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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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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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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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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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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