stating that specified period once determined may not be recomputed. Accordingly, the Department has advised the companies that it was open for them not to recompute the specified period even when there is change in the rates of depreciation later on (as against the position of the Department’s earlier circular of 1985 on the subject). It is argued that as far as the existing assets are concerned, the companies can follow either of the two circulars. An option under the 1986 circular would thus be available to the companies as at present not recomputing the specified period where the Straight Line Method is used. In other words, where a company decides to follow the 1986 circular, assets on which SLM depreciation was being charged can continue to be depreciated at old SLM rates.
In view of this Department’s Circular No. 1 of 1986 (No. 1/1/86 CL.V), dated 21.5.1986, specified period once determined may not be recomputed. The companies which follow this circular may, therefore, continue to charge depreciation at the old SLM rates in respect of the already acquired assets against which depreciation has been provided in earlier years on SLM basis.
(3) Can higher rates of depreciation be charged?
It is stated that Schedule XIV clearly states that a company should disclose depreciation rates if they are different from the principal rates specified in Schedule. On this basis, it is suggested that a company can charge depreciation at rates which are lower or higher than those specified in Schedule XIV.
It may be clarified that the rates as contained in Schedule XIV should be viewed as the minimum rates, and, therefore, a company shall not be permitted to charge depreciation at rates lower than those specified in the Schedule in relation to assets purchased after the date of applicability of the Schedule. However, if on the basis of a bonafide technological evaluation, higher rates of depreciation are justified, they may be provided with proper disclosure by way of a note forming part of annual accounts.
(4) Can SLM rates be different than those specified under Schedule XIV?
It is stated that SLM rates (corresponding to the WDV rates as per Schedule XIV) can be different than those prescribed under Schedule XIV provided a company continues to determine the rates as provided under Section 205. Thus, against the SLM rates prescribed under Schedule XIV of 11.31% (triple shift rate for general plant and machinery), a company can charge depredation at the rate of 10.56%. It may be mentioned that the rate of 11.31% has been determined on the basis of 8 years and 6 months or so of specified period whereas if 95% is divided by 9 years, the corresponding SLM rate comes to 10.56%. The argument is that for calculating the SLM rates complete years have to be taken into account whereas the rates under Schedule XIV also take into account fractions of years.
It is clarified that a company must necessarily provide SLM depreciation on the rates prescribed under Schedule XIV and the interpretation that fractions of years cannot be taken into account is not correct.
Yours faithfully,

U. P. Mathur

Director

Advertisements

APPOINTMENT OF STATUTORY AUDITORS AND THEIR SERVICES UNDER THE COMPANIES ACT, 2013

SECTION 139, 141,142, and 144 of the Companies Act, 2013 and the Companies (Audit and Auditors) Rules, 2014 deal with appointment of Auditors, the criteria to become Auditors and payment of their remuneration etc. The new Act has not simplified the process. It is for us to understand the complexities involved and to a possible extent present the same in a simplified manner. Section 139 starts with the appointment of First Auditors and Rule3 (7) deals with appointment of subsequent auditors. Payment of remuneration is dealt in Section 143 and duties and responsibilities of the Auditors are dealt in Section 144. Section 141 deals with criteria to become a Statutory Auditor. Rule 10 gives some explanations to Section 141 who is not eligible to become Auditors .Rule 3 deals with the manner and selection of Auditors by the Audit committee of certain classes of Companies. Restriction on terms of office of a Statutory Auditor is dealt in Section 139 and Rule 5.

After studying the Act and the Rules, I have made an attempt to simply the legal aspects of appointments, manner of appointments, criteria of appointments, payment of remunerations, casual vacancy appointments, services rendered concerning the Auditors. Business tax consultants

1. Appointment of a Statutory Auditor

A. Appointment of Auditors by Companies (other than Government Owned/controlled Companies)

i. Section 139(6) reads that the First Statutory Auditors shall be appointed within 30 days of registration of the Company by the Board so as to hold office from the conclusion of the First Board Meeting till the conclusion of the First Annual General Meeting and thereafter the Auditors shall be appointed by the members in the First Annual General meeting so as to hold office from the conclusion of the First Annual General Meeting till the Conclusion of the Sixth Annual General Meeting.

ii. As per Rule 3 (7), all existing Companies registered on or before 31.3.2014 and which are not supposed to appoint the First Auditors shall appoint Auditors in the forthcoming Annual General meeting so as to hold office from the conclusion of that meeting till the conclusion of the sixth Annual General Meeting.

iii. If the Board fails to appoint the first Auditor, it shall inform the members who shall appoint an Auditor within 90 days in an Extra Ordinary General Meeting and the appointed Auditor shall hold office till the conclusion of the next Annual General Meeting.

iv. However in every Annual General Meeting, the appointment of Statutory Auditors should be ratified. If ratification of appointment is not made by the members in the Annual General meeting, the Board shall appoint another individual or Firm as Auditors as per procedures laid down under the Act.
Note: Rule 3(7) states under the heading Explanation “”If ratification of appointment is not made by the members in the Annual General meeting, the Board shall appoint another individual or Firm as Auditors as per procedures laid down under the Act.’ This is contrary to the provisions contained in Section 139(10) wherein it states if no auditor is appointed or reappointed, the existing auditor shall continue to be the auditor of the Company.

B. Appointment of Auditors in Government owned/controlled Companies

i. The Controller and Auditor General of India shall appoint the first Auditor within sixty days from the date of registration of Company. If the Controller and Auditor General of India fails to appoint the Auditor within the above period, the Board of Directors shall appoint the Auditor within the next thirty days, failing which, it shall inform the members who shall appoint the Auditor within 60 days in an Extra Ordinary General Meeting.

ii. The subsequent Auditors shall be appointed by the Controller and Auditor General of India within 180 days from the commencement of the financial year and the appointed Auditor shall hold office till the conclusion of the next Annual General Meeting.

Know more about information: Virtual office services and New company registration

Hope the information will assist you in your Professional endeavors. For query or help, contact: info@carajput.com or call at 011-43520194

TDS Implication on commission Payment to Non-Resident

TDS Implication on commission Payment to Non-Resident
In Indian tax regime, TDS has to be deducted if the payment is made to non-resident by the payer because of the sec. 9 of Income Tax Act,1961. In the said act, it is prescribed that income has to be taxed in India, if it derives from-
•    through or from any business connection in India
•    or through or from any property in India
•    or through or from any asset or source of income in India
•    or  through the transfer of a capital asset situate in India
Commission paid to non-resident for procuring customers is generally fallen under first category,i.e, “business connection” in India.
To escape from Indian tax liability, payment to non-resident can be made by following two ways-
•    In the form of Salary
•    In the form of Dividend
IN THE FORM OF SALARY-
As per para 1 of Article 16 of DTAA between India and USA, salary is taxable in India if that particular employment is exercised from India. But if (as per para 2 of same article) that salary is not borne by employer or permanent establishment of employment in India, then it would not be taxable in India.
It means if salary is provided by the permanent establishment in USA, then that amount would not be taxable in India.
As per para 5 of Article 5 of DTAA between India and USA, For being permanent establishment, certain conditions must be fulfilled by the agent-
•    Activities of agent are devoted wholly or almost wholly to the organization.
•    Transactions between the agent and the enterprise are not made under arm’s-length conditions
If agent fulfils the above mentioned conditions, then payment is sent to the PE and there agent can withdraw his commission in the form of salary as employment consideration by PE to agent.
IN THE FORM OF DIVIDEND-
As per Article 10 of DTAA, dividend paid by company to NR is taxable in the state where NR is resides. It can be taxable in India as per DTAA but since dividend paid by Indian Companies are exempt because of DDT, dividend is taxable only once, in USA.

Know more about information: Service Tax and Company Registration
Hope the information will assist you in your Professional endeavors. For query or help, contact:   info@carajput.com or call at 011-43520194

Amount Paid To Nonresidents for Rendering Nontechnical Services to Be Treated As Business Income of Payee’s

Sri Subbaraman Subramanian vs. ACIT  
Facts  of  Case:  The  assessee,  an  individual  has  two  proprietary  concerns  namely Gemini  International  and  Gemini  Tours  and  Travels.  Gemini  International  made  payment  to  a  non‐resident,  Misc.  Maldives  Pvt.  Ltd.  towards  commission  fees  and  Gemini Tours and Travels also has made the payment to a non‐resident Mr. Hussain  Shiham,  Maldives  towards  tourist  handling  charges.  AO  observed  that  tax  has  not  been  deducted  at  source  in  respect  of  the  above  payments  as  required  u/s  195  and  therefore invoke the provision of sec. 40(a) (i) and held that  the income has accrued  to  the  payee  from  the  payments  made  by  the  assessee.  And  disallowed  the  said  expenditure  of  commission/fees  for  technical  services  and  added  back  a  sum  of  Rs.  29,19,389/‐  to  the  returned  income  of  the  assessee  and  completed  the  assessment  accordingly.

On  appeal  before  CIT(A)  assessee  contended  that  both  M/s  Misc.  Maldives  Pvt. Ltd.,and  Mr.  Hussain  Shiham  are  non‐residents  and  are  rendering  services  outside   India  and also that the bills are raised outside India and, therefore, the payments made to them are not subject to  tax in India. He placed reliance upon the provisions of sub.‐Sec. 2of sec. 5 to the effect that a non‐resident is liable to be charged with income‐tax  in  India  only  if  such  non‐resident  renders  services  in  India  or  through  his  agents  in  India. He submitted that the provisions of sec. 194 and 195 are not applicable to any  such  payments  as  the  services  are  rendered  outside  India  by  the  non‐residents.  As  regards  handling  charges,  the  assessee  also  submitted  that  M/s  Gemini  Tour and  Travels  is  doing  business  as  touring  operator  and  the  assessee has undertaken  to  provide  to  its  customers  stay  at  various  resorts  and  hotels at Maldives and thesetourists  are  received  by  Mr.  Hussain  Shiham,  who  puts  them  into  their  hotels  and  resorts and ensures liasoning with the hotels etc. For the services rendered by him at  Maldives,  a  sum  of  $15  per  person  was  being  paid  which  is  retained  by  the  person entitled to such commission and only the balance is paid to the assesses. Income tax consultant in Delhi

Ld.  CIT(A),  held  that  the  payments  by  the  purchaser  of  the  items  are  made  to  the  agents at Maldives and they remit the balance amount to the assessee after deducting  their  dues  and  in  the  case  of  tour  operators,  the  local  associates  receives  the  assessee’s clients at the airport and facilitate their stay at the resorts/hotels and a fee  of $15 per client is collected directly from the clients at Maldives as handling charges.  He also has taken into consideration that the services are rendered outside India and  the  incomes  are  earned  and  received/paid  outside  India.  However  observing  that  these  activities  fall  squarely  under  the  definition  of  ‘technical  services’  being  in  the  nature  of  ‘consultancy  and  managerial  services’  requiring  domain  knowledge  and  technical exposure, held that deduction of tax u/s 195 is required on these payments
as per the provisions of sec. 9(1)(vii) and explanation thereto.

Whether the income earned by the non­resident are in the nature of their’business income’ and not ‘fees for technical services’ as held by the AO and the CIT(A). 
ITAT  bench  observed  that,  for  application  of  the  said  provision,  the  nature  of  the  services  rendered  by  the  non‐residents  in  Maldives  are  to  be  examined.  As  far  as  Gemini  International  is  concerned,  we  find  that  it  supplies  building  materials  to  various  tourist  resorts  at  Maldives  and  to  facilitate  the  delivery  of  goods to  its  customers, the assessee has engaged the services of M/s Misc. Maldives Pvt. Ltd, for  weighing the goods, clearance from the customs at Maldives and their delivery to the  purchasers. In this whole exercise, we have to examine whether there is any technical,  consultancy or managerial services rendered by the non‐resident. For every activity  of  supervision,  certain  skill  and  knowledge  of  the  equipment  to  be  dealt  with  is  required  but  can  it  be  called  as  technical  services.  The  agent  only  receives  the  material, gets the material cleared from the customs and delivers it to the purchasers.  In  this  whole  exercise,  there  is  no  application  of  mind  by  the  agent  and  no  independent  decision  taken  with  regard  to  the  goods  to  be  delivered.  In  such  circumstances,  it  cannot  be  said  that  technical  services  have  been  rendered  by  the  agent at Maldives. Therefore, the income earned by the said agent outside India is to be considered as his business income.

Further  as  regards  the  payment  made  by  Gemini  International  Tours  and  Travels is  concerned, the agent receives the clients and leave them in the resorts or hotels for which  he  is  paid  commission.  The  nature  of  the  activity  of  the  agent  at  Maldives  isonly to facilitate the movements of the tourists of the assessee within the country of  Maldives and to see that no inconvenience is caused to them. He is not entitled to take any decision as regards the destination of the tourists or with regard to their stay and  accommodation.

Conclusion/Verdict:

Therefore,  services  rendered  by  him  also  cannot  be  said  to  be  technical  services u/s  9(1)(vii)  of  the  Income‐tax  Act.  If  the  said  services  cannot  be  termed  as  technical  services,  then  the  payment  made  to  the  agent  can  only  be  considered as his business income which can be taxed in India only if he has a PE in India. And there is no PE in India for Mr. Hussain Shiham.

The agent only receives the material, gets the material cleared from the customs and delivers it to the purchasers. In this whole exercise, there is no application of mind by the agent and no independent decision taken with regard to the goods to be delivered.   In such circumstances, it cannot be said that technical services have been rendered bythe agent at Maldives. Therefore, the income earned by the said agent outside India is  to be considered as his business income.

Know more about information:Virtual office providers and New company registration India

Hope the information will assist you in your Professional endeavors. For query or help, contact:   info@carajput.com or call at 011-43520194

TAX RESIDENCY CERTIFICATE (TRC)

In the Finance Act 2012, an amendment in Section 90 of the Income Tax Act, 1961 has been made which says that a foreign vendor / beneficiary / NRI who wish to avail DTAA rate for the Financial Year 2012-13 will have to mandatorily provide Tax Residency Certificate (TRC) to the deductor. TRC is issued by the Tax / Government authority where the beneficiary / vendor reside. No other document in lieu of TRC shall be considered for availing the DTAA rate for the said financial year.

The Act says that TRC should be obtained in a manner containing such particulars as may be prescribed by the Indian Income Tax Authorities, in regard to the residency of the assessee in the respective country outside India.

The following sub-section (4) is inserted after sub-section (3) of section 90 by the Finance Act, 2012, w.e.f. F.Y.2012-13

(4) An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate, containing such particulars as may be prescribed, of his being a resident in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory.

RULE 21AB

Rule 21AB has been inserted to the Income-tax Rules, 1962. These Rules shall come into force on 1 April 2013. This rule prescribes:

For Resident Assessee: the specified forms to obtain a TRC and

  • A taxpayer who is a resident of India, and who wishes to obtain a certificate of residence for the purposes of a tax treaty, shall make an application in Form No. 10FA to the Assessing Officer (AO).
  • The AO on receipt of an application from the taxpayer shall issue a certificate of residence in Form No. 10FB.

For Non-Resident Assessee : Details required to be furnished in TRC

  • Name of the assessee;
  • Status (individual, company, firm etc.) of the assessee;
  • Nationality (in case of individual);
  • Country or specified territory of incorporation or registration (in case of others);
  • Assessee’s tax identification number in the country or specified territory of residence or in case no such number, then, a unique number on the basis of which the person is identified by the Government of the country or the specified territory;
  • Residential status for the purposes of tax;
  • Period for which the certificate is applicable; and
  • Address of the applicant for the period for which the certificate is applicable;

The TRC shall be duly verified by the government of the country or the specified territory of which the taxpayer is a resident for tax purposes.

IMPACT OF TRC:

An Indian Company (A) has to pay to a US based Company (B) USD 1, 00,000/- towards business commission. It is considered as “business profit” for Company B. As per Income Tax Act, Company A should deduct TDS @ 40%. As per DTAA between India & USA, the rate at which Tax Deducted at Source for this transaction is NIL.

To avail the benefit of DTAA, B should provide “No Permanent Establishment Certificate” and “Tax Residency Certificate” mandatorily.

Know more about information: International Tax Consultant and Bookkeeping Outsourcing

Hope the information will assist you in your Professional endeavors. For query or help, contact:   info@carajput.com or call at 011-43520194

DOUBLE TAXATION AVOIDANCE AGREEMENTS

Fiscal jurisdiction is often the most aggressively guarded jurisdiction of any nation. As a consequence, even in times when economies are going global and borders fading, leading to liquid movement of goods, services and capital, double taxation is still one of the major obstacles to the development of inter-country economic relations. Nations are often forced to negotiate and accommodate the claims of other nations within their heavily guarded fiscal jurisdiction by the means of double taxation avoidance agreements, in order to bring down the barriers to international trade. Income tax consultants

The Fiscal Committee of OECD in the Model Double Taxation Convention on Income and Capital, 1977, defines ‘the phenomenon of international juridical double taxation’ as ‘the imposition of comparable taxes in two or more states on the same tax payer in respect of the same subject matter and for identical periods’. Therefore, the basic cause of international multiple taxation is the exercise by sovereign states of their inherent right to levy tax extra-territorially. Most of the countries subject their residents to tax, on the basis of ‘personal jurisdiction’, on their global income including income arising or having its source in foreign countries.

Double tax treaties comprise of agreements between two countries, which, by eliminating international double taxation, promote exchange of goods, persons, services and investment of capital. These are bilateral economic agreements where the countries concerned evaluate the sacrifices and advantages which the treaty brings for each contracting state, including tax forgone and compensating economic advantages.

The interaction of two tax systems each belonging to different country, can result in double taxation. Every country seeks to tax the income generated within its territory on the basis of one or more connecting factors such as location of the source, residence of taxable entity, maintenance of Permanent Establishment and so on. Double Taxation of the same income in the hands of same entity would give rise to harsh consequences and impair economic development. Double Taxation Agreements between two countries therefore aim at eliminating or mitigating the incidence of double taxation.

In this article an attempt has been made to give a brief description of the various concepts related to double taxation avoidance agreements.

CLASSIFICATION
Double taxation avoidance agreements, depending on their scope, can be classified as Comprehensive and Limited. Comprehensive Double Taxation Agreements provide for taxes on income, capital gains and capital, while Limited Double Taxation Agreements refer only to income from shipping and air transport, or estates, inheritance and gifts. Comprehensive agreements ensure that the taxpayers in both the countries would be treated equally and on equitable basis, in respect of the problems relating to double taxation.

OBJECTIVES
The object of a Double Taxation Avoidance Agreement is to provide for the tax claims of two governments both legitimately interested in taxing a particular source of income either by assigning to one of the two the whole claim or else by prescribing the basis on which tax claims is to be shared between them. The need and purpose of tax treaties has been summarized by the OECD in the ‘Model Tax Convention on Income and on Capital’ in the following words:

It is desirable to clarify, standardize, and confirm the fiscal situation of taxpayers who are engaged, industrial, financial, or any other activities in other countries through the application by all countries of common solutions to identical cases of double taxation.

The objectives of double taxation avoidance agreements can be enumerated in the following words:
First, they help in avoiding and alleviating the adverse burden of international double taxation, by –
a) laying down rules for division of revenue between two countries;

  1. b) exempting certain incomes from tax in either country ;
  2. c) reducing the applicable rates of tax on certain incomes taxable in either countries

Secondly, and equally importantly tax treaties help a taxpayer of one country to know with greater certainty the potential limits of his tax liabilities in the other country.

Still another benefit from the tax-payers point of view is that, to a substantial extent, a tax treaty provides against non-discrimination of foreign tax payers or the permanent establishments in the source countries vis-à-vis domestic tax payers.

PATTERN OF TAXATION

Double taxation agreements allocate jurisdiction with respect to the right to tax a particular kind of income. The principle underlying tax treaties is to share the revenues between two countries. If each country gets a reasonable share of tax revenues, the bilateral and multilateral trade prospers and the overall tax collection also increases as a result of which both countries tend to benefit.[3] A double tax avoidance agreement deals by and large with business income, income from moveable property and from immovable property.

There are well established patterns of taxation of various types on income. The agreements provide of allocation of taxing jurisdiction to different contracting parties in respect of different heads of income.

In general, the rules are to the following effect:

Income from the business is taxed –

only in the resident country, if the business entity has no activity in the source state;
only on the source state, if there is a fixed place of business, i.e. Permanent Establishment and to the extent it is attributable to that place· Income form immovable property[5] arising to a non-resident is taxed primarily in the state of its location, i.e. the source[6] state.

Income from movable property such as dividends[7], interest[8] and royalties[9] are primarily taxed in the resident state, but the source state may impose a reduced tax.

Know more about information: Chartered accountant in Delhi and Virtual office providers

Further, If you are looking professional assistance on Corporate Law, Direct, Indirect tax law, Accounts Outsourcing or any other related matter, mail us at: –info@carajput.com or call at 011-43520194,

CASH FLOW: THE PULSE OF YOUR BUSINESS

Cash flow is the lifeblood of any small business. Some business experts even say that a healthy cash flow is more important than your business’s ability to deliver its goods and services! While that might seem counterintuitive, consider this: if you fail to satisfy a customer and lose that customer’s business, you can always work harder to please the next customer. If you fail to have enough cash to pay your suppliers, creditors, or employees, then you’re out of business!

WHAT IS CASH FLOW?

Cash flow, simply defined, is the movement of money in and out of your business; these movements are called inflow and outflow. Inflows for your business primarily come from the sale of goods or services to your customers, but keep in mind that inflow only occurs when you make a cash sale or collect on receivables. It is the cash that counts! Other examples of cash inflows are borrowed funds, income derived from sales of assets, and investment income from interest. Accounting outsourcing services India

Outflows for your business are generally the result of paying expenses. Examples of cash outflows include paying employee wages, purchasing inventory or raw materials, purchasing fixed assets, operating costs, paying back loans, and paying taxes.

Note: An accountant is the best person to help you learn how your cash flow statement works. Please contact us and we can prepare your cash flow statement and explain where the numbers come from.

CASH FLOW VERSUS PROFIT

While they might seem similar, profit and cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat broad and only looks at income and expenses over a certain period, say a fiscal quarter. Profit is a useful figure for calculating your taxes and reporting to the IRS.

Cash flow, on the other hand, is a more dynamic tool focusing on the day-to-day operations of a business owner. It is concerned with the movement of money in and out of a business. But more important, it is concerned with the times at which the movement of the money takes place.

In theory, even profitable companies can go bankrupt. It would take a lot of negligence and total disregard for cash flow, but it is possible. Consider how the difference between profit and cash flow relate to your business.

Example: If your retail business bought a $1,000 item and turned around to sell it for $2,000, then you have made a $1,000 profit. But what if the buyer of the item is slow to pay his or her bill, and six months pass before you collect on the account? Your retail business may still show a profit, but what about the bills it has to pay during that six-month period? You may not have the cash to pay the bills despite the profits you earned on the sale. Furthermore, this cash flow gap may cause you to miss other profit opportunities, damage your credit rating, and force you to take out loans and create debt. If this mistake is repeated enough times, you may go bankrupt.

ANALYZING YOUR CASH FLOW

The sooner you learn how to manage your cash flow, the better your chances for survival. Furthermore, you will be able to protect your company’s short-term reputation as well as position it for long-term success.

The first step toward taking control of your company’s cash flow is to analyze the components that affect the timing of your cash inflows and outflows. A thorough analysis of these components will reveal problem areas that lead to cash flow gaps in your business. Narrowing, or even closing, these gaps is the key to cash flow management.

Some of the more important components to examine are:

Accounts receivable. Accounts receivable represent sales that have not yet been collected in the form of cash. An accounts receivable is created when you sell something to a customer in return for his or her promise to pay at a later date. The longer it takes for your customers to pay on their accounts, the more negative the effect on your cash flow.

Credit terms. Credit terms are the time limits you set for your customers’ promise to pay for their purchases. Credit terms affect the timing of your cash inflows. A simple way to improve cash flow is to get customers to pay their bills more quickly.

Credit policy. A credit policy is the blueprint you use when deciding to extend credit to a customer. The correct credit policy – neither too strict nor too generous – is crucial for a healthy cash flow.

Inventory. Inventory describes the extra merchandise or supplies your business keeps on hand to meet the demands of customers. An excessive amount of inventory hurts your cash flow by using up money that could be used for other cash outflows. Too many business owners buy inventory based on hopes and dreams instead of what they can realistically sell. Keep your inventory as low as possible.

Accounts payable and cash flow. Accounts payable are amounts you owe to your suppliers that are payable at some point in the near future – “near” meaning 30 to 90 days. Without payables and trade credit, you’d have to pay for all goods and services at the time you purchase them. For optimum cash flow management, examine your payables schedule.

Some cash flow gaps are created intentionally. For example, a business may purchase extra inventory to take advantage of quantity discounts, accelerate cash outflows to take advantage of significant trade discounts, or spend extra cash to expand its line of business.

For other businesses, cash flow gaps are unavoidable. Take, for example, a company that experiences seasonal fluctuations in its line of business. This business may normally have cash flow gaps during its slow season and then later fill the gaps with cash surpluses from the peak part of its season. Cash flow gaps are often filled by external financing sources. Revolving lines of credit, bank loans, and trade credit are just a few of the external financing options available that you may want to discuss with us.

Monitoring and managing your cash flow is important for the vitality of your business. The first signs of financial woe appear in your cash flow statement, giving you time to recognize a forthcoming problem and plan a strategy to deal with it. Furthermore, with periodic cash flow analysis, you can head off those unpleasant financial glitches by recognizing which aspects of your business have the potential to cause cash flow gaps.

Need assistance? We can help you analyze and manage your cash flow more effectively and make sure your business has adequate funds to cover day-to-day expenses. Know more about information: Virtual office providers and Chartered accountant in Delhi

Further, If you are looking professional assistance on Corporate Law, Direct, Indirect tax law, Accounts Outsourcing or any other related matter, mail us at: –info@carajput.com or call at 011-43520194,