VOLUME 59 NO.

3 SEPTEMBER 2010 R100

CHARTERED

JOURNAL
THE
ACCOUNTANT
THE INSTITUTE OF CHAR
RTTERED ACCOUNT
TAANTS OF INDIA
 379
Limited Liability Partnership (LLP)
Limited Liability Partnership Act,
2008 has been enacted to provide
for the establishment of the LLPs,
an alternative corporate business
vehicle that gives the benefits
of limited liability and allows its
members the flexibility of organizing
their internal structure on the basis
of a mutually arrived agreement.
This format would be quite useful
for small and medium enterprises
in general and for the enterprises
in services sector in particular.
Individuals or existing businesses
can be members of a Limited
Liability Partnership, and an LLP
must have at least two members.
As prescribed, every LLP should
also have two designated partners
of whom one shall be the resident in
India. Day-to-day operations of LLP
are managed by the designated
partners who are also responsible
for ensuring the compliance of
all the applicable laws. Limited
Liability Partnership is managed as
per the LLP Agreement. Unlike in
the case of a company, there is no
requirement for minimum capital
contribution for an LLP. However,
the registration cost for LLP is
determined on the basis of amount
of contribution.
While an LLP will be a separate
legal entity liable to the full extent
of its assets, the liability of the
partners would be limited to their
agreed contribution in the LLP.
Further, no partner would be liable
on account of the independent
or unauthorised actions of other
partners, thus allowing individual
partners to be shielded from joint
liability created by another partner’s
wrongful business decisions or
misconduct. Thus one advantage
of this structure, in preference to a
limited company, is that the partners
will have flexibility in the matter of
internal working and, at the same
time, their liability will be limited.
An LLP shall be under obligation
to maintain annual accounts
reflecting true and fair view of its
state of affairs. Since, tax matters
of all entities in India are addressed
by the Income-tax Act, 1961, the
taxation of LLPs is also addressed
in that Act. LLP is also required to
prepare and file the statement of
accounts and solvency every year
with the Registrar of Companies.
The accounts of LLP are required
to be compulsory audited by
a Chartered Accountant, if the
turnover of such LLP exceeds R40
lakh or contribution of partners
exceeds R25 lakh.
The Finance Act, 2010 has
given fillip to emergence of LLP
by allowing conversion of private
companies or unlisted public
companies. However, there are
some conditions be satisfied such
as continuity of the association by
the erstwhile partners/shareholders
of the predecessor retaining their
interest in the LLP for a period
of five years. By prescribing the
conversion benefit only to entities
having turnover of R60 lakh or less
in three preceding years, the scope
for eligible entities for conversion is
somewhat restricted and regulated.
There is complete relief on
conversion into LLP and distribution
of accumulated profits by the
erstwhile entity after minimum lock
in period of three years prescribed
in law. With this mix of benefits with
attendant regulations, if nursed
properly by the taxpayers, there
is an ample scope for taking total
advantage of the available fiscal
incentives.
With a view to enable the members
of the ICAI to practice through this
new business vehicle, consequential
september 2010
Editorial
amendments in the Chartered
Accountants Act, 1949 arising from
the LLP Act, 2008, the Chartered
Accountants (Amendment) Bill,
2010 was introduced in the Rajya
Sabha in April 2010, which, inter alia,
proposes to amend the Chartered
Accountants Act, 1949 to (i) apply
certain provisions of the LLP Act,
2008 to Chartered Accountants Act
1949 in order to allow the members
to form the LLP (ii) to insert new
definition of firm, partner, partnership
and sole proprietorship (iii) to allow
members to form partnership with
members of such other professional
institutes as prescribed (iv) to
empower the Council of the ICAI
to make regulations for recognition
of other professionals with whom
the Members of ICAI can enter
into partnership in LLP. The Bill was
referred to the Standing Committee
on Finance to present its report.
These changes, once enacted,
will enable the Chartered
Accountants to reap true benefits
from this new corporate structure.
The LLP structure would also enable
them to form big firms (currently
only 284 CA firms in India having 10
or more partners), jointly with other
legal and technical professionals,
providing multi-disciplinary
services and competing with their
counterparts on global scale.
This hybrid structure will also
facilitate entrepreneurs, service
providers and professionals to
organize and operate in an innovative
and efficient manner for effectively
competing in the global market. The
LLP Act, 2008 will definitely bring a
remarkable difference in the existing
law related to the company laws in
India.
Editorial Board
ICAI – Partner in Nation Building
THE CHARTERED ACCOUNTANT 3
 Contents 380

EDITORIAL BOARD
EDITOR CA. AMARJIT CHOPRA, volume 59 no. 3 september 2010 r100

CHARTERED
President
set up by an act of parliament
JOINT EDITOR CA. G. RAMASWAMY,

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- Accounting Reforms In India: A Bird’s Eye View............................................. 499
- Technical Guide on Internal Audit of Sugar Industry....................................... 500
 ICAI Awards for Excellence in Financial Reporting —
Invitation to Participate in the Competition for the Year 2009-10...................... 500
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publicationmaynotbereproduced,whetherinpartorinwhole,withoutthe  ICAI International Study Tour to Australia, 7th-14th November 2010.................... 524
consent of ICAI.
DISCLAIMER:The ICAI is not in any way responsible for the result of any
 Seminar on Capital Market at Kolkata.............................................................. 525
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members,however,may bear in mind the provision of the Code of Ethics
while responding to the advertisements.
TOTAL CIRCULATION: 1,99,690
INDEX
Total No. of Pages: 164 including Covers  Index of Volume 58 [July 2009 to June 2010] of The Chartered Accountant.... 527

4 THE CHARTERED ACCOUNTANT september 2010

 381 Contents

........................ ACCOUNTING
 Introduction to IFRS
- CA. Aditya Singhal 421
 International Financial Reporting Standards:
The Future of Indian GAAP MANAGEMENT
- CA. Shalini Tibe 424  Leadership Approach and Attributes in
Strategy Implementation in Indian Companies
- Dr. S. K. Sharma, Dr. Sunil Giri, and
Dr. A. K. Sharma 463

........................ AUDITING
 An Overview of Attestation Services in India
- CA. K. L. Chandak 430
 Internal Audit Manual banking and finance
- CA. Surender Pal Bagaria 434  Reverse Mortgage Facilities in India —
For Cash Poor–Home Rich Senior Citizens
- CA. Ashok K. Malhotra 468
 How to Manage Our Money:
An Introduction to Personal Financial Planning
- CA. Sangameshwar C. Shirol 476

........................ INTERNATIONAL TAXATION

 Construction PE – Basic Concepts and Issues
- Committee on International Taxation of the ICAI 445

bOOK REVIEW
 Qualifications in the Auditor’s Report and
Disclosures on Accounting Standards 487

........................ TAXATION GENERAL

 Treatment of Price Difference Between the Date of  Spirituality for a Chartered Accountant

Removal and Revised Price - CA. Sanjay Manohar Kshirsagar 503

- CA. M. Govindarajan 452

 Overview of Goods and Service Tax Legislation
- CA. Rajat Mohan 459

BACKPAGE
Cross Word 051
Smile Please 527

september 2010 THE CHARTERED ACCOUNTANT 5

 From the President 382

Dear All:
Let us recall when, about a year ago,
the parents of Indian students studying
in Australia were fear-stricken, as
violence allegedly on the line of racial
discrimination had been reported.
Mass and media of our country had
raised their voice against this violence.
According to the UN, a ‘discrimination
between human beings on the ground
of race, colour or ethnic origin is an
offence to human dignity and shall be
condemned…as a violation of the human
rights and fundamental freedoms…
as a fact capable of disturbing peace
and security among peoples.’ Our own
Constitution in its Article 15(2) defines:
‘No citizen shall, on grounds only of
religion, race, caste, sex, place of birth or
any of them, be subject to any disability,
liability, (or) restriction…’
Post-independence, for quite some
years, the same ghost (of discrimination)
has been haunting us in our own land. sentiments through our conscience. a high-profile delegation led by Shri R.
Soul of India lives in villages, it is said. It is time that we have to plunge deep Bandhyopadhyay, Secretary, Ministry
Visit villages and we may discover: into our conscience, find out the roots of Corporate Affairs, Government
there is no concept of common wells, of such differences and remove their of India, with an objective to share
utensils or places of worship, to be used traces from it eventually. our perspective with the concerned
by all. We are generally more aware of People at the receiving end appear Japanese constituent to provide a
the difference on grounds of religion/ to be silent. We are silent too. Is it a framework for experience sharing in the
caste and our socialisation with people careful silence on our part? Let us process of convergence to the IFRS.
of different religion/caste decreases. explore our responses. Let us be aware With India already committed to treading
When it comes to family, such people of the kind of future we will pass on to a path to IFRS convergence in a phased
are not a reality for us. Their inclusion our generation next. Since the youth manner and Japan having started
in family is farther away from reality. have an incessant energy, a heritage of the thought process for mandatory
This divide continues at workplace too. divide and intolerance can create havoc application of IFRS to be determined
We are neither ready to acknowledge in their life, which ultimately will affect around 2012, the coming together of
the presence of this divide nor strong the state of affairs in our country. We these Asian economies assumes a
enough to resist its presence. It is not have to be responsible and vocal about great significance in the region. The
acceptable that we still have divided voicing our opinions against it. We owe visit witnessed the signing of a historic
opinions over such instances. Martin this to our generation next. We cannot MoU between the Core Group on IFRS
Luther King Jr., had expressed his evade our responsibility to our times. (constituted by the Ministry of Corporate
concerns over this social difference and This is our social responsibility, probably Affairs, Government of India) and the
the value of togetherness: ‘We cannot a more important one, as it is more IFRS Council, Japan. The undersigned
walk alone…I have a dream that one fundamental and capable of affecting signed the MoU representing India
day on the red hills of Georgia the sons our professional spheres too. Can we in the presence of the representation
of former slaves and the sons of former pledge to move towards this fundamental from Ministry of Corporate Affairs,
slaveowners will be able to sit down unity of mankind in our land? Government of India, and other officials.
together at a table of brotherhood….I During the occasion, the five sub-
have a dream that my four children will groups on accountancy profession
one day live in a nation where they will Consolidating Professional represented by undersigned and CA.
not be judged by the color of their skin Ties G. Ramaswamy, Accounting Standards
but by the content of their character.’ Japan: Joint Initiative on IFRS represented by CA. Manoj Fadnis,
Unity is divine. India as a multicultural The undersigned along with the ICAI stock exchanges represented by Smt.
country presents us lots of challenges in Vice-President CA. G. Ramaswamy Usha Narayanan, Executive Director,
the way of our unity, but history shows, and the ASB Chairman CA. Manoj SEBI, regulatory issues represented
we have always resisted such divisive Fadnis recently visited Japan as part of by Shri Sunil Verma, Secretary, Audit

6 THE CHARTERED ACCOUNTANT september 2010

 383
Board, C&AG, Shri Jitesh Khosla, IICA,
and representatives of PFRDA, IRDA
and RBI, and industry represented by
CA. T. V. Mohandas Pai, Infosys, met
and exchanged their views. Apart from
the undersigned and ASB Chairman,
SEBI Chairman Mr. C. B. Bhave, Smt.
Narayanan and Mr. Ravi Mohan from
RBI also made presentations. Then,
India-Japan Forum 2010 on issues
related to implementation of IFRS was
held. Sir David Tweedie, Chairman IASB,
who was also present, addressed the
occasion and expressed satisfaction
over this dialogue and assured his
support to this initiative. The event has
a strong attendance of over 300 JICPA
professionals and other professionals
from Japanese industry.
Singapore: Towards Future Ties
At the advice of the Ministry of
Commerce, Government of India, the
ICAI delegation which included the
undersigned and ICAI Secretary Shri
T. Karthikeyana among others, visited
Singapore to participate in the first round
of the 2nd Review Meeting in the context
of India-Singapore CECA. The meeting
was attended by the officials of Ministry
of Trade & Industry, Government of
Singapore. The undersigned interacted
with Dr. Ernest Kan, President, ICPAS,
and with other ICPAS functionaries. We
clarified them that we at the moment
were not looking at the licensing rights
and, therefore, would not provide the
same to the ICPAS members. Further,
it was decided that the two Institutes
would share their wish list by
mid-August. Wish List from ICPAS has
already been received and it is being
perused for further necessary actions.
While we invited the ICPAS delegation
for a visit, they in turn invited us to
visit them this year to carry the matter
forward. This intent was shared by
both ICAI and ICPAS in the plenary
session of the Review Meeting chaired
together by Mr. Rahul Khullar, Secretary,
Ministry of Commerce, Government of
India and Mr. Ravi Menon, Permanent
Secretary, Minister of Trade, Singapore.
It has been proposed to hold an
international conference jointly with
the professional accounting bodies of
Australia, New Zealand and Singapore
in the last week of September in New
Delhi.
Bangladesh: Attending SAFA
Events
An ICAI delegation led by the
undersigned that also included the
ICAI Secretary Shri T. Karthikeyan and
the Central Council members CA. Raj
Kumar Adukia, CA. Sumantra Guha and
CA. Pankaj Tyagee visited Bangladesh
recently to attend the SAFA events. We
actively participated and played a key
role in taking the decision to a logical
conclusion at the meetings of the SAFA
Board and Assembly, and of various
SAFA Committees. We also attended an
international conference organised by
the ICAB on Role of Chartered Accoun-
tants in the Mobilization of Natural
Resources, which was inaugurated
by Hon’ble President of the People’s
Republic of Bangladesh Mr. Md. Zillur
Rahman. It was attended by Nobel
Laureate Prof. Muhammad Yunus,
Managing Director, Grameen Bank, as
special guest. Dr. Atiur Rahman, Governor
of Bangladesh Bank, the central bank
of the country, was also present in the
conference. The Conference provided a
platform for sharing knowledge among
the participants and for formulating
recommendations on effective mobi-
lisation of domestic resources.
Status of Convergence with
IFRS
Clearing Accounting Standards
As the members are aware, meeting the
target of convergence with the IFRS has
been one of the primary focus areas of
our Institute. To meet this target, relentless
efforts are being made. As far as
formulation of IFRS-converged Accounting
Standards is concerned, all Standards
have been cleared by the Council of the
ICAI except that on Insurance Contracts
(corresponding to IFRS 4) in respect of
which comments are awaited from the
IRDA. Most of the Standards have also
been cleared by the National Advisory
Committee on Accounting Standards
(NACAS). Expectedly, all Standards
would be ready for notification by the
Government soon. The exercise to
converge with IFRS and not to adopt
the same signifies that efforts are being
made to formulate Accounting Standards
which, as far as possible, should be in
line with the corresponding IAS/IFRS
keeping in view the Indian conditions
and circumstances. Accordingly, few
september 2010
From the President
departures are also being contemplated.
To be properly addressed at international
level, Indian concerns are also being taken
up with the IASB. We would like to thank
Accounting Standards Board Chairman
and Secretary CA. Manoj Fadnis and Dr.
Avinash Chander, respectively, for their
guidance and strategic contribution in the
complete process behind this valuable
conclusion.
IASB Outreach Programmes
Since, in future, we would formulate
and revise the converged Accounting
Standards in accordance with the IFRSs
issued/revised from time to time, a
formal procedure for sending comments
on the consultative documents issued
by the IASB has been finalised so that
Indian concerns are appropriately
raised. To familiarise our members,
corporates and other stakeholders with
consultative documents and to address
their concerns, many IASB outreach
programmes are being organised by the
Institute. Recently, such Programmes
were organised in Bangalore, Mumbai
and Delhi, where IASB member CA.
Prabhakar Kalavacherla and IASB
Technical Manager Ms. April Pitman
addressed on two IASB consultative
documents on proposed IFRSs on
Revenue and Leases and interacted
with them to know the Indian concerns
involved in those documents. One of
such programmes held in Mumbai was
attended by the NACAS Chairman CA.
Y. H. Malegam also, who expressed
reservations against accounting treat-
ments suggested by IFRS in respect of
Revenue Recognition and Leases.
XBRL Progress: Towards
International Status
We want to inform our members that
ICAI had taken an initiative to promote
XBRL (eXtensible Business Reporting
Language) in the country. XBRL is a novel
method of electronic communication of
business/financial data and an immense
utility to capital markets and investing
community. It is revolutionising the world
business reporting while changing only
the way of reporting. ICAI was granted
a Provisional Jurisdiction of XBRL
International Inc. (XII) in December 2008.
During its tenure, XBRL India Jurisdiction
has developed two taxonomies, General
Purpose Financial Reporting XBRL
THE CHARTERED ACCOUNTANT 7
 From the President
Taxonomy for Commercial and Industrial
Companies and Banking Taxonomy,
which have been acknowledged by
the XII. At present, the process of
establishing taxonomies for NBFCs has
been initiated. These taxonomies act
as ‘dictionaries’ which are computer
readable financial terms. The Jurisdiction
is now in the process of opening up
membership, for which a Section 25
company is being incorporated. After
the incorporation, the Jurisdiction would
apply to XII for becoming an Established
Jurisdiction, which would enable India
for voting at International Steering
Committee (ISC) of the XII.
ICAI Recommends
Amendments to CA Act, 1949
Our Council, at its 294th meeting held
in March 2010 had constituted a Group
on Amendments in the Chartered
Accountants Act, 1949, under the
Convenorship of the Vice-President of
the Institute, CA. G. Ramaswamy, and
asked it to suggest draft amendments
in the Act arising out of the Report
of the High-Powered Committee as
submitted to the Central Government so
as to amend the Act to take disciplinary
action against erring CA firms also.
On the recommedations submitted in
June 2010 by the Group, the Council
requested back the Group to reconsider
in the light of suggestions made by
its members. The Group resubmitted
its revised recommendations to the
Council in August 2010 and now it will
again consider the amendments in light
of the suggestions made by the Council
members. Then, this will be forwarded
to the Central Government for consi-
deration and incorporation. The major
purpose of making various amend-
ments to the Act is to make disciplinary
process speedier and more time-
bound, and to demonstrate to society
for upholding the highest conduct of the
professionals. Some of the amendments
include the determination of prima-facie
cases not to be handled by Director
(Discipline) alone but rather by a
Committee, action against CA firms, etc.
Moreover, the action against the firm shall
be covered by both Schedules to the Act
involving not only financial penalty but
also suspension thereof. However, the
action against the firm is proposed to be
taken by the Council only.
8 THE CHARTERED ACCOUNTANT september 2010
Capacity Building Measure:
Meeting CA Firms
To adhere with the spirit of professional
development, the Committee for
Capacity Building of CA Firms and
Small & Medium Practitioners organized
in Mumbai and New Delhi meetings and
brainstorming sessions for the partners
of CA firm, where we interacted with the
partners of CA firms and got wonderful
suggestions.
As a matter of fact, 74 per cent of the
profession is comprised of proprietors
and, even after 61 years of the profession,
most of the members still wait for a bank
audit assignment as their major work
sphere. It is high time that we come up
and create world-class CA firms. We
can’t ignore the likely challenge from
China. We must be able to foresee the
changing scenario in our profession
and prepare accordingly. We need to
encourage our firms to grow bigger
with their multidimensional professional
expertise. Networking and merger of the
firms should be for real capacity building
and, in no way, be limited to audit
empanelment. We are aware that some
of the arrangements or procedures laid
down in the networking rules need to
be reconsidered and reviewed afresh
so as to encourage networking and
merger. Name, place and seniority of
the professionals and their firms should
not be major concern in consolidations
and mergers. Perspective and mindset
towards consolidation needs to be
changed. Firms should join hands
for long-term prospects and the right
parameter to measure the consolidation
and merger of firms would gain in
terms of increase in competencies and
annual turnover. Here, we would like to
appreciate the concerns of our members
in profession who wish to set up their
practice and face lot of challenges in
the process. We are happy to inform
that we have entered into an agreement
with the Corporation Bank, which will
grant loan on liberal terms. The details
of the scheme will be announced
shortly.
Planning Vision Document
It is quite satisfying to inform that we
have already concluded 19 interactive
workshop across the country in order
to include the voice and vision of
key resourceful people from varied
384
stakeholder sections of the profession
in our vision document, and we still plan
to host a few more of such exercises in
remaining key areas. Members across
the strata have expressed their concerns
that the Institute should become a major
global player by reorienting its strategy in
education system including examination
reforms so as to produce socially-relevant
chartered accountants. However, there
were concerns expressed by some
stakeholders with regard to realignment
of the profession deliverables. We
ensure all our stakeholders who have
contributed to the process that their
valued inputs given towards creating
an inspiring vision for the profession will
be given due consideration. To ensure
members’ active participation, we have
hosted a web-form on the agenda of the
vision exercise on our website (available
till September 15, 2010). We urge our
members to become a part of this grand
exercise and ensure that their feedback
is recorded with us.
Rajya Sabha Deputy Chairman
Releases Booklet on
Accounting Reforms
Shri K Rahman Khan, Hon’ble Deputy
Chairman, Rajya Sabha recently
released the booklet, Accounting
Reforms in India-A Bird’s Eye View,
prepared by the Committee on Public
Finance & Government Accounting of
the Institute. This booklet covers the
achievements of accounting reforms,
roadblock in the way for accounting
reforms, needs to harmonize accounting
standards, conversion from cash to
accrual system and single to double
entry book-keeping, implementation of
accrual accounting in Government, and
other related issues. While stressing
a need to converge from single- to
double-entry accounting system, Shri
Khan appreciated our efforts in bringing
out this booklet on Accounting Reforms
in India. Having regard to the huge social
and developmental expenditure of the
Govt. of India on NREGA (now called
Mahatma Gandhi Rojgar Yojna), he called
upon the profession to conduct in-depth
audit to serve the public interest more
effectively.
Dr Parthasarathy Shome at
ICAI Council Meeting
Dr. Parthasarathy Shome, Chief
 385
Economist in the Her Majesty’s Revenue
and Customs (the British tax office)
and ex-Advisor to the former Finance
Minister of the country, came to the
Institute at the 297th meeting of the
Council held on 5th August, 2010. It was
a matter of pride and privilege to have
the august presence of one of the top
economists at the Council meeting
of the Institute and we must thank our
Council Colleague Ms. Bhavna J. Doshi
for taking the initiative for organising
his visit. Dr. Som recalled that, as an
advisor to the Finance Minister Mr. P.
Chidambaram, he always suggested
him to get chartered accountants from
the national institute to look through
what they were through. He admitted
that he revered the accountancy
profession.
Foundation Stone at Jodhpur:
Seminar on Accounting and
Taxation
The undersigned visited the newly
acquired land site and laid the foun-
dation stone of the Jodhpur Branch of
ICAI. The senior-most member of the
Jodhpur Branch and first gold-medallist
of the Institute, CA. Ajeet Singh S.
Bhandari was also honoured.
A seminar on Accounting and Taxation
was organised for the members that
was followed by a successfully-held, i.e.
strong attendance of over 350, students’
seminar at Jodhpur. The undersigned
was the Chief Guest for the programme.
CA. Sunil Goyal, Past President, ICAI, CA
Kemisha Soni, Chairperson-CIRC, and
CA. Rajendra Kumar Saraf, Chairman-
Jodhpur Branch were also present on
the occasion. We apprised the members
about the proposed plan of the Institute
for increasing the membership fees,
biometric verification in the CPE
seminars, increase in contribution to the
benevolent funds, etc. We asked our
members to look at the infrastructure
from a long-term perspective. With
regard to our students’ initiative, we
conveyed that various new measures
like uploading of the training record
by articled assistant, updation of
study materials of IPCC course,
commencement of the virtual classrooms
by November 2010, etc., are in the
pipeline. We also stressed our concerns
for the students’ motivation for studying
on continuing basis with seriousness.
Conference on Audit and
Financial Reporting in Udaipur
Two-day conference on Excellence
in Audit and Financial Reporting was
organised by the Udaipur Branch of
CIRC. Out of many presentations of
papers and overviews, some of the
notable ones were by our Central
Council colleagues CA. Jaydeep N.
Shah, Chairman, Financial Reporting
Review Board, and CA. Abhijit
Bandyopadhyay, Chairman, AASB,
which were appreciated a lot for their
deep insight and value-contribution. CA.
Shah presented Common Discrepancies
in Financial Statements Including Audit
Reports in the conference, where he
apprised the participants about the
common non-compliances observed by
the Financial Reporting Review Board
(FRRB) during the review of general-
purpose financial statements. CA.
Bandyopadhyay presented Overview of
Standards in Auditing and Best Practices
in Audit Reporting.
Training for Members for
ICAEW Membership
In 2008, the ICAI had signed a historic
MoU with the Institute of Chartered
Accountants England and Wales
(ICAEW), which allows our members
having two-year post-qualification
experience to obtain the ICAEW
membership on passing the ICAEW’s
final advanced-level paper Advanced
Case Study – a 4-hour final paper that
aims to test candidates’ professional
skills in the context of business issues,
building on technical skills and learning
outcomes. We are happy to inform
our members that we are now offering
training for that course in our country
exclusively through accredited training
providers and publishers, Get Through
Guides (GTG). GTG and ICAI have jointly
designed a 10-day training programme,
to be facilitated by faculty from England,
for the purpose.
Convocations: Consolidating
Members’ Belongingness
We would like to inform that a
convocation ceremony of our Institute
is intended to bring the young members
of the profession under the umbrella of
chartered accountant fraternity and to
consolidate their belongingness to the
Institute. The conferment at a convocation
september 2010
From the President
ceremony goes a long way in the
milestones of the chartered accountants
concerned as they cherish this occasion
forever in their life. Convocations for
the northern region were successfully
held in New Delhi and Ludhiana, where
more than 120 members attended the
function along with their family members.
Convocation for the eastern region was
held in Kolkata and more than 200
members attended the function along
with their family members. Convocations
for the southern region were held in
Bangalore and Chennai where more
than 120 members and 250 members,
respectively, attended the function along
with their family members. Suresh C.
Senapaty, Exec. Director & CFO, Wipro,
and Col. (Dr.) G. Thiruvasagam, Vice-
Chancellor, University of Madras, were
the chief guest in the Bangalore and the
Chennai ceremonies respectively.
Disciplinary Cases Concluded
Since the Council has expressed its
serious concerns over the speedy
conclusion of the disciplinary cases
going on in the Institute, the Disciplinary
Committee has followed the Council’s
disposition in the right spirit and has
cleared many cases since February
2010: Disciplinary Committee – 60
cases under Section 21D and 20 cases
under Section 21B; Board of Discipline
– 34 cases under Section 21A; and old
Disciplinary 10 cases.
Students’ Matters
Revision of Stipend
We are really happy to inform our
students that the Council at its recent
meeting, keeping in view the prevailing
inflation rate, felt a need for revising the
existing stipend of articled assistants
and decided to double it from its
existing value. Accordingly, in order
to implement the same, the relevant
draft amendments in the Chartered
Accountants Regulations, 1988 would
be sent to the Central Government for
approval, as the same would come into
force after its approval:
PEE-II, PCE and IPCE Results
The ICAI recently announced the results
of the examinations of PE II, PCE and
IPCE held in May, 2010 on August 4,
2010. The pass percentages (both
Groups) were 1.95, 13.5 and 12.28
THE CHARTERED ACCOUNTANT 9
 From the President
in PE II, PCE and IPCE examinations
respectively.
Female Candidates Excel: There are
two candidates at all-India first rank in the
Professional Competence Examinations
(PCE) held in May 2010 with 77.67 per
cent marks and both of them are female
students. Even the second-rank holder
is a female student with 76.33 per cent
marks. The two of the first three toppers,
second and third, of the IPCE (Integrated
Professional Competence Examination)
held in May 2010 are again female
students. The second topper with 76.00
per cent marks is very close to the first,
i.e. 76.14 per cent. The pass percentage
of female student in all examinations
but in PE-II, is better than their male
counterparts.
Region-wise Performance: The
percentage of students passed in PCE
as well as in IPCE of the EIRC region was
the best one among all regions, i.e. with
20.05 and 16.73 per cent respectively,
while the WIRC was trailing behind on the
second position with 13.71 per cent in the
PCE and, surprisingly, the overseas was
the second best in IPCE with 13. 64 per
cent. CIRC was a close third, i.e. 13.29
per cent, in the PCE and WIRC got third
rank with 12.84 per cent in the IPCE.
Decisions for PE-II and PCC
Students
We are happy to inform our student
community that the Council has
considered the case of PE-II students
especially in order to mitigate their
hardship vis-à-vis their joining the CA
course through PCC/IPCC route. PE-
II students having joined the course
through all streams can now commence
articled training in case they have passed
any of the groups of PE-II examination
instead of earlier requirement of passing
both the groups. They will also be eligible
to appear in the Final Examination
during the last 12 months of articled
training. In addition, such students
shall be exempted from undergoing the
Orientation Programme, on switching
over to IPC course. Further, they shall not
be charged any fee for switching over to
IPC course, except R1,500 to cover the
cost of study material and administrative
charges, instead of R4,000 at present.
With a view to bring overall uniformity,
students registered for Professional
Competency Course (PCC) shall
now be eligible to appear in the Final
10 THE CHARTERED ACCOUNTANT september 2010
Examination during the last six months
of the three and a half year period of
articled training as against the earlier
requirement of appearing in the Final
Examination after completion of articled
training. Further realising the difficulties
faced by the students to complete the
Information Technology Training (ITT)
and Orientation Programme before
appearing at the examination, it has
been decided that all students would
now be permitted to submit proof of
their successful completion of ITT
to the Examination Section before
the commencement of the article
training, instead of earlier requirement
of submitting the said proof before
appearing in the examination. However,
this would not be applicable to the PCC
students. However, it has been observed
that many students are withdrawing their
registration from ITT centres and they
wish to complete the ITT and Orientation
Programme before the commencement
of the article training. In our opinion, all
such students are advised to undergo
ITT and Orientation Programme as
early as possible, because this wouldn’t
only help them in solving the questions
posed in examinations in the IT paper
but also release the pressure on the
training centres.
We have also decided that students
with a permanent disability of 50 per
cent or more and fulfilling the prescribed
guidelines shall be exempted from the
payment of fees for undergoing Orientation
Programme and they shall neither be
required to attend the course nor to pass
the special test of three hours.
We organised a joint meeting of the
Examination Committee and faculty of
the Board of Studies, wherein certain
student-friendly decisions were taken.
It was decided to host the suggested
answers to the questions set in
examinations within 25–30 days of the
respective examinations. Further, it was
decided that the study material should
be made more application-oriented
and case studies be included in various
subjects like Accounting and Strategic
Manegement. Steps are also being
taken to present a more responsive
and transparent examination system in
students’ interests.
We would like to thank the Council
– particularly ICAI Secretary Shri T.
Karthikeayn, Board of Studies Chairman
CA. Vinod Jain and Board of Studies
386
Director Shri Vijay Kapur – for playing
a strategic role in the preparation and
execution of the above-said decisions.
This is also to inform that we are
planning to propose a mega international
conference in the third week of January
2011 in New Delhi. Exact dates will be
announced later. We appeal to our
professional fraternity to join in large
number and make this a successful
event.
Let us recall what the Corporate
Affairs Minister Shri Salman Khurshid
had said on July 1 this year: Bring a
change in your policy and bring at least
33 per cent women power before a lady
joins in my position. Although uttered in
humour, we cannot ignore its underlying
serious implications on our profession
and society. The truth cannot be kept
aside. First educator of our family has
to be an educated and empowered
person. It is quite desirable that women
running their homes and managing
their accounts for ages must get a
respectable share in the profession.
Gender equality is a serious concern –
both before profession and society. A
better show of the female candidates
in the examinations of PE II, PCE and
IPCE held in 2010 is a sign of good
hope in this direction. We appreciate
this leap towards equality and sincerely
wish the community success in its true
and justified endeavours. Change in
tradition, if constructive and positive, is
never a distortion, and we should always
welcome such a change.
Weather, a symbol of change, is a
justified metaphor for life too. Weather
may be good or bad and nothing much
could be done about this. Nowadays, it
is raining day and night cats and dogs in
the capital. American poet and columnist
J. M. L. Hughes says: Let the rain beat
upon your head with silver liquid drops.
Let the rain sing you a lullaby. We would
like to wish everybody a happy rainy
season with sound health.
Best Wishes
CA. AMARJIT CHOPRA
President, ICAI
August 27, 2010
 READERS WRITE
August 2010 Issue of Journal was Knowledge
Enhancing
Congratulations! Journal for the month of August 2010 was yet
another knowledge enhancing Issue. The articles, especially
“Research and Development Expenditure Accounting,” were
highly informative and interesting. Examples of difference
between Research and Development were interesting to
read. Another article which deserves special mention was
“IFRS: Are Indian Banks Ready!” The benefits of convergence
with IFRSs among the different sections of the society raise
the confidence to adapt to these changes in the near future.
Major five technical accounting challenges for banks and
what should bank focus on to meet this challenge while
converging with IFRSs were really interesting to read.
- CA. Savita Khanna
The August (2010) issue of the journal effectively packed
knowledge and information to the benefit of large section of
members. Coverage on ICAI Flag, Accounting Legend Rai
Bahadur Pandit Balak Ram Pandya, ‘CA Day Celebrations’
and the article titled ‘Setting up a Website for a CA Firm’ were
specially informative and interesting. The articles published
under ‘Accounting’, ‘Taxation’ and ‘International Taxation’
sections were also very useful from members perspective.
Congratulations for combining quality content and attractive
presentation in this issue.
- CA. P. Deslahra
“e-sahaayataa” is Really Superb
As a Student of ICAI, it makes me feel proud that the Institute
has launched a new helpline for us called “e-sahaayataa”. In
general I was of the view that a query regarding registration
letter (of IPCC in my case) would take nearly 10-15 days. But
I tried to do it using this helpline and to my high satisfaction
I got my e-registration letter as fast as in 4 hours of posting
the complaint. I would like all concerned to make use of this
platform for easy and quick outcome. Thank you ICAI.
- Swapnil Jain, CA Student
We are very much satisfied with the quick and appropriate
response from Team e-Sahaayataa. The date of expected
reply given for us is evening of August 4, 2010. But the Team
Editor
For the Attention of Readers
Editor
Readers’ attention is specifically invited to the fact
that the views and opinions expressed or implied in
The Chartered Accountant journal are those of the
respective authors only, and not of the ICAI. The ICAI
bears no responsibility of any sort whatsoever in case
of any action taken by any reader based on any article
published in the Journal.
12 THE CHARTERED ACCOUNTANT september 2010
388
e-Sahaayataa acted very quickly. The reply was so quick
that we got the reply within 4 Hours. The practice of sending
informative SMSs over mobile phones is also very useful.
- A. Satyasrinivasa Rao, P. Narasimha Rao,
G. N. B. Kiran and P. Rambabu
I am highly pleased with the quick response and prompt
action in resolving the grievance through E-Sahaayataa
mode. I was very happy and satisfied with the end result of
my query. It has been much better than expected. I am sure
such good work would go a long way in clearing grievances
and issues of our fraternity within short notice, in keeping
with the high credentials of our profession.
- CA. Sathyaranjan Udupa H.
Formation of a New Group Commendable
The formation of a Group to check fraudulent practices is
a welcome step in the right direction. Even nationalised
banks are unaware of the genuineness of the signatories
to the financial statements, submitted by their clientele, for
sanction of fresh/additional limits. They should be enabled
to verify the genuineness from any corner of the country on
website. Similarly, the use of nomenclature ‘Auditors’ should
not be allowed to be used by non-CAs, since it misleads the
public, especially when they are not authorised to conduct
audit of any kind and issue Audit Reports.
- CA. Suresh. R. Puducherry
More Articles on GST, DTC and IFRS
These days, GST, DTC and IFRS are the current and most
relevant topics of members’ interest at large. Whole system
of Direct as well Indirect Taxes is going to change within
a year or so. Timely and up-to-date information on these
topics is very much required by professionals like us to
keep ourselves abreast about the recent developments and
changes nationwide. Therefore, it is desirable that Institute
provides vital information on the recent developments on
these topics by regularly containing a page or two in each
coming Journal till these become Act or are implemented.
Also, more seminars and workshops on these topics need
to be conducted during the current year.
- CA. Hardeep Saini, Hoshiarpur
Write to Editor
‘Information is Power’ and our ever-evolving profession
needs more and more of that today than ever before.
Do you have any relevant points to make, experiences
to share, and views to spread among the CA fraternity?
If yes, e-mail us at eboard@icai.org/nadeem@icai.org
or write to:
The Editor, The Journal Section, ICAI, A-94/4, Sector 58, Noida
(UP) - 201301
 Photographs
Meeting of Minds: SAFA Events
ICAI President CA. Amarjit Chopra meets Nobel Laureate Prof. Muhammad
Yunus, Founder/MD, Grameen Bank (Bangladesh), in Dhaka, while Central
Council members CA. Rajkumar S. Adukia and CA. Sumantra Guha
look on
Rajya Sabha Deputy Chairman Releases a Booklet on
Accounting Reforms in India
Shri Rahman Khan releases the Booklet, while ICAI President CA. Amarjit
Chopra, ICAI Secretary Shri T. Karthikeyan and Central Council members
CA. Anuj Goyal, CA. V. Murali, CA. Madhukar N. Hiregange and CA. Pankaj
Tyagee follow the spirit of moment (July 30,2010)
Capacity Building and CA Firms
New Delhi
ICAI President CA. Amarjit Chopra addresses partners of various CA
firms, while Central Council members CA. Sanjeev Maheswari (Chairman,
CCBCAF & SMP), CA. Jaydeep N. Shah, CA. Sanjay K. Agarwal and CA.
Pankaj Tyagee share the dais (August 17, 2010)
14 THE CHARTERED ACCOUNTANT september 2010
390
Exchanging Vows of Cooperation
Mr Noriaki Shimazaki, Chairman, International Affairs Committee, the IFRS
Council of Japan and CA. Amarjit Chopra, President, ICAI, in the august
presence of Mr. R. Bandyopadhyay, Secretary, MCA, Government of India,
exchange their MoUs, while Mr. R. Ramanujam, Minister (Economic &
Commercial), Embassy of India in Japan and Mr Sunil Verma, Secretary
Audit Board, Office of C&AG were also present (July 26, 2010)
Dr. Parthasarathy Shome, Chief Economist, Her Majesty’s Revenue and
Accounts at 297th Council
ICAI President CA. Amarjit Chopra and ICAI Vice-President CA. G.
Ramaswamy celebrate Dr. Shome’s presence (August 5, 2010)
Mumbai
ICAI President CA. Amarjit Chopra addresses the partners of CA firms, while
Central Council members CA. Sanjeev Maheswari (Chairman, CCBCAF &
SMP) and CA. Nilesh Vikamsey share the dais. (August 11, 2010)
 Photographs 392

Together We Stand and Smile
ICAI President CA. Amarjit Chopra hoisting the National Flag and sharing
the joy with the kids, i.e.future of our country, while NIRC Chairman CA.
Atul K. Gupta, NIRC member CA. Hans R. Chugh and others cherish the
moments of delight (August 15, 2010)
IASB Outreach Programme at ICAI New Delhi
ICAI President CA. Amarjit Chopra along with ASB Chairman CA. Manoj
Fadnis and ASB Secretary Dr. Avinash Chander discussing the concerns
with the IASB member CA. Prabhakar Kalavacherla and IASB Technical
Manager Ms. April Pitman (August 10, 2010)

Foundation Stone of Jodhpur Branch
ICAI President CA. Amarjit Chopra unveils the stone showing the particulars
of the ceremony in the presence of members from the Branch (August 16,
2010)
National Conference on Excellence in Audit and Financial Reporting
ICAI President and Vice-President CA. Amarjit Chopra and CA. G.
Ramaswamy along with the Central Council members CA. Jaydeep
N. Shah, CA. Abhijit Bandyopadhyay and CA. Ravindra Holani at the
Conference jointly organised by AASB and FRRB (July 24, 2010)

Convocation Ceremony

Ludhiana
Convocation Ceremony at Ludhiana: ICAI President CA. Amarjit Chopra
lights the lamp to open the ceremony in presence of members of the
Ludhiana Branch of ICAI (August 14, 2010)
Kolkata
ICAI President CA. Amarjit Chopra lights the lamp with his Central Council
colleagues CA. Subodh K. Agrawal and CA. Sumantra Guha, while the
Chief Guest, Mayor of Kolkata Municipal Corporation, Shri Sovan Chatterjee
shares the dais with them (August 12, 2010)

Chennai
ICAI President and Vice-President CA. Amarjit Chopra and CA. G
Ramaswamy, and Chief Guest Vice-Chancellor, University of Madras,
Col. (Dr.) G. Thiruvasagam lighting the lamp together on the occasion,
while Central Council member CA. V. Murali fondly looks on (August 23,
2010)
Bangalore
Wipro Executive Director and CFO CA. Suresh C. Senapaty lights the lamp
to open the ceremony, while ICAI Persident CA. Amarjit Chopra, Central
Council members CA. M. Devaraja Reddy and CA. K. Raghu, and other
members of the Branch put their hands together for the moment (August
22, 2010)

16 THE CHARTERED ACCOUNTANT september 2010

 393 ICAI NEWS

IMPORTANT ANNOUNCEMENT
Committee for Capacity Building
of CA Firms and Small & Medium
Practitioners

Audit Tool Kit & Document Management

Software
The Committee for Capacity Building of CA Firms
and Small & Medium Practitioners, ICAI has compiled
ready-to-use illustrative checklists for various areas of
professional needs such as Accounting Standards,
Audit manual, CARO, Bank Branch Audit, Tax Audit
and illustrative formats for day to day Income Tax
correspondence etc. The same is launched on July 1,
2010, in a tool kit containing softwares namely KDOC
and eSecretary. The application of the software will
help the members in efficient audit documentation
and Knowledge & Contact Management. The CDs
containing software are being sent in a tool kit free
of cost to all the members and CA Firms. The details
of use and benefits are given on ICAI website http://
www.icai.org/ccbcaf/kdoc-esecretary.html. Members
may avail the benefits of this initiative.

Database for Transfer Pricing

The Committee in order to enable members to have
access to qualitative database for doing comparative
study for transfer pricing, has tied up with C-MOTS
Internet Technologies Pvt. Ltd. for providing access
to Capitaline TP Corporate Database (online version)
at a special discounted price of R10,000/- plus taxes
only. The database is complemented with powerful
analytical software tools to enable extensive query
and search. Members desirous of availing the benefit
of this arrangement may visit http://www.icai.org/
ccbcaf/capitaline/Register.html.

NOTE: General information on audit tool kit software

and transfer pricing database are available on
ICAI’s website www.icai.org under Committee page.
Members may also contact the Committee for details
of products by email on ccbcaf@icai.org.

september 2010 THE CHARTERED ACCOUNTANT 17

 Ethics 394

Know Your Ethics*

Ethical Issues in Question-Answer Form shall follow the direction given, by the Council or an appropriate
Q. Is there any recommended scale of fees chargeable for the Committee or on behalf of any of them, to him being the incoming
work done by the members of the Institute? auditor(s) not to accept the appointment as auditor(s), in the
A. The Council of the Institute recommends from time to time scale case of unjustified removal of the earlier auditor(s).
of fees chargeable for the work done by the members of the Q. Can the auditor revise his Audit Report?
Institute. Such scale of fees were last revised in May, 2006. They A. Yes, the Council has issued a “Guidance Note on Revision of the
are appearing at pages 326-327 of the Code of Ethics, 2009 and Audit Report” in booklet form. The auditor can revise his audit
also being given hereunder for the benefit of members: report in the situations and circumstances mentioned therein.
Q. Whether a member of the Institute shall be deemed to be guilty
Existing Revised with effect
from (12th May 2006) of professional misconduct, if he includes in any statement,
Between And Between And return or form to be submitted to the Council or any of
(R) (R) (R) (R) its committees, Director (Discipline), Board of Discipline,
1. For giving expert evidence 5,000 10,000 7,500 15,000 Disciplinary Committee, Quality Review Board or the Appellate
in courts of law in the Authority any particulars knowing to be false?
Union of India according to [For each day or [For each day or A. Yes, as per Clause (3) of Part II of the Second Schedule to the CA
professional standing of the part there of, part thereof, spent in
spent in atten- attendance and/ or
Act, 1949, a member of the Institute, whether in practice or not,
witness.
dance and/ or travelling] shall be deemed to be guilty of professional misconduct if he
travelling] includes in any statement, return or form to be submitted to the
2. Other work: above authorities any particulars knowing them to be false.
(a) Statutory Audit,Tax Audit, Q. What is the status of a Chartered Accountant who is a salaried
Internal Audit, Accountancy employee of a Chartered Accountant in practice or a firm of
and Secretarial Work: such Chartered Accountants?
Principal 600 1,200 900 1,800 A. An associate or a fellow of the Institute who is a salaried employee
Qualified Assistants 300 600 450 900 of a Chartered Accountant in practice or a firm of such Chartered
Semi-Qualified/ 100 [Per 200 150 300 Accountants shall, notwithstanding such employment, be
Other Assistants Hour] [Per [Per [Per Hour] deemed to be in practice for the limited purpose of the training
Hour] Hour] of articled assistants. He may hold Certificate of Practice, but he
(b) Taxation Work: is not entitled to perform attest functions w.e.f. 1.4.2005.
Principal 1,000 2,000 1,500 3,000 Q. Can a member in practice be Promoter/Promoter Director
Qualified Assistants 500 1,000 750 1,500 of a Company?
Semi-Qualified/ 200 400 300 600 A. Yes, there is no bar to a member in practice becoming a promoter/
Other Assistants [Per [Per [Per [Per Hour] signatory to the Memorandum and Articles of Association of any
Hour] Hour] Hour]
company. For becoming such promoter/signatory, members are
(c) Investigation, Management not required to obtain specific permission of the Council .
Services or Special
Assignments:
Q. Can such a Promoter/Promoter Director of a Company may be
Director Simplicitor of that Company?
Principal 1,500 3,000 2,250 4,500
A. Yes, there is also no bar for a such a promoter/signatory becoming
Qualified Assistants 750 1,500 1,125 2,250
Director Simplicitor of that Company irrespective of whether the
Semi-Qualified/ 250 500 375 750
Other Assistants [Per [Per [Per [Per Hour]
objects of the Company include areas which fall within the scope
Hour] Hour] Hour] of the profession of Chartered Accountants. In this case also,
specific permission of the Council is not required.
Note Q. Can a member in practice be a sleeping partner in family
1.
Office time spent in travelling would be chargeable. In case business concern?
of outstation work, travelling and out-of-pocket expenses A. Yes, a member in practice can be a sleeping partner in a family
would also be chargeable. business concern provided he takes specific permission from
2. The Council issues for general information the above the Council in terms of Regulation 190A of CA Regulations.
revised recommended scale of fees which it considers Q. Can a member who is in part time/full time employment apply
reasonable under present conditions. It will be appreciated for Certificate of Practice and perform audit?
that the actual fees charged in individual cases will be a A. No, he cannot perform audit although he can apply for Certificate
matter of agreement between the member and the client. of Practice.
Q. Whether a member of the Institute in practice is liable for Q. What should be the size of signboard for the office?
professional misconduct, if he does not follow the direction A. With regard to the size of the signboard for his office that a
given by the Council or an appropriate Committee or on member can put up, it is a matter in which the members should
behalf of any of them, to the incoming auditors not to accept exercise their own discretion and good taste. The size of the
the appointment as auditors, in the case of unjustified removal signboard should be reasonable. Use of glow signs or lights on
of the earlier auditors? large-sized boards as is used by traders or shopkeepers would
A. Yes, in exercise of the powers conferred by Clause (1) of Part II of not be proper. A member can have a name board at the place
the Second Schedule to the CA Act, the Council of the Institute of his residence with the designation of a Chartered Accountant,
of Chartered Accountants of India issued General Guidelines, provided it is a name plate or name board of an individual
2008 which specify that a member of the Institute in practice member and not of the firm. n
*
Contributed by the Ethical Standards Board of ICAI

18 THE CHARTERED ACCOUNTANT september 2010

 395
Legal Decisions1
DIRECT TAXES
Section 10(23C) of the Income-tax Act,
1961 – Religious Trust/ Institution
Where trust carried on no activity other than
educational activities, fact that a surplus
had incidentally arise from activities of trust after meeting
expenditure incurred for conducting educational activities,
would not disentitle trust of benefit of exemption
Vanita Vishram Trust v. Chief Commissioner of Income-
tax, May 6, 2010 (BOM)
The Chief Commissioner declined to grant approval to the
petitioner trust.
The Bombay High Court held that though the objects
clause of the assessee trust contained varied objects even
including the management and development of movable
and immovable properties, the only activity which had been
carried out by the Trust ever since its inception was the
conduct of educational institutions. The petitioner was an
institution which had not sought approval for the first time or
which had been set up in the proximate past. The trust had
a history of over eighty years during the course of which the
only activity was of conducting educational institutions.
The fact that the Trust existed solely for educational purposes
was evidenced from assessment orders made under
Section 143(3). These orders contained statement to the
effect that the assessee was running schools and colleges
with the sole intent of imparting education. Merely because
some surplus arises from the operations of a Trust, it cannot
be held that the institution is running for the purpose of
profit, so long as no person or individual is entitled to any
portion of the profit and the profit is utilized for the purpose
of promoting the objects of the institution and the income of
such a Trust will be exempted under Section 10(22). If after
meeting the expenditure, a surplus results incidentally from
an activity lawfully carried on by the educational institution,
the institution would not cease to be one which is existing
solely for educational purposes since the object is not to
make profit. If a Trust exists solely for educational purposes
and conducts an educational institution, the fact that it has
other objects, will not disentitle it to the exemption so long
as the activity carried out by it in that assessment year is
that of running an educational institution and not for profit.
Though the Memorandum of Association of a trust contains
varied objects, so long as the record demonstrates that the
assessee only conducts educational institutions, it must be
regarded as existing solely for the purpose of education
and no other activity is carried on. Secondly, the fact that
a surplus may incidentally arise from the activities of the
Trust, after meeting the expenditure incurred for conducting
educational activities would not disentitle the Trust of the
benefit of the provisions of Section 10(23C).
By the third proviso, it has been clarified that in the case
inter alia of Universities or other educational institutions
which have applied its income or accumulated it for
application wholly and exclusively to the objects for which it
1
Readers are invited to send their comments on the selection of cases and their utility at eboard@icai.org. For the convenience of readers full text of
these cases have been hosted on the website of the institute at the link: www.icai.org/post.html?post_id=967&c_id=59
LEGAL UPDATE
Legal Decisions
is established and in a case where fifteen per cent of income
is accumulated on or after April 1, 2002, the period of the
accumulation of the amount exceeding fifteen per cent, shall
in no case exceed five years. This provision would establish
that Parliament did not regard the accumulation of income
by a University or educational institution governed by sub­
clause (vi) as a disabling factor, so long as the purpose of
accumulation is the application of the income wholly and
exclusively to the objects for which the institution has been
established. Parliament has, however, prescribed that where
more than fifteen per cent of the income is accumulated
after 1-4-2002, the amount exceeding fifteen per cent shall
not be accumulated for a period in excess of five years.
For all these reasons, the rejection of the approval to the
petitioner trust was manifestly misconceived.
Section 10A of the Income-tax Act, 1961 – Free Trade
Zone
Business losses of a non-eligible unit, cannot be set off
against profits of eligible unit while computing deduction
under Section 10A [Assessment Years 2003-04 & 2004-
05]
Scientific Atlanta India Technology (P) Ltd v. Asstt. CIT,
February 5, 2010 [ITAT-Chennai(SB)]
From the reading of Section 10A, it can be easily inferred
that what is contemplated is only deduction of profits and
gains derived by an undertaking from export of articles or
things or computer software The very fact that the Section
10A is brought under separate sub-heading and the specific
word “deduction” used in the section would go to show that
the intention of the Legislature was to give only deduction
and not exclusion from total income. Of course, in the
initial years, the entire profits of such undertaking eligible
for deduction under Section 10A was allowed as deduction.
However, with effect from 1-4-2003, the said deduction was
restricted to 90 per cent of such profits and gains derived
by undertaking by adding separate proviso to Section 10A.
Perhaps, the Legislature knowingly or consciously has kept
Section 10A under a separate sub-heading within Chapter
III only with the idea of varying the percentage of deduction
from year to year or whenever necessary. Even though
Section 10A falls under Chapter III, it has been mentioned in
the section itself that what is to be given is only a deduction
and not exemption.
Under the scheme of the Act, the profits of the unit eligible
for deduction under Section 10A, would form part of the income
computed under the head “Profits and gains of business and
profession”. However, in order the same will not suffer tax,
deduction will have to be made in respect of such profits while
computing the income under the head “Profits and gains
of business and profession”. In other words, a deduction in
respect of profits eligible under Section 10A is required to be
made at the stage of computing the income under the head
“Profits and gains of business or profession. Thus, what is
contemplated by the Legislature is that profits and gains of the
september 2010 THE CHARTERED ACCOUNTANT 19
 LEGAL UPDATE
Legal Decisions
undertakings from the export of article or things or computer
software are to be deducted while computing the profits and
gains of business or profession (at hundred per cent up to
assessment year 2002-03 and ninety per cent thereafter).
Even though it is a deduction to be given, it is to be deducted
while arriving at the profits of business and profession and not
from the gross total income as envisaged under Chapter Vl-A.
Thus, deduction under Section 10A under Chapter III of the
IT Act is to be granted while computing the profits and gains
of business and profession itself and not from the gross total
income.
From the reading of Section 80AB, it can be seen that
the section says that Section 10A is not included in Chapter
Vl-A. Hence, as long as Section 10A is not falling under
Chapter Vl-A, Section 80AB cannot be applied.
Even though the claim under Section 10A is a deduction
and not exemption, the same cannot be subjected to
provisions of Section 80AB which falls under different
chapter, namely, Chapter VI-A so long as the Legislature
has not specifically mentioned so to apply the provisions of
Section 80AB, to the claim of deduction under Section 10A.
It can be noticed that even though there is a mention about
Sections 80HH, 80HHA, 80-IA and 80-IB in Section 10A(6),
no mention about Sections 80AB, 80HHC and 80HHE has
been made.
It can be noticed from the language of Section 10A(1)
that a deduction of such profits and gains that as are
derived by “an” undertaking qualifies under Section 10A
is to be given from the total income. Interestingly, the
Legislature has mentioned the profits and gains as are
derived by an undertaking. It means that the assessee
may have more than one undertaking and in such a case,
one has to consider the profits and gains of that “particular
undertaking” which qualifies for deduction under Section
10A. According to Section 10A(4), the deduction is to be
computed in the same proportion which bears to the profits
of the undertaking, the same proportion as the export
turnover bears to the total turnover. It may be noticed that
again the words used are “Profits and gains of business of
the undertaking”. In any case, this is not the total profits of
the business of the assessee. Thus, in computing deduction
under Section 10A, the total income is to be ascertained as
per the provisions of the Act in respect of “that undertaking”
and the amount so determined is to be reduced from the
total income.
Nowhere it is mentioned in the section that such
deduction is to be restricted to the total income of the
assessee computed under the provisions of the Act, before
allowing such deduction. On the other hand, wherever the
Legislature wants to restrict the deduction, it has provided
such restriction.
Conclusion:
The deduction under Section 10A is not an exemption but
only a deduction under Chapter III of the Income-tax Act and
the provisions of Section 80AB of Chapter VIA would not
be applicable to such deduction under section 10A, and
also that the deduction under Section 10A is undertaking
specific.
20 THE CHARTERED ACCOUNTANT september 2010
396
Where there is only one eligible unit claiming deduction
under Section 10A, the loss from non-eligible unit cannot be
set off against the profits of the eligible unit while determining
deduction under Section 10A.
If there are more than one undertaking which is eligible
for deduction under Section 10A and if some of the units
have profit and other units have loss, it would be an entirely
different case.
Section 14A read with Sections 10(33) and 94 of the
Income-tax Act, 1961 - Total income - Expenditure in-
curred in relation to income not includible in
In dividend stripping transaction, though alleged to be
colourable device by Department, loss on sale of units at
lower NAV after declaration of tax exempted, dividend could
not be considered as expenditure in relation to earning of
dividend income that is exempted under Section 10(33)
and, hence, it cannot be held to be disallowable under
Section 14A [Assessment Year 2000-01]
CIT v. Walfort Share & Stock Brokers P. Ltd, July 6, 2010
(SC)
A mutual fund company advertised that tax free dividend
income could be earned if investments were made before
record date of 24-3-2006. The assessee invested R8 crores
on 24-3-2000 and earned dividend at the rate of Rs. 4 per
unit. As a result of the dividend pay-out, the NAV of the mutual
fund, which was R17.23 per unit on the record date, fell to
R13.23 on the next trading date 27-3-2000. the assessee
sold all units at NAV of R13.23 per unit on 27-3-2000 and
received R5.9 crores as against R8 crores. In its return, the
assessee claimed the dividend received as exempt under
Section 10(33) and also claimed set-off for the loss against
its taxable income, thereby seeking to reduce its tax liability
and gain tax advantage. According to the revenue, the
differential amount between the purchase and sale price of
the units [i.e. loss of R4 per unit] constituted “expenditure
incurred” by the assessee for earning tax-free income,
hence, liable to be disallowed under Section 14A.
The Supreme Court of India held that the words
“expenditure incurred” in Section 14A refers to expenditure
on rent, taxes, salaries, interest, etc. in respect of which
allowances are provided for (see Sections 30 to 37). Every
pay-out is not entitled to allowances for deduction. These
allowances are admissible to qualified deductions. These
deductions are for debits in the real sense. A pay-back does
not constitute an “expenditure incurred” in terms of Section
14A. Even applying the principles of accountancy, a pay-
back in the strict sense does not constitute an “expenditure”
as it does not impact the Profit & Loss Account. Pay-back or
return of investment will impact the balance-sheet whereas
return on investment will impact the Profit & Loss Account.
Cost of acquisition of an asset impacts the balance sheet.
Return of investment brings down the cost. It will not
increase the expenditure. Hence, expenditure, return on
investment, return of investment and cost of acquisition are
distinct concepts. Therefore, one needs to read the words
“expenditure incurred” in Section 14A in the context of the
scheme of the Act and, if so read, it is clear that it disallows
 397
certain expenditures incurred to earn exempt income from
being deducted from other income which is includible
in the “total income” for the purpose of chargeability
to tax.
The scheme of Sections 30 to 37 is that profits and
gains must be computed subject to certain allowances
for deductions/expenditure. The charge is not on gross
receipts, it is on profits and gains. Profits have to be
computed after deducting losses and expenses incurred for
business. A deduction for expenditure or loss which is not
within the prohibition must be allowed if it is on the facts
of the case a proper Debit Item to be charged against the
Incomings of the business in ascertaining the true profits. A
return of investment or a pay-back is not such a Debit Item,
hence, it is not “expenditure incurred” in terms of Section
14A. Expenditure is a pay-out. It relates to disbursement.
A pay-back is not an expenditure in the scheme of Section
14A. For attracting Section 14A, there has to be a proximate
cause for disallowance, which is its relationship with the
tax exempt income. Pay-back or return of investment is not
such proximate cause, hence, Section 14A is not applicable
in the present case. Thus, in the absence of such proximate
cause for disallowance, Section 14A cannot be invoked.
The return of investment cannot be construed to mean
“expenditure” and if it is construed to mean “expenditure”
in the sense of physical spending still the expenditure was
not such as could be claimed as an “allowance” against
the profits of the relevant accounting year under Sections
30 to 37 of the Act and, therefore, Section 14A cannot be
invoked. Hence, the two asset theory was not applicable
in the instant case as there was no expenditure incurred in
terms of section 14A.
Section 28(i) of the Income-tax Act, 1961 - Business and
professional income – Chargeable as
Receipt relating to liquidated damages on delay in supply of
plant and machinery is capital receipt in hands of assessee
[Assessment Year 1974-75]
CIT v. Saurashtra Cement Ltd, July 9, 2010 (SC)
The assessee, entered into an agreement with the supplier for
purchase of additional cement plant. As per the agreement,
in the event of delay caused in delivery of the machinery,
the assessee was to be compensated at the rate of 0.5 per
cent of the price of the respective portion of the machinery
for delay of each month by way of liquidated damages by
the supplier, without proof of actual loss. However, the total
amount of damages was not to exceed 5 per cent of the total
price of the plant and machinery. The supplier defaulted and
failed to supply the plant and machinery on the scheduled
time and, therefore, the assessee received an amount of
R8,50,000 from the supplier by way of liquidated damages.
A question arose whether the said amount received by the
assessee as damages was a capital or a revenue receipt.
The Supreme Court held that the delay in supply could
be of the whole plant or a part thereof but the determination
of damages was not based upon the calculation made in
respect of loss of profit on account of supply of a particular
part of the plant. It was evident that the damages to
LEGAL UPDATE
Legal Decisions
the assessee was directly and intimately linked with the
procurement of a capital asset, i.e., the cement plant, which
would obviously lead to delay in coming into existence of the
profit making apparatus, rather than a receipt in the course
of profit earning process. Compensation paid for the delay
in procurement of capital asset amounted to sterilization of
the capital asset of the assessee as supplier had failed to
supply the plant within time as stipulated in the agreement
and the relevant clause for liquidated damages came into
play. The afore-stated amount received by the assessee
towards compensation for sterilization of the profit earning
source, not in the ordinary course of their business, was a
capital receipt in the hands of the assessee.
Section 28(i) of the Income-tax Act, 1961 - Business and
professional income – Chargeable as
Where assessee company was in business of selling timeshare
units in its various resorts, entire amount of timeshare
membership fee receivable by assessee up front at time of
enrolment of a member would not be income chargeable
to tax in initial year when there was contractual obligation
fastened to such receipt to provide services in future over term
of contract [Assessment Years 1998-99 to 2002-03]
Asstt. CIT v. Mahindra Holidays & Resorts (India) Ltd,
May 26, 2010 [ITAT-Chennai (SB)]
The assessee company was in the business of selling
timeshare units in its various resorts. The relevant balance
sheet showed an amount of R14,98,30,966 under the
heading “Deferred income – advance towards members
facilities.” This figure represented the amount collected from
timeshare members but not recognised as revenue for the
current year.
The question arose as to whether the entire amount of
the time-share membership fee receivable by the assessee
upfront at the time of enrolment of a member was the
income chargeable to tax in the initial year when there is a
contractual obligation fastened to the receipt to provide the
services in future over the term of the contract.
The Chennai Bench of Tribunal held that two conditions
are necessary to say that income has accrued to or earned
by the assessee. They are, (i) it is necessary that the
assessee must have contributed to its accruing or arising
by rendering services or otherwise, and (ii) a debt must have
come into existence and he must have acquired a right to
receive the payment. In the present case, a debt was created
in favour of the assessee immediately on execution of the
agreement. However, it could not be said that the assessee
had fully contributed to its accruing by rendering services.
The assessee was bound to provide accommodation
to the members for one week every year till the currency
of the membership. Till the assessee fulfilled its promise,
the parenthood could not be traced to it. The reservation
for holiday could be done 90 days to 1 day before the
commencement of holiday but the same was subject to
availability. In other words, if the resort requested for was
not available, the member would be deprived of the holiday.
If the assessee confirmed the reservation but was not able
to provide the allotted or the alternate accommodation,
september 2010 THE CHARTERED ACCOUNTANT 21
 LEGAL UPDATE
Legal Decisions
assessee was liable to pay liquidated damages to the member.
But it was not liable to pay any damages if it was not able to
provide an accommodation on account of non- availability.
Membership fee was essentially a consideration for the right
to occupy a resort for one week in a year for 33/25 years.
But the contingency of non- availability of accommodation
would always be there. Sometimes, if the assessee was
not able to provide accommodation in any of its notified
resorts, it would try to procure alternate accommodation.
This also would entail additional expenditure on the part of
the assessee over and above paying liquidated damages
to the assessee. The liability in this case was difficult not
only to quantify but also to reasonably estimate it. However,
the liability was undoubtedly there. However, no scientific
basis has been brought to our notice to quantify the same
even reasonably. In the instant case, the membership was
ever increasing and in which year how many contingencies
of non-availability of accommodation could arise, could be
anybody’s guess.
The word “contingencies” is not used in the sense that
the event of non-availability of accommodation is wholly
uncertain. The event is certain, only how many such events
can occur is uncertain. The assessee was bound to provide
accommodation for one week in a year during the tenure of
the membership.
Secondly, by saying that no service was left to be
rendered, what the assessee means to say was that there
was no taxable event under the Service Tax laws once a
person becomes member.
The past event was admitting a person as a member
with a promise to fulfil the obligation of providing him
accommodation for one week every year for the next
33/25 years. It was not an ordinary obligation. The sale
of timeshare unit is not as tangible as sale of goods but
becomes tangible when the assessee fulfils its promise.
There was every possibility of an obligating event arising
which will result in an outflow of resources.
The assessee could not have made reasonable provision
every year which would meet the matching concept also. A
provision is recognised when: (a) an enterprise has a present
obligation as a result of a past event; (b) it is probable that an
outflow of resources will be required to settle the obligation;
and (c) a reliable estimate can be made of the amount of
the obligation. If these conditions are not met, no provision
can be recognised. In the present case, the assessee had
a present obligation as a result of a past event. Thus, the
first condition was satisfied. The outflow of resources was
probable to settle the obligation. The second condition
was also satisfied. However, considering the nature of
activity, it was the third condition which was difficult to be
satisfied. The demand for accommodation by the members
is essentially tourism oriented. Tourism, in turn, depends
on several factors. They may be social, political, climatic
and so on. There may be many possibilities which may not
come to mind but may put the assessee into tremendous
pressure. All these factors are such which are twined with
the normal human life and hence are not only certain to
occur but also makes it difficult to reasonably estimate the
probable outflow of resources.
22 THE CHARTERED ACCOUNTANT september 2010
398
There was a definite liability cast on the assessee to fulfil
its promise and therefore, it could not be said that the entire
fee received by it had accrued as income. As a result, the
peculiar nature of the activity and the complexity attached
to it, no reasonable provision for the liability could be
made. Therefore, recognising the entire receipt as income
in the year of receipt could lead to distortion. The revenue
expenditure which was incurred wholly and exclusively for
the purpose of business must be allowed in its entirety in
the year in which it incurred. It could not be spread over a
number of years even if the assessee had written it off in his
books over a period of years. However, the facts may justify
an assessee who had incurred expenditure in a particular
year to spread and claim it over a period of ensuing years. In
fact, allowing the entire expenditure in one year might give a
very distorted picture of the profits of a particular year.
The liability which was likely to be incurred in future was
to be estimated, more so in the absence of any scientific
basis or historical data. Therefore, the only way to minimise
the distortion was to spread over a part of the income over
the ensuing years. It was not justifiable to tax the entire
income in a single year as was the case of the department.
Accordingly, it was to be held that the entire amount
of timeshare membership fee receivable by the assessee
up front at the time of enrolment of a member was not the
income chargeable to tax in the initial year.
Section 80HHC of the Income-tax Act, 1961 - Deduc-
tions - Profits from export business
Where foreign exchange fluctuation was not in respect
of sale proceeds or its delayed realization and it was in
respect of deposits in EEFC Account and interest on
deposits in EEFC Account receipts on account of foreign
exchange fluctuation cannot be treated as part of business
income and accordingly cannot be included in profit of
business while calculating deduction under section 80HHC
[Assessment Years 2000-01 to 2004-05]
CIT v. Shah Originals, April 22, 2010 (BOM) II.
Circulars:
The question arose as to whether receipts on account
of foreign exchange fluctuation on EEFC Account and
interest on EEFC Account can be treated as part of
business income and accordingly included in the profit
of business while calculating deduction under Section
80HHC.
The Bombay High Court held that the assessee received
the entire proceeds of the export transaction.
The Reserve Bank of India, had granted a facility to certain
categories of exporters to maintain a certain proportion of
the export proceeds in an EEFC Account. The proceeds of
the account were to be utilised for bonafide payments by
the account holder subject to the limits and the conditions
prescribed. An assessee who is an exporter is not under
an obligation of law to maintain the export proceeds in the
EEFC Account but, this is a facility which is made available
by the Reserve Bank. The transaction of export is complete
in all respects upon the repatriation of the proceeds. It
lies within the discretion of the exporter as to whether the
 LEGAL UPDATE
Legal Decisions
export proceeds should be received in a rupee equivalent
in the entirety or whether a portion should be maintained
in convertible foreign exchange in the EEFC Account. The
exchange fluctuation that arises, it must be emphasized, is
after the export transaction is complete and payment has
been received by the exporter. Upon the completion of the
export transaction, what the seller does with the proceeds,
upon repatriation, is a matter of his option. The exchange
fluctuation in the EEFC Account arises after the completion
of the export activity and does not bear a proximate and
direct nexus with the export transaction so as to fall within
the expression “derived” by the assessee in sub-Section
(1) of Section 80­HHC. The exchange fluctuation arose
subsequent to the transaction of export. In other words,
the exchange fluctuation was not on account of a delayed
realization of export proceeds. The deposit of the receipts in
the EEFC Account and the exchange fluctuation which has
arisen therefrom cannot be regarded as being part of the
profits derived by the assessee from the export of goods or
merchandise.
The interest which has arisen as a result of the deposits
maintained in the EEFC Account cannot be regarded as
representing the business income of the assessee. The
business of the assessee consisted of the manufacture
and export of garments. The interest income which was
generated from the deposits held in the EEFC Account
would not fall for classification as income under the head of
business and profession but, would fall for classification as
income from other sources.
The fluctuation in the instant case was not on account of
the sale proceeds or for that matter on account of a delayed
realization of the sale proceeds. The fluctuation had arisen
in the deposits maintained by the assessee in the EEFC
Account in convertible foreign exchange after the completion
of the export transaction. Therefore, the receipts cannot be
treated as part of business income and accordingly cannot
be included in profit of business while calculating deduction
under Section 80HHC.
Section 94 read with section 14A of the Income-tax Act,
1961 - Tax Avoidance - Securities transactions
Dividend stripping transactions making use of provisions of
Act in a preplanned manner, are not sham or bogus; it only
after insertion of Section 94(7) with effect from 1-4-2002,
loss to extent of dividend income is to be ignored while loss
in excess of dividend income is to be allowed [Assessment
Year 2000-01]
CIT v. Walfort Share & Stock Brokers P. Ltd, July 6, 2010
(SC)
A mutual fund company advertised that tax free dividend
income could be earned if investments were made before
record date of 24-3-2006. The assessee invested R8 crores
on 24-3-2000 and earned dividend at the rate of R4 per unit.
As a result of the dividend pay-out, the NAV of the mutual
fund, which was R17.23 per unit on the record date, fell to
R13.23 on the next trading date 27-3-2000. the assessee
sold all units at NAV of R13.23 per unit on 27-3-2000 and
received R5.9 crores as ag ainst R8 crores. In its return, the
24 THE CHARTERED ACCOUNTANT september 2010
400
assessee claimed the dividend received as exempt under
Section 10(33) and also claimed set-off for the loss against
its taxable income, thereby seeking to reduce its tax liability
and gain tax advantage. According to the revenue, the
differential amount between the purchase and sale price of
the units [i.e., loss of R4 per unit] constituted “expenditure
incurred” by the assessee for earning tax-free income and,
hence, liable to be disallowed under Section 14A as a
whole.
The Supreme Court held that for the assessment years
prior to insertion of Section 94(7) vide Finance Act, 2001 with
effect from 1-4-2002, the AO had erred in disallowing the
loss. In the case of Vijaya Bank v. Additional Commissioner
of Income Tax [1991] 187 ITR 541, it was held by this
Court that where the assessee buys securities at a price
determined with reference to their actual value as well as
interest accrued thereon till the date of purchase the entire
price paid would be in the nature of capital outlay and no
part of it can be set off as expenditure against income
accruing on those securities.
A citizen is free to carry on its business within the four
corners of the law. That, mere tax planning, without any
motive to evade taxes through colourable devices is not to
be frowned upon.
Hence, in the cases arising before 1.4.2002, losses
pertaining to exempted income cannot be disallowed.
However, after 1.4.2002, such losses to the extent of dividend
received by the assessee could be ignored by the AO in
view of Section 94(7). The object of Section 94(7) is to curb
the short term losses. Applying Section 94(7) in a case for
the assessment year(s) falling after 1.4.2002, the loss to be
ignored would be only to the extent of the dividend received
and not the entire loss. In other words, losses over and above
the amount of the dividend received would still be allowed
from which it follows that the Parliament has not treated the
dividend stripping transaction as sham or bogus. It has not
treated the entire loss as fictitious or only a fiscal loss. After
1.4.2002, losses over and above the dividend received will
not be ignored under Section 94(7). If the argument of the
Department that such dividend stripping is clourable, is to
be accepted, it would mean that before 1.4.2002 the entire
loss would be disallowed as not genuine but, after 1.4.2002,
a part of it would be allowable under Section 94(7) which
cannot be the object of Section 94(7) which is inserted
to curb tax avoidance by certain types of transactions in
securities. There is one more way of answering this point.
Sections 14A and 94(7) were simultaneously inserted by the
same Finance Act, 2001. As stated above, Section 14A was
inserted w.e.f. 1.4.1962 whereas Section 94(7) was inserted
w.e.f. 1.4.2002. The reason is obvious. Parliament realized
that several public sector undertakings and public sector
enterprises had invested huge amounts over last couple of
years in the impugned dividend stripping transactions so
also declaration of dividends by mutual fund are being vetted
and regulated by SEBI for last couple of years. If Section
94(7) would have been brought into effect from 1.4.1962, as
in the case of Section 14A, it would have resulted in reversal
of large number of transactions. This could be one reason
why the Parliament intended to give effect to Section 94(7)
 401
only w.e.f. 1.4.2002. It is important to clarify that this last
reasoning has nothing to do with the interpretations given to
Sections 14A and 94(7). However, it is the duty of the court
to examine the circumstances and reasons why Section 14A
inserted by Finance Act 2001 stood inserted w.e.f. 1.4.1962
while Section 94(7) inserted by the same Finance Act as
brought into force w.e.f. 1.4.2002.
Reconciliation of Sections 14A and 94
Two sections operate in different fields. Section 14A deals
with disallowance of expenditure incurred in earning tax-
free income against the profits of the accounting year under
Sections 30 to 37 of the Act. On the other hand, Section
94(7) refers to disallowance of the loss on the acquisition of
an asset which situation is not there in cases falling under
Section 14A. Under Section 94(7) the dividend goes to
reduce the loss. It applies to cases where the loss is more
than the dividend. Section 14A applies to cases where
the assessee incurs expenditure to earn tax free income
but where there is no acquisition of an asset. In cases
falling under Section 94(7), there is acquisition of an asset
and existence of the loss which arises at a point of time
subsequent to the purchase of units and receipt of exempt
income. It occurs only when the sale takes place. Section
14A comes in when there is claim for deduction of an
expenditure whereas Section 94(7) comes in when there is
claim for allowance for the business loss. One must keep in
mind the conceptual difference between loss, expenditure,
cost of acquisition, etc. while interpreting the scheme of the
Act.
Para 12 of Accounting Standard AS-13
Para 12 indicates that interest/ dividends received
on investments are generally regarded as return on
investment and not return of investment. It is only in certain
circumstances where the purchase price includes the right
to receive crystallized and accrued dividends/ interest, that
have already accrued and become due for payment before
the date of purchase of the units, that the same has got to be
reduced from the purchase cost of the investment. A mere
receipt of dividend subsequent to purchase of units, on the
basis of a person holding units at the time of declaration of
dividend on the record date, cannot go to offset the cost of
acquisition of the units. Therefore, AS-13 has no application
where units are bought at the ruling NAV with a right to
receive dividend as and when declared in future and did not
carry any vested right to claim dividends which had already
accrued prior to the purchase.
Section 112 read with Sections 48 and 70 of the Income-
tax Act, 1961 - Capital gains - Tax on long term capital
gains
Long term capital gains on sale of shares, other than bonus
shares is to be computed after giving benefit of indexation
[Assessment Year 2001-02]
CIT v. Anuj A. Sheth HUF, April 7, 2010 (BOM)
The assessee entered into eight sale transactions involving
the shares of four companies. Of the sale transactions,
LEGAL UPDATE
Legal Decisions
the shares of Infosys comprised entirely of bonus shares
where the cost of acquisition was nil. There being no cost
of acquisition, the long term capital gains on bonus shares
were computed at R6.13 crore. Out of the remaining seven
transactions one sale resulted in a long term capital gain
of R9.47 lakh with indexation whereas in the remaining
transactions the assessee reported a loss of R2.78 crore
with indexation. The assessee set off the long term capital
loss of R2.68 crore from the long term capital gains of
R6.13 crore and paid a tax of 10 per cent on the net long
term capital gain of R3.45 crore. The Assessing Officer
adopted the sale price realized from the shares sold by
the assessee of R7.51 crore and after deducting the cost
of acquisition of shares of R3.16 crore, assessed the
long term capital gains without indexation at R4.34 crore.
The Assessing Officer denied the benefit of indexation
to the assessee while giving effect to the proviso to
Section 112(1).
The Bombay High Court held that the assessee was
entitled to indexation by virtue of the second proviso to
Section 48. Moreover, in view of the provisions of Section
70 the assessee was entitled to set off the loss sustained
in respect of one source falling under the same head of
income from its income against any other source under the
same head. In the present case, as a matter of fact, the
question of indexation in relation to the bonus shares would
not arise since the cost of acquisition of bonus shares
was nil. Where the cost of acquisition is nil, the indexed
cost would necessarily be nil. Out of seven transactions
while computing the loss sustained in respect of the six
transactions and the profit sustained in remaining one the
assessee sought indexation. For the purposes of working
out the application of the proviso to Section 112, there is
nothing in the section which would deprive the assessee
of the indexation claimed on the sale of shares where there
was a resultant loss. What the proviso to Section 112
essentially requires is that where the tax payable in respect
of income arising from a listed security, being a long term
capital asset, exceeds 10 per cent of the capital gains
before indexation, then such excess beyond 10 per cent is
liable to be ignored. The assessee reported a net capital
gain of R3.45 crore which was computed after setting
off the loss sustained in the sale of shares in certain
transactions relating to the sale of listed securities against
capital gains arising inter alia out of the sale of the bonus
shares of Infosys Technologies. The proviso to Section
112 requires a comparison to be made on the one hand
between the tax payable in respect of income arising
from the transfer of listed securities, computed at 20 per
cent with the tax payable at the rate of 10 per cent on the
capital gains before giving effect to indexation. The present
case did not deal with a situation where the assessee had
acquired at a cost, shares on the sale of which a capital gain
had arisen. Were the assessee to acquire those shares on
which a capital gain was to arise, at a cost, then it would
have been necessary for the purposes of the proviso
to Section 112(1) to compute the capital gains before
giving effect to indexation under the second proviso to
Section 48. That, however, would not arise in the facts of
september 2010 THE CHARTERED ACCOUNTANT 25
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this case inasmuch as the bonus shares of Infosys on
which the assessee realized a capital gain of R6.13 crore
were acquired at no cost. There is nothing in the provisions
of Section 112 which would lead to the acceptance of
the contention of the Revenue that the assessee would
be entitled to a set off of the loss under Section 70, but
without the benefit of indexation. No such requirement is
legislated upon by Parliament either under Section 70 or in
Section 112.
The relevant circulars state the Revenue’s understanding
that (i) The benefit of a set off would be available while
computing the income arising from the transfer of a long
term capital asset, which is part of the total income of an
assessee; and (ii) The benefit of the cost inflation index or
indexation would continue to be available subject to the
condition that where the tax on long term capital gains
without adjustment for indexation exceeds 10 per cent such
excess shall be ignored.
In the circumstances, on the balance, that the
Tribunal was justified in coming to the conclusion that
the assessee’s claim of computation of long term capital
gains on the sale of shares other than the bonus shares
of Infosys, after giving the benefit of indexation was in
consonance with the proviso to Section 112(1) and that the
assessee was assessable to net long term capital gain of
R3.45 crore.
Section 195 read with Sections 45 and 201 of the In-
come-tax Act, 1961 - Deduction of tax at source - Pay-
ments to Non-resident
Where foreign fishing vessel charted by assessee started
journey from India Port to catch fish in SEZ, i.e., outside
territory of India, brought fish to Indian port and after
customs and port clearance received 85 per cent of fish
as charter fee, mere sale of fish and realization of sale
consideration of fish by it outside India, (e.g., in SEZ) would
not mean that there was no receipt in India; assessee would
be liable to TDS
Kanchanganga Sea Foods Ltd. v. CIT, July 7, 2010
(SC)
The assessee/appellant was an Indian company engaged
in sale and export of sea food and for that purpose obtained
permit to fish in the exclusive economic zone of India.
To exploit the fishing rights, the appellant entered into
an agreement chartering two fishing vessels from a non-
resident Hong Kong based company. 85 per cent of
the gross earnings from the sale of fish was to be paid
to the non-resident company. Trawlers were delivered
to the appellant with full equipment and complement
of staff at Chennai Port. Actual fishing operations were
done outside the territorial waters of India but within the
exclusive economic zone. The voyage commenced and
concluded at Chennai Port. The catch made at high
seas were brought to Chennai where surveyor of Fishery
Department verified the log books and assessed the
value of the catch over which local taxes were levied
and paid. The assessee after paying the dues arranged
Customs clearance for the export of the fish and the
26 THE CHARTERED ACCOUNTANT september 2010
402
Trawlers, which were used for fishing, carried the fish to
destination chosen by non-resident company. The Trawlers
reported back to Chennai Port after delivering fishes to
the destination and commenced another voyage. The
appellant did not deduct the tax from the non-resident
company. Notice under Section 201(1) was issued to the
appellant to show cause as to why it should not be deemed
to be an assessee in default in relation to tax deductible
but not deducted.
The Supreme Court held that from a plain reading of
provision of section 5 it is evident that total income of non-
resident company shall include all income from whatever
source derived received or deemed to be received in
India. It also includes such income which either accrues,
arises or deem to accrue or arise to a non-resident
company in India. The legal fiction created has to be
understood in the light of terms of contract. In the present
case the chartered vessels with the entire catch were
brought to the Indian Port, the catch were certified for
human consumption, valued, and after customs and port
clearance non-resident company received 85 per cent
of the catch. So long the catch was not apportioned the
entire catch was the property of the assessee and not
of non-resident company as the latter did not have any
control over the catch. It was after the non-resident
company was given share of its 85 per cent of the catch it
did come within its control. It is trite to say that to
constitute income the recipient must have control over it.
Thus the non-resident company effectively received the
charter-fee in India. Therefore, the receipt of 85 per cent
of the catch was in India and this being the first receipt
in the eye of law and being in India would be chargeable
to tax. The non-resident company having received the
charter fee in the shape of 85 per cent of fish catch in India,
sale of fish and realization of sale consideration of fish by
it outside India would not mean that there was no receipt
in India. When 85 per cent of the catch was received after
valuation by the non-resident company in India, in sum
and substance, it amounted to receipt of value of money.
Had it not been so, the value of the catch ought to have
been the price for which non-resident company sold
at the destination chosen by it. According to the terms
and conditions of the agreement charter fee was to be
paid in terms of money, i.e., US $ 600,000 per vessel per
annum “payable by way of 85 per cent of gross earning
from the fish-sales”. There was no escape from the
conclusion that income earned by the non-resident company
was chargeable to tax under Section 5(2).
It was, thus, obvious that the assessee was liable to
deduct tax under Section 195 on the payment made to
the non-resident company and admittedly it having not
deducted and deposited was rightly held to be in default
under Section 201.
Section 263 of the Income-tax Act, 1961 - Revision – Of
orders prejudicial to revenue
Where original assessment is reopened under Section 147
in relation to certain specified grounds and, subsequent
to passing of order of reassessment, jurisdiction under
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Section 263 is sought to be exercised with reference to
issues which do not form subject of opening of assessment
or order of reassessment; period of limitation provided for
in sub-Section (2)of Section 263 would commence from
date of order of original assessment and not from date
on which order of reopening for reassessment is passed
[Assessment Year 2004-05]
Ashoka Buildcon Ltd. v. Asstt. CIT, April 23, 2010
(BOM)
The original assessment under Section 143(3) was passed
on 27-12-2006. Reopening of said order was sought by
notice under Section 148 on 6-3-2007 solely on the basis
that the benefit of Section 72A had been wrongly allowed
to the assessee. In the order of reassessment on 27-12-
2007, the assessee’s claim regarding Section 72A was
disallowed. On 30-4-2009 the Commissioner issued a notice
under Section 263 on the ground that the assessment order
passed on 27-12-2007 was erroneous and pre-judicial to
the interest of the Revenue.
The Bombay High Court held that under Section 263,
the Commissioner did not find any error in the reassessment
order dated 27-12-2007 in respect of claim under Section
72A. The revision notice dated 30-4-2009 adverted to issues
which, did not form either the subject matter of the notice for
reassessment nor the reassessment order. The jurisdiction
under Section 263 was sought to be exercised with reference
to issues which were unrelated to the grounds on which the
original assessment was reopened and reassessed. These
were related to different deductions, losses, etc.
28 THE CHARTERED ACCOUNTANT september 2010
404
Sub-Section (2) of Section 263 stipulates that no order
shall be made under sub-Section (1) after the expiry of
two years from the end of the financial year in which the
order sought to be revised was passed. That period of two
years from the end of the financial year in which the original
order of assessment dated 27-12-2006 was passed, had
expired on 31-3-2009. Hence the exercise of the revisional
jurisdiction in respect of the original order of reassessment
was barred by limitation. This was sought to be obviated
by the Commissioner of Income Tax by seeking to revise,
under Section 263, the order dated 27-12-2007. The order
dated 27-12-2007 was passed after the assessment was
reopened on the ground of an escapement of income under
Section147 and an order of reassessment was passed by
which the claim under Section 72A came to be disallowed.
There was nothing on the record of the instant case to
indicate that there was any other income which had come
to the notice of the Assessing Officer as having escaped
assessment in the course of the proceedings under Section
147 and when he passed the order of reassessment. The
Commissioner, when exercised his jurisdiction under Section
263, in the facts of the present case, was under a bar of
limitation since limitation would begin to run from the date
on which the original order of assessment was passed. The
bar of limitation in instant case arose because the revisional
jurisdiction under Section 263 was sought to be exercised
in respect of issues which did not form the subject matter of
the reassessment proceedings under Section 143(3) read
with Section 147. In respect of those issues, limitation would
commence with reference to the original order of assessment.
 405
If the exercise of the revisional jurisdiction under section 263
was to be in respect of issues which formed the subject
matter of the reassessment, after the original assessment
was reopened, the commencement of limitation would be
with reference to the order of reassessment. The present
case did not fall in that category. Therefore, the exercise of
the revisional jurisdiction under Section 263 was barred by
limitation.
Section 263 of the Income-tax Act, 1961 - Revision – Of
orders prejudicial to revenue
Assessment order which gives effect to a binding
precedent of advance ruling of AAR, cannot be regarded
as being erroneous or as being prejudicial to interests of
Revenue; unless binding Ruling in case of petitioner is
displaced by pursuing requisite procedures under law, that
ruling must continue to operate and be binding between
petitioner and revenue [Assessment Years 2004-05 and
2005-06]
Prudential Assurance Company Ltd. v. Director of
Income-tax, April 29, 2010 (BOM)
The returned income of the petitioner was accepted in
view of the ruling of the AAR in the case of the petitioner.
The Director of Income Tax (International Taxation) formed
an opinion that the assessment orders were liable to be
revised under Section 263 on the ground that the AAR, in
its subsequent ruling in the case of another FII, viz., Fidelity
Northstar Fund, 288 ITR 641 held differently.
The Bombay High Court held that evidently, the
Commissioner had ignored the clear mandate of the
statutory provision that a ruling would apply and be binding
only on the Applicant and the Revenue in relation to the
transaction for which it was sought. The ruling in Fidelity
could not possibly, as a matter of the plain intendment and
meaning of Section 245S displace the binding character of
the advance ruling rendered between the Petitioner and the
Revenue.
That apart, the Commissioner could not possibly have
found fault with the Assessing Officer for having followed a
binding ruling. Where the Assessing Officer has followed a
binding principle of law laid down in a precedent which has
binding force and effect, it is not open to the Commissioner
to exercise his revisional jurisdiction under Section 263. On
two counts the invocation of the jurisdiction under Section
263 was improper. Firstly, the Commissioner had ex¬facie
made a determination contrary to the plain language of
Section 245S when he holds that the ruling of the AAR in
the case of Fidelity Northstar Fund would apply to the case
of the assessee. Unless the binding ruling in the case of
the petitioner is displaced by pursuing requisite procedures
under the law, that ruling must continue to operate and
be binding between the petitioner and the Revenue.
Secondly, and in any event, the Commissioner could not
have possibly come to the conclusion that the view of the
Assessing Officer was erroneous or that it was prejudicial
to the interests of the Revenue when the Assessing Officer
has followed a binding ruling of the AAR. The assessment
order which gives effect to a binding precedent, in this case
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of the AAR, cannot be regarded as being erroneous or as
being prejudicial to the interests of the Revenue. Since the
invocation of the jurisdiction was not proper in the instant
case, the petitioners should not be relegated to pursue the
proceedings initiated under Section 263.
INDIRECT TAXES
Excise/Customs
Rule 57Q of the Central Excise Rules,
1944 – Modvat Credit
Where admittedly, appellant was not able to
identify machinery for which capital goods
in form of components, spares and accessories had been
used, in absence of such identification, it was not possible
for Assessing Authorities to come to a decision as to
whether Modvat Credit would be given in respect of capital
goods in question
Madras Cements Ltd. v. CCE, May 6, 2010 (SC)
In order to avail of Modvat/Cenvat credit, an Assessee has
to satisfy the Assessing Authorities that the capital goods in
the form of component, spares and accessories had been
utilized during the process of manufacture of the finished
product.
Where admittedly, the appellant was not able to identify
the machinery for which the goods in question had been
used, in the absence of such identification, it was not
possible for the Assessing Authorities to come to a decision
as to whether Modvat Credit would be given in respect of
the goods in question.
OTHER ACTS
Companies Act
Section 397 of the Companies Act, 1956
- Application to Company Law Board for
relief in cases of oppression
Where minority shareholders themselves were party
in awarding turnkey contract to respondent-majority
shareholders and also instrumental in paying large sums
to respondent, petitioner could not allege oppression/
mismanagement and siphoning off of company’s fund
Incable Net (Andhra) Limited v. AP. Aksh Broadband
Ltd, May 5, 2010 (SC)
The respondent No. 1 company awarded a turnkey EPC
contract to the Respondent No.5 which was one of the
principal shareholders having a controlling interest in the
company. The said contract envisaged the completion of
the infrastructural facilities within a period of 65 weeks at a
fixed cost of R370 crore upto the stage of commission and
implementation of the project. As a point of oppression and
mismanagement, the petitioners alleged that the respondent
No. 5 company had not fulfilled the contractual obligations
while siphoned off funds of the company.
The Supreme Court held that admittedly, the Respondent
No.5 was a majority shareholder in the Respondent No.
1 Company and at the same time the EPC Contract had
also been given by the Respondent No. 1 Company to the
Respondent No. 5, to which transaction the Petitioner No.
september 2010 THE CHARTERED ACCOUNTANT 29
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2 was also a party in his capacity as Vice-Chairman of the
Respondent No.1 Company. Besides being a party to the
decision to give the EPC Contract to the Respondent No.
5, the Petitioner No. 2 was also instrumental in payment of
large sums of money being made to the Respondent No.
5. This would stop him from alleging that the Respondent
No.2 Company had been siphoning off the funds of the
Respondent No. 1 Company without diligently performing its
part of the contract. There is substance in submissions of the
respondents that the EPC Contract given to the Respondent
No.5 by the Respondent No. 1 was a commercial contract
and stood outside the ambit of Sections 397 and 398 of
the Companies Act. Failure to act in terms of the contract
could not be said to have amounted to either oppression
or mismanagement by the Respondent No. 1. At best it
could be said that the Respondent No. 1 had been used as
a tool or mechanism by the Respondent No. 5 to acquire
benefits for itself, which in the instant case, did not appear
to be so, having regard to the fact that one of the Petitioners
in the Company Petition was himself responsible for such
payments being made.
From the facts as revealed, the only conclusion that
could be arrived at was that the Respondent No. 5 had
committed a breach of contract in regard to supply of
materials to the Respondent No. 1 Company in terms
of the EPC contract. Such lapse would not constitute the
ingredients of a complaint under Section 397, 398, 402 and
403 of the Companies Act, 1956. Such breach could give
rise to an action of breach of contract under Section 73 of
the Indian Contract Act, 1872.
Since no act of oppression or mismanagement within the
meaning of Sections 397, 398, 402 and 403 of the Companies
Act, 1956, had been made out by the Petitioners against
the majority shareholders of the company, there was no
justification of making a winding up order on the ground that it
would be just and equitable to do so and to pass appropriate
orders to bring to an end the matters complained of.
Cr.PC
Section 357 of Criminal Procedure Code, 1973 read
with Section 138 of Negotiable Instrument Act, 1938 –
Order to Pay Compensation
A sentence for default can be imposed on default of
payment of compensation awarded to victims by Court
while passing judgment of conviction
K. A. Abbas H.S.A. v. Sabu Joseph, May 11, 2010 (SC)
Essentially Section 357 empowers the courts, not to just
impose a fine alone or fine along with the sentence of
imprisonment, but also when the situation arises, direct
the accused to pay compensation to the person who has
suffered any loss or injury by reason of the act for which the
accused person has been sentenced.
Sub-Section (3) of Section 357 empowers the Court to
award compensation to victims while passing judgment of
conviction. In addition to conviction, the Court may order the
accused to pay some amount by way of compensation to
victim who has suffered by the action of accused. It may be
noted that this power of Courts to award compensation is
30 THE CHARTERED ACCOUNTANT september 2010
406
not ancillary to other sentences but it is in addition thereto.
This power was intended to do something to reassure the
victim that he or she is not forgotten in the criminal justice
system. It is a measure of responding appropriately to crime
as well of reconciling the victim with the offender. It is, to
some extent, a constructive approach to crimes. It is indeed
a step forward in our criminal justice system. All courts
should exercise this power liberally so as to meet the ends
of justice in a better way.
A sentence of imprisonment can be granted for default
in payment of compensation awarded under Section
357(3) of Cr.PC. The whole purpose of the provision is to
accommodate the interests of the victims in the criminal
justice system. Sometimes the situation becomes such that
there is no purpose is served by keeping a person behind
bars. Instead directing the accused to pay an amount of
compensation to the victim or affected party can ensure
delivery of total justice. Therefore, this grant of compensation
is sometimes in lieu of sending a person behind bars or in
addition to a very light sentence of imprisonment. Hence
on default of payment of this compensation, there must be
a just recourse. Not imposing a sentence of imprisonment
would mean allowing the accused to get away without
paying the compensation and imposing another fine
would be impractical as it would mean imposing a fine
upon another fine and therefore would not ensure proper
enforcement of the order of compensation. While passing
an order under Section 357(3), it is imperative for the courts
to look at the ability and the capacity of the accused to
pay the same amount as has been laid down by the cases
above, otherwise the very purpose of granting an order of
compensation would stand defeated.
Section 431 clearly provides that an order of
compensation under Section 357(3) will be recoverable in
the same way as if it were a fine. Section 421 further provides
the mode of recovery of a fine and the section clearly
provides that a person can be imprisoned for non-payment
of fine. Therefore, going by the provisions of the code, the
intention of the legislature is clearly to ensure that mode of
recovery of a fine and compensation is on the same footing.
In light of the aforesaid reasoning, the contention of the
accused that there can be no sentence of imprisonment for
default in payment of compensation under Section 357(3)
should fail.
Securities Laws
Section 2(h) of the Securities Contract Regulation Act,
1956 – Securities
Where contract note issued in relation to a transaction does
not show that it is a spot delivery contract, transaction will
clearly be contrary to Circular [S.O. 2561] dated 27-6-1969;
consequently in terms of provisions of sub-Section (2) of
Section 16, said transaction will be illegal and not capable
of being enforced
Naresh K. Aggarwala v. Canbank Financial Services
Ltd, May 5, 2010 (SC)
It is clear from the Circular [S.O. 2561] dated 27-6-1969 that
after issuance of the Circular, transactions into securities by
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(i) Spot delivery contract; (ii) Contract for cash; (iii) Hand
delivery and (iv) Special Delivery are only permitted.
A perusal of the definition of the term `spot delivery’ is
defined in Section 2 (i) of the Securities Contract Regulation
Act, 1956 would show that spot delivery contract is the
contract where actual delivery of the securities and the
payment of price is either on the same day or on the next
day.
The terms, contract for cash, hand delivery or special
delivery are not defined by the Act. Therefore, in terms of the
circular dated 27-6-1969, if the rules made under the Act,
Bye laws and Regulations of a recognized Stock Exchange
permit contract for cash, hand delivery or special delivery,
those types of transactions would also be permitted by the
circulars.
The definition of the term ‘securities’ as given in
Section 2(h) of the Securities Contracts Regulation Act,
1956 shows that it does not make any distinction between
listed securities and unlisted securities and therefore
it is clear that the Circular will apply to the securities
which are not listed on the Stock Exchange. Where the
contract note issued in relation to a transaction does not
show that it is a spot delivery contract, the transaction
will clearly be contrary to the circular. Consequently, in
terms of the provisions of sub-Section (2) of Section 16
the transaction will be illegal and is not capable of being
enforced.
DRT Act
Section 2(g) of the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993 - Debt
Where stock and machineries of tenant which were
hypothecated to bank against loan, were sold by owner of
premises for realization of rent due with full knowledge of
hypothecation, bank could recover sale proceeds along
with interest
32 THE CHARTERED ACCOUNTANT september 2010
408
Eureka Forbes Limited v. Allahabad Bank, May 3, 2010
(SC)
The appellant company entered into an agreement with
respondent Nos. 2 and 3 a proprietor and his firm, granting
licence in their favour to use the premises for a consideration
of R12,000/- payable to the appellant, along with the plant
and machinery as well as their trade mark “OSBOURNE”.
It is further the case of the appellant that they had no
knowledge of the fact that, respondent Nos. 2 and 3 had
availed certain cash credit facility and had hypothecated
their raw materials, semi-finished and finished products to
respondent bank. After about 4 years, the said respondents
requested the appellant to take over the possession of the
said premises along with the closing stock lying therein
and machines because respondent Nos. 2 and 3 had
not paid the licence fee for the use and occupation of the
premises. The appellant sold the stocks as well as lathe
machine lying in the factory premises and adjusted the
sale proceeds thereof towards the arrears of licence fee.
The respondent bank raised objection and initiated recovery
proceedings.
The appellant argued that, there was no privity of
contract and they were not covered under the definition
of `debt’, and as such, recovery proceedings could not be
initiated, much less, recovery could be effected from them
under the provisions of the Act.
The Supreme Court held that the goods in question had
been sold by the appellant without the consent of the Bank.
Respondent Nos. 2 and 3 had hardly raised any dispute and
resistance, to the claim of the Bank. In fact, even before the
instant Court there was no representation on their behalf.
The documentary and oral evidence on record clearly
established that the Bank raised a financial claim upon
the principal debtor, as well as upon the person who had
intermeddled and/or at least dealt with the charged goods
without any authority in law. Not only this, the appellant
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Legal Decisions
had sold the hypothecated goods and stocks by public
auction, despite the fact the appellant had due knowledge
of the fact that the goods were charged in favour of the
Bank.
Maxim Nullus commodum capere potest de injuria sua
propria has a clear mandate of law that, a person who by
manipulation of a process frustrates the legal rights of
others, should not be permitted to take advantage of his
wrong or manipulations. In the present case Respondent
Nos. 2 and 3 and the appellant had acted together while
disposing off the hypothecated goods, and now, they
could not be permitted to turn back to argue, that since
the goods had been sold, liability could not be fastened
upon respondent Nos. 2 and 3 and in any case on the
appellant.
The Bank had come to know, that respondent Nos. 2
and 3 had a leave and license agreement with the appellant.
Despite that heavy loan was sanctioned and disbursed to
the above respondents. Even thereafter, the Bank and its
officers/officials appeared to have taken no serious steps
to ensure that the goods hypothecated to the Bank were
not disposed off without its consent. The officers/officials
of the Bank, even after knowing about the handing over of
the possession of the property including the hypothecated
goods to the appellant and having communicated the same
to the appellant vide their letter dated August 24, 1987,
made no serious efforts to recover its debt and ensure that
the goods were not disposed off, as the suit itself was filed
for recovery of the amount on February 1, 1989 after serious
delay.
The appellants would be liable to pay to the respondent
Bank, the approximate value of the hypothecated stock
sold by the appellants with interest at the rate of 6 per cent
per annum on the above sum during the period from 14-
3-1988, the date of filing of the plaint, to the date of actual
realisation.
34 THE CHARTERED ACCOUNTANT september 2010
410
RTI Act
Section 8, read with section 4 of the Right to Information
Act, 2005 – Exemption from Disclosure of Information
Where appellant sought to inspect of case files of third
parties relying upon a decision of Central Information
Commission but said case had been stayed, appeals
were to be dismissed in regard to inspection of case files;
however, information sought in respect of procedure for
inspection and filing complaints were to be provided
Rakesh Kumar Gupta v. Income Tax Appellate Tribunal,
June 22, 2010 (CIC)
The Appellant sought inspection of all the records related
to some appeal, provide the form, procedure, rules through
which third parties are allowed to become intervener and
also other procedures. The appellant received a response
from CPIO informing him that larger public interest was
not established. On appeal, the Appellate Authority issued
orders rejecting the appeal.
The Central Information Commission held that none
can accept the argument that because the information held
by ITAT is in the form of only judicial record, such record
is outside the purview of the RTI Act. The Supreme Court
of India and High Courts, all have rules for disclosure
of information both administrative and judicial. The only
requirement is that applicant must adhere to the particular
rules in making an application under the RTI Act.
In the case of ITAT, which is a part of Government, the
rules regarding the means of disclosure of information with
regard to carrying out the provisions of the Act and fees /
costs to be charged are covered by rules 27(1) and 28 in
both of which appropriate Government and the competent
authority are defined in Sections 2(a) and 2(b). Clearly ITAT
will fall under the appropriate Government described in
Section 2(a).
What appellant sought was inspection of case files of
third parties. However, the decision of this Commission
upon which appellant has relied, i.e., CIC/LS/A/2009/000647
dated 14-12-2009 had been stayed. Equally clearly, Section
8(1)(j) cannot be applied to the information sought viz.,
(i) providing the form, procedure, rules through which third
parties are allowed to become intervener.
(ii) providing the procedure (e.g., to whom form of request
letter and deposit challan, etc., are to be deposited)
for the inspection and copying fee (for inspection and
copies as pre ITAT Rules).
(iii) allowing inspection of all records related to section 4
compliance providing the procedure and person to
whom vigilance complaints are to be made for ITAT.
(iv) providing copy of documents including note sheet/
orders pointed out at the time of inspection for above
requests.
Therefore, appeals were to be dismissed in regard
to inspection of case files. However, with regard to the
remaining information sought (in respect of procedure, etc.,
for inspection and complaints) suo moto disclosure of which
is mandated by Section 4(1)(6)(vii), (xv) and (d) of the Act
would be provided to the appellant. n
 LEGAL UPDATE
Circulars / Notifications
CIRCULARS/NOTIFICATIONS
DIRECT TAXES
1. Notification No. 50/2010 dated 14-07-
2010
In exercise of the powers conferred by
clause (xii) of Section 80C(2) of the Income-
tax Act, 1961, the Central Government has specified
the Immediate Annuity Plan of the ICICI Prudential Life
Insurance Company Limited, as approved by the Insurance
Regulatory and Development Authority, as the annuity plan
for the purpose of the said clause for the assessment year
2007-08 and subsequent years.
2. Notification No. 52/2010 dated 14-07-2010
Section 10(15)(vii) of the Income-tax Act, 1961 provides
for the exemption of interest on bonds issued by a local
authority or by a State Pooled Finance Entity and specified
by the Central Government by notification in the official
Gazette. Accordingly, the Central Government has specified
the Tax Free Pooled Finance Development Bonds under
Pooled Finance Development Scheme of Government of
India (Second Tranche) carrying an interest rate of upto
maximum 8 percent annum to be issued by the Water and
Sanitation Pooled Fund, Tamil Nadu designated as State
Pooled Finance Entity for the state of Tamil Nadu for the
purpose of the said section.
3. Notification No. 59/2010 dated 21-07-2010
In exercise of the powers conferred by clause (v) of the
Explanation to Section 48 of the Income-tax Act, 1961, the
Central Government has notified the Cost Inflation index for
the financial year 2010-11 i.e. 711.
4. Notification No. 67/2010 dated 03-08-2010
Clauses (a) and (b) of Section 80-IB(10) lays down
certain conditions to be complied with by an undertaking
developing and building housing projects for the purpose
of claiming deduction under the said section. However, the
conditions contained in these clauses would not apply to a
housing project carried out in accordance with a scheme
framed by the Central Government or a State Government
for reconstruction or redevelopment of existing buildings in
areas declared to be slum areas under any law for the time
being in force and such scheme is notified by the CBDT in
this behalf.
Accordingly, the CBDT has notified the Scheme contained
in Regulation 33(10) of Development Control Regulation for
Greater Mumbai 1991 read with the provisions of notification
no. TPB-4391/4080(A)/UD-11(RDP) dated June 3, 1992, as a
scheme for the purpose of the said section subject to certain
exclusions mentioned in the said notification.
The complete text of the above notifications can
be downloaded from the website of the Income-tax
Department, www.incometaxindia.gov.in and the complete
link may be downloaded from the home page of the Direct
Taxes Committee of the Institute at: http://www.icai.org/post.
html?post_id=965&c_id=57.
(Matter on Direct Taxes has been contributed by the Direct
Taxes Committee of the ICAI)
36 THE CHARTERED ACCOUNTANT september 2010
412
INDIRECT TAXES
A. SERVICE TAX
I. Notification:
1. Notification No. 45/2010 -ST dated
20.07.2010: The Central Government vide
the powers conferred by section 11C of the
Central Excise Act, 1944 read with section 83 of the Finance
Act, 1994 has directed that service tax payable on all taxable
services, which was not being levied in accordance with a
generally prevalent practice, provided by a person to any
other person in relation to:
(a) transmission of electricity is not required to be paid for
the period up to 26.02.2010;
(b) distribution of electricity is not required to be paid for
the period up to 21.06.2010.
It is important to note here that transmission and
distribution of electricity have been exempted from service
tax with effect from 27.02.2010 and 22.06.2010 vide
Notification No. 11 and 32/2010 respectively.
II. Circulars:
1. Circular No. 125/2010-ST dated 30.07.2010 has
been issued to clarified that levy and collection of service tax
on State Government agencies/departments implementing
centrally sponsored scheme (CSS) under a central grant, is
not legally tenable and therefore in such cases service tax
will not be leviable.
2. Circular No. 126/2010-ST dated 10.08.2010 : The
terms ‘underwriting’ and ‘underwriter’ as provided in the
Finance Act, 1994 and further defined in the Securities
and Exchange Board of India (Underwriters) Rules, 1993,
pertain to dealing in securities of a body corporate. In other
words, service tax is leviable on underwriting only when the
securities of a body corporate are underwritten.
Though the Government securities are issued
by the Reserve Bank of India (RBI), which is a ‘body
corporate’ in terms of Section 3(2) of the RBI Act, 1934,
Government securities are not securities of a body corporate
as they are sovereign securities having zero default risk and
RBI only manages the issue as also the auction of Government
securities on behalf of the Government of India.
The primary dealers registered with the RBI (as
opposed to registration with the Securities Exchange
Board of India) deal in Government Securities, issued by
the RBI on behalf of the Government of India, as a part of
the Central Government’s market borrowing program.
Therefore, it has been clarified that service
tax liability does not arise on Underwriting Fee or
Underwriting Commission received by the primary
dealers during the course of the dealing in government
securities.
B. CUSTOMS
I. Notification:
1. Central Board of Excise and Customs has amended
Courier Imports and Exports (Clearance) Regulations,
1988 vide Notification No. 75/2010 Cus. (N.T.) dated
12.08.2010.
 413
II. Circular:
1. Circular No. 23/2010-Cus. dated 29.07.2010
has been issued to clarify that 4 per cent CVD refund
claims under Notification No.102/2007-Cus. dated
14.09.2007 and Notification No. 93/2008-Cus. dated
01.08.2008 will be disposed of despite the fact that
the assessment continues to be provisional without
awaiting for finalization of assessments.
The complete text of the above-mentioned notifications
and circulars are available at www.cbec.gov.in the process as mandated, it appears that all the investor
(Matter on Indirect Taxes has been contributed by the
Indirect Taxes Committee of the ICAI)
CORPORATE LAWS
1. Updation of Investor Related
Documents
www.sebi.gov.in
The SEBI has issued Circular No.
Cir/IMD/DF/9/2010 dtd. 12.08.2010 in
relation to SEBI’s earlier advise to mutual funds to confirm
LEGAL UPDATE
Circulars / Notifications
whether all the investor related documents are maintained/
available with them and also that in case the investor
related documentation was incomplete, the trustees of the
mutual funds were advised not to make further payment
to such distributors till full compliance/completion of
the steps enumerated in the said circular and to send a
status to SEBI as and when process is completed to
satisfaction. Since SEBI has not received any confirmation
from the trustees of mutual funds on the completion of
related documentation is not available with the AMCs and
hence investors’ rights to approach the AMCs directly
are restricted and investors are forced to depend on the
distributors for executing any financial or non-financial
transactions. Now, in order to ensure that investors have
unrestricted access to AMCs and to enable AMCs to
provide prompt investor service including execution of
investors’ financial or non-financial transactions, all mutual
funds/AMCs are directed that, (a) all new folios/accounts
shall be opened only after ensuring that all investor related
september 2010 THE CHARTERED ACCOUNTANT 37
 413 LEGAL UPDATE
Circulars / Notifications
documents including account opening documents, IT-PAN,
KYC, PoA (if applicable), specimen signature are available
with AMCs/RTAs and not just with the distributor, and, (b)
for existing folios, AMCs shall be responsible for updation of
the investor related documents including account opening
documents, PAN, KYC, PoA (if applicable), specimen
signature by 15 November, 2010. SEBI has mandated that
the trustees shall submit a confirmation after they receive
certification from an independent auditor on completion of
this process latest by November 22, 2010. One may refer to
the above citation for further details.
2. Amendments to the Takeover Code
www.sebi.gov.in
The SEBI has issued the Report of the Takeover
Regulations Advisory Committee on 19.07.2010 which
seeks to replace the SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 1997 (“the Takeover
Code”) in line with international standards and the changing
business and economic milieu. The Committee under the
Chairmanship of Shri C. Achuthan (former Presiding Officer
of the Securities Appellate Tribunal) has comprehensively
redrafted the Takeover Code and submitted its report to
SEBI. The proposals contained in the Report include those
relating to, (a) increase in the threshold limit for a public
offer from 15 per cent to 25 per cent, (b) the requirement to
give an exit opportunity to 100 per cent public shareholders
via a public offer as compared to the minimum 20 per
cent now, (c) recognised issues like financing M&A deals
under the revised proposals particularly the disadvantaged
position of Indian acquirers vis-à-vis foreign acquirers
under the extant exchange control regulations, (d) removal
of exemption to 25 per cent consideration as non compete
payment from inclusion in open offer price, (e) requirement
for the target company to be delisted if pursuant to a
statutory open offer, the level of the acquirer’s shareholding
increases beyond 90 per cent, following the public offer, (f)
if the acquirers shareholding is between 75 per cent and 90
per cent, necessary steps would need to be undertaken to
bring down their shareholding to 75 per cent, (g) revisions
to pricing formula for the open offer, (h) specific provisions
on open offer pricing in case of indirect acquisitions which
would reduce the ambiguity under the present takeover
code. One may refer to the above citation for further
details.
3. Arbitration mechanism in stock exchanges
www.sebi.gov.in
The SEBI has issued Circular No. CIR/MRDDSA/24/2010
dtd. 11.08.2010 whereby SEBI has decided to
streamline the arbitration mechanism available at stock
exchanges for arbitration of disputes (claims, complaints,
differences, etc.) arising between a client and a member
(Stock Broker, Trading Member and Clearing Member)
across various market segments. The Circular inter alia
deals with Maintenance of a Panel of Arbitrators, Code
of Conduct for arbitrators, appellate panel of arbitrators,
arbitration fees, Place of Arbitration can be at a regional
centre nearest to the client, Implementation of Arbitral
38 THE CHARTERED ACCOUNTANT september 2010
414
Award in favour of clients, etc. One may refer to the above
citation for further details.
4. Regulatory framework for Core Investment
Companies
www.rbi.gov.in
The RBI has issued Notification No. 197/03.10.001/
2010-11 dtd. 12.08.2010 in relation to companies which
have their assets predominantly as investments in shares
for holding stake in group companies but not for trading,
and also do not carry on any other financial activity, i.e.,
Core Investment Companies, (CICs), justifiably deserve
a differential treatment in the regulatory prescription
applicable to Non-Banking Financial Companies (NBFCs)
which are non-deposit taking and systemically important.
In order to rationalise the policy approach for CICs,
such companies having an asset size of R100 crore and
above would be treated as systemically important core
investment companies and would require registration with
the Reserve Bank and would be given exemption from
maintenance of net owned fund and exposure norms
subject to certain conditions. With this Notification, the
regulatory framework is brought into effect. It is provided
that CICs were not considered as carrying on the
business of acquisition of shares and securities in certain
circumstances, which were having, (a) not less than 90 per
cent of their assets were in investments in shares for the
purpose of holding stake in the investee companies, (b)
they were not trading in these shares except for block sale
(to dilute or divest holding), (c) they were not carrying on
any other financial activities, and, (d) they were not holding/
accepting public deposits. Also, it is provided that since
it is very difficult to determine whether a company has
invested in the shares of another company for the purpose
of holding stake or for the purpose of trade, it was therefore
decided that investing in shares of other companies, even
for the purpose of holding stake should also be regarded
as carrying on the business of acquisition of shares in
terms of Section 45I(c)(ii) of RBI Act. Hence, CICs will be
required to obtain certificate of registration under the RBI
Act, 1934, but, CICs with an asset size of less than R100
crore would be granted exemption from the applicability of
registration requirements. CICs having asset size of 100
crore or above, being systemically important CICs (CIC-
ND-SI) will be required to obtain registration certificate
under Section 45-IA of the RBI Act and be governed by
the provisions of the RBI Act, 1934 and the directions
issued by the RBI from time to time. Every CIC-ND-SI
shall ensure that at all times it maintains a minimum Capital
Ratio whereby its adjusted net worth shall not be less
than 30 per cent of its aggregate risk weighted assets on
balance sheet and risk adjusted value of off-balance sheet
items as an the date of the last audited balance sheet
as at the end of the financial year. Every CIC-ND-SI shall
ensure that its outside liabilities at all times shall not exceed
2.5 times its adjusted net worth as on the date of the last
audited balance sheet as at the end of the financial year.
A CIC-ND-SI which adheres to the requirements regarding
capital requirements and leverage ratio as specified above
 415 LEGAL UPDATE
Circulars / Notifications

may to the extent necessary, be exempted from compliance

with, (a) maintenance of statutory minimum Net Owned
Fund (NoF), and, (b) requirements of “Non-Banking
Financial (Non-Deposit Accepting or Holding) Companies
Prudential Norms (Reserve Bank) Directions, 2007”
including requirements of capital adequacy and exposure
norms. A transition period is provided for all CICs-ND-SI,
irrespective of whether they were specifically exempted in
the past from registration with the RBI or not, and which
should apply to the RBI for obtaining the registration
certificate within a period of six months from the date of the
Notification. One may refer to the above citation for further
details of the comprehensive and operational aspects of the
guidelines.
(Matter on Corporate Laws has been contributed by CA.
Jayesh Thakur)

FEMA
1. Export of Goods and Services
- Unrealized export bills – Write-off -
Surrender of export incentives
RBI/2010-11/ 123 A.P. (DIR Series)
Circular No.03 dated July 22, 2010
(Ref: A.P. (DIR Series) Circular No. 12 dated September 09,
2000, A.P. (DIR Series) Circular No. 30 dated April 04, 2001,
A.P. (DIR Series) Circular No. 61 dated December 14, 2002,
A.P. (DIR Series) Circular No. 40 dated December 05, 2003
and A.P. (DIR Series) Circular No. 33 dated February 28,
2007)
As per the above referred circulars the requests for
“write-off” made by the exporters were permitted to be
acceded by the AD Category – I Banks only on surrender of
proportionate export incentives by the exporter.
In accordance with the extant policy realization of export
proceeds shall not be insisted upon, under any of the Export
Promotion Schemes under the Foreign Trade Policy (FTP),
subject to the following conditions:-
i) the write-off on the basis of merits is allowed by
the Reserve Bank or by the AD Category – I banks
on behalf of the Reserve Bank, as per the extant
guidelines;
ii) the exporter produces a certificate from the Foreign
Mission of India concerned, about the fact of non-
recovery of export proceeds from the buyer; and
iii) this would not be applicable in self-write-off cases.
The above relaxation is applicable for the exports made
with effect from August 27, 2009.
It is clarified the drawback amount has to be recovered
even if the claim is settled by the Export Credit Guarantee
Corporation of India Limited (ECGC) or the write–off is
allowed by the Reserve Bank.

2. External Commercial Borrowings (ECB) Policy

–Take-out Finance
RBI/2010-11/124 A.P.(DIR Series) Circular No.04 dated
July 22, 2010

september 2010 THE CHARTERED ACCOUNTANT 39

 LEGAL UPDATE
Circulars / Notifications
(Ref: A.P. (DIR Series) Circular No. 5 dated August
1, 2005 and A.P (DIR Series) Circular No. 39 dated
March 29, 2010 relating to the External Commercial
Borrowings (ECB).)
It has been decided to permit take-out financing
arrangement through ECB, under the approval route, for
refinancing of Rupee loans availed of from the domestic
banks by eligible borrowers in the sea port and airport,
roads including bridges and power sectors for the
development of new projects, subject to the following
conditions:
i. The corporate developing the infrastructure project
should have a tripartite agreement with domestic
banks and overseas recognized lenders for either a
conditional or unconditional take-out of the loan within
three years of the scheduled Commercial Operation
Date (COD). The scheduled date of occurrence
of the take-out should be clearly mentioned in the
agreement.
ii. The loan should have a minimum average maturity
period of seven years.
iii. The domestic bank financing the infrastructure
project should comply with the extant prudential
norms relating to take-out financing.
iv. The fee payable, if any, to the overseas lender until
the take-out shall not exceed 100 bps per annum.
v. On take-out, the residual loan agreed to be taken-
out by the overseas lender would be considered as
ECB and the loan should be designated in
a convertible foreign currency and all extant
norms relating to ECB should be complied
with.
vi. Domestic banks/Financial Institutions will not be
permitted to guarantee the take-out finance.
vii. The domestic bank will not be allowed to carry
any obligation on its balance sheet after
the occurrence of the take-out event.
viii.Reporting arrangement as prescribed under the
ECB policy should be adhered to.
All other aspects of ECB policy, such as, USD 500
million limit per company per financial year under the
automatic route, eligible borrower, recognised lender, end-
use, average maturity period, prepayment, refinancing
of existing ECB and reporting arrangements remain
unchanged.
3. Guidelines on trading of Currency Options on
Recognised Stock / New Exchanges
RBI/2010-11/147 A.P. (DIR Series) Circular No.05 dated
July 30, 2010
Ref: The Foreign Exchange Management (Foreign Exchange
Derivative Contracts) Regulations, 2000 dated May 3, 2000
[Notification No. FEMA/25/RB-2000 dated May 3, 2000], as
amended from time to time and A.P. (DIR Series) Circular
No. 05 dated August 6, 2008
1. In order to expand the existing menu of exchange
traded hedging tools, it was announced in the Monetary
40 THE CHARTERED ACCOUNTANT september 2010
416
Policy Statement 2010-11 (para 62) that recognised
stock exchanges would be permitted to introduce plain
vanilla currency options on spot US Dollar/ Rupee
exchange rate for residents. Accordingly, it has been
decided to permit trading of currency options on spot
USD-INR rate in the currency derivatives segment
of the stock exchanges, recognized by the
Securities and Exchange Board of India
(SEBI).
2. Persons resident in India are permitted to participate
in the currency options market, subject to the
directions contained in the Exchange Traded
Currency Options (Reserve Bank) Directions, 2010,
[Notification No.FED.01 / ED (HRK)-2010 dated
July 30, 2010] (Directions) issued by the Reserve
Bank of India.
4. Establishment of Branch Offices (BO) / Liaison Offices
(LO) in India by Foreign Entities – Delegation of Powers
RBI/2010-11/ 154 A.P. (DIR Series) Circular No. 06 dated
August 09, 2010
In view of the difficulties expressed by some Liaison
Offices / Branch Offices in submitting the Annual Activity
Certificates (AACs) within the prescribed period i.e. on or
before April 30 every year, it has been decided to review
the current calendar for the same. Accordingly, the AACs
from the Auditors, as at end of March 31, along with the
audited Balance Sheet may be submitted on or before
September 30 of that year. In case the annual accounts of
the LO/ BO are finalized with reference to a date other than
March 31, the AAC along with the audited Balance Sheet
may be submitted within six months from the due date of
the Balance Sheet.
All the other instructions of A.P. (DIR Series)
Circular No.24 dated December 30, 2009 shall remain
unchanged.
5. Buyback / Prepayment of Foreign Currency
Convertible Bonds (FCCBs)
RBI/2010-11/ 158 A.P. (DIR Series) Circular No.07 dated
August 09, 2010
Ref: A.P. (DIR Series) Circular No. 44 dated March 29,
2010
On a review of the policy and in view of the representations
received from the issuers of FCCBs, the due date for
considering the applications, under the approval route, for
buyback of FCCBs, has been extended from June 30, 2010
to June 30, 2011, provided the issuers comply with all the
terms and conditions of buyback/ prepayment of FCCBs,
as prescribed.
The complete text of the above-mentioned circulars and
notifications on FEMA can be downloaded from the link:
http://www.rbi.org.in
(Matter on FEMA has been contributed by CA. Manoj Shah
and CA. Hinesh Doshi) n
 OPINION
Treatment of liquidated damages payable
for delay in commissioning of plant.
The following is the opinion given by the Expert Advisory Committee of the Institute in
response to a query sent by a member. This is being published for the information of readers.
A. Facts of the Case
1. A limited company having its registered office in India
is a group member of a transnational player in the
global gases and engineering industry. The company’s
gases division is engaged in the manufacture and sale
of industrial, medical and special gases to customers
across industries. The company also has a Project
Engineering Division which executes turnkey projects
for both in-house and third parties.
2. The querist has stated that the company has an
established customer base in steel industry as oxygen
is required in large quantities for steel making. Based on
Long Term Agreements (LTAs), typically of 15 to 20 years’
duration, entered into with such steel companies, plants
owned by the company, are built within the customer’s
premises for ‘across the fence’ supplies of gases to them
as well as to other customers in the merchant market in
the region. Such Build-Own-Operate (BOO) schemes
for gas supplies to major customers, particularly in the
steel industry, is an established business model for the
company. Time being the essence of such schemes
where any delay by the company in building and
commissioning of its plants to commence supplies of
gases to its customers on dates as mentioned in the
LTAs could cause substantial financial losses to them
and vice-versa, stringent liquidated damage clauses for
delays by either party feature prominently in LTAs.
3. The company has entered into one such LTA dated 31st
May, 2006 for supply of industrial gases to a customer
by installing an air separation plant (the plant) at the
customer’s steel works premises on Build–Own-Operate
(BOO) basis. As per one of the clauses of the ‘general
conditions’ of the agreement, the company is liable to
pay ‘late start liquidated damages’ to the customer if
there is a delay in the commencement of gas supply
from the plant after the target commencement date due
to the company’s fault and the customer is ready to
consume gas at its expanded steel making facility.
4. As per the agreement, the target commencement date
was 31st March, 2008, being the date on which the
company estimated that it would be able to start fulfilling
42 THE CHARTERED ACCOUNTANT september 2010
418
its obligation to supply gas from the plant. However, as per
the querist, due to delay by the main equipment supplier of
the plant and other related problems at site, the company
was not ready to commission the plant and commence
supplies on the target commencement date and instead,
was ready for supply of gases only in November 2008. At
this stage, due to the economic downturn, the customer
requested to further delay the start-up of the plant which
was finally commissioned in February 2009.
5. The company capitalised the total cost of the project in
its books of account in March 2009 after trial runs of
the plant were successful. The company follows the
calendar year as its financial year. The querist has stated
that the company is now in the process of negotiating
a settlement with the customer for the delays in plant
commissioning on both its own as well as on the
customer’s part. As a result of such negotiation, the
company will have to pay late start liquidated damages
to the customer for the delayed commissioning of the
plant due to its inability to have the plant ready for supply
of gases on the appointed target commencement date
of 31st March, 2008.
6. The querist has drawn the attention of the Committee
to paragraph 20 of Accounting Standard (AS) 10,
‘Accounting for Fixed Assets’, which states as under:
“20. The cost of a fixed asset should comprise its
purchase price and any attributable cost of bringing the
asset to its working condition for its intended use.”
Asperthequerist,theplantwasbroughttoitsworkingcondition
for its intended use, i.e., for supply of gas to the customer
in November 2008. The point for consideration is whether
liquidated damages payable for delay in commissioning
the plant should be treated as cost attributable for bringing
the plant to its working condition for its intended use (supply
of gas to the customer) within the ambit of paragraph
20 of AS 10.
B. Query
7. Based on the facts stated above, the querist has sought
the opinion of the Expert Advisory Committee on the
following issues:
 419 OPINION

(a) Whether the amount to be paid by the company

on account of liquidated damages due to delay in
commencement of supply of gases to the customer
consequent upon delay in bringing the plant to
its working condition on the appointed target
commencement date can be capitalised in its books
of account as additional cost attributable to the
project (capitalised in March 2009) in accordance
with the provisions of AS 10 and any other related
Accounting Standard or statute.
(b) If the answer to (a) above is in the negative, whether
the liquidated damages payable can be treated as
deferred revenue expenditure to be amortised over
a period of 3 to 5 years after the commencement of
commercial production.
(c) If the answer to (b) above is also in the negative,
whether the only option available to the company
will then be to charge off the amount of liquidated
damages as an expense in the profit and loss
account .
(d) Generally, on any other issue related to the subject.

C. Points considered by the Committee

8. The Committee notes that the basic issue raised in the
query relates to the treatment of liquidated damages
payable by the company for delay in commissioning
of the plant. The Committee has, therefore, considered
only this issue and has not touched upon any other
issue that may arise from the Facts of the Case, such
as, appropriateness of capitalisation of the plant by
the company in March 2009, compensation receivable
by the company, if any, on account of request by the
customer to delay the start-up of the plant, compensation
receivable by the company, if any, for the delay by the
main equipment supplier of the plant, expenses incurred
during the period the plant is ready to commence
production and the actual date of commencement of
production, etc.

9. The Committee notes from the Facts of the Case that

the plant has been constructed by the company under
BOO scheme. Therefore, in the view of the Committee,
the provisions related to self-constructed assets would
apply in the present case. In this context, the Committee
notes paragraph 20 of AS 10 as reproduced by the
querist in paragraph 6 above, and paragraph 21 of AS
10 which is reproduced below:
“21. The cost of a self-constructed fixed asset should
comprise those costs that relate directly to the
specific asset and those that are attributable to the

september 2010 THE CHARTERED ACCOUNTANT 43

 OPINION
construction activity in general and can be allocated
to the specific asset.”
The Committee further notes that paragraph 10.1
of AS 10 provides that in arriving at the gross book
value of self-constructed fixed assets, the same
principles apply as those described in paragraphs
9.1 to 9.5. The Committee notes that paragraph 9.1 is
relevant to the case under consideration which states
as below:
“9.1 The cost of an item of fixed asset comprises
its purchase price, including import duties and other
non-refundable taxes or levies and any directly
attributable cost of bringing the asset to its working
condition for its intended use; any trade discounts
and rebates are deducted in arriving at the purchase
price. Examples of directly attributable costs are:
(i) site preparation;
(ii) initial delivery and handling costs;
(iii) installation cost, such as special foundations
for plant; and
(iv) professional fees, for example fees of architects
and engineers.
The cost of a fixed asset may undergo changes
subsequent to its acquisition or construction on
account of exchange fluctuations, price adjustments,
changes in duties or similar factors.”
10. The Committee notes from the Facts of the Case that
the ‘late start liquidated damages’ are payable by the
company on account of delay in the commencement of
gas supply from the plant on the target commencement
date. The Committee is of the view that such expenditure
cannot be said to be attributable to bringing the plant
to its working condition for its intended use. Such
expenditure is not attributable to the construction
activity. It is also not in the nature of price adjustment on
account of which cost of a fixed asset may undergo a
change subsequent to its construction. The Committee
is of the view that the liquidated damages are of the
nature of a penalty resulting from non-fulfillment of
the terms of the agreement, in this case, the target
date of commencement of gas supply. The amount of
liquidated damages is a compensation to the customer
for loss of revenue on account of non-supply of gas
by the company. Accordingly, the Committee is of the
view that such expenditure cannot be capitalised and
should be expensed by way of charge to the profit and
loss account as no future benefit is expected from the
same.
44 THE CHARTERED ACCOUNTANT september 2010
420
D. Opinion
11. On the basis of above, the Committee is of the following
opinion on the issues raised in paragraph 7 above:
(a) The amount to be paid by the company on account of
liquidated damages due to delay in commencement
of supply of gases to the customer consequent upon
delay in bringing the plant to its working condition on
the appointed target commencement date cannot be
capitalised in its books of account as additional cost
attributable to the project (capitalised in March 2009) in
accordance with the provisions of AS 10 or any other
Accounting Standard or statute.
(b) The liquidated damages payable cannot be treated
as deferred revenue expenditure to be amortised
over a period of 3 to 5 years after commencement of
commercial production as explained in paragraph 10
above.
(c) The company should charge off the amount of liquidated
damages as an expense in the profit and loss account.
(d) The Committee, as per its Advisory Service Rules,
answers only specific queries raised by the querist
on accounting and/or auditing principles and allied
matters and as a general rule, the Committee does not
answer open-ended general queries. See paragraph
8 above.
1 The Opinion is only that of the Expert Advisory
Committee and does not necessarily represent the
Opinion of the Council of the Institute.
2 The Opinion is based on the facts supplied and in
the specific circumstances of the querist.
3 The Compendium of Opinions containing the
Opinions of Expert Advisory Committee has been
published in twenty-seven volumes which are also
available in the form of a CD. Each volume of the
Compendium and the CD are available for sale at
the Institute’s office at New Delhi and its regional
council offices at Mumbai, Chennai, Kolkata and
Kanpur. The CD can also be accessed at the
Institute’s website, www.icai.org
4 Recent opinions of the Committee are available
on the website of the Institute under the head
‘Resources’.
5 Opinions can be obtained from EAC as per its
Advisory Service Rules which are available on the
website of the ICAI, under the head ‘Resources’.
For further information, write to eac@icai.org
n
 421 ACCOUNTING

Introduction to IFRS
The pace of development in financial reporting has accelerated sharply during the last few years, especially
since the decision of the European Commission to force the consolidated financial statements of listed
companies to be prepared under the auspices of the International Accounting Standards Board (IASB) from
2005 onwards, which has sole responsibility for establishing International Financial Reporting Standards
(IFRSs). Other components of the structure are the Trustees of the IASC Foundation, the IFRIC and the
Standards Advisory Council (SAC). Read on to know more.

The International Accounting called International Financial Reporting

standards Board (IASB) held its first
official meeting in London in April 2001,
where it was resolved that all Standards
and Interpretations issued by the
International Accounting Standards
Committee (IASC) should continue to
be applicable unless and until they are
amended or withdrawn. It was agreed
that the new IASB standards would be
Standards (IFRSs). When the term
IFRS is used, it includes standards
and interpretations approved by the
IASB and the International Accounting
Standards (IAS), and interpretations
issued by the International Financial
Reporting Interpretations Committee
(IFRIC). The revised structure of the
IASC is illustrated below:

CA. Aditya Singhal

(The author is a member of the Institute.
He can be reached at eboard@icai.org)

september 2010 THE CHARTERED ACCOUNTANT 45

 ACCOUNTING
IFRS 1 deals with the basic defi-
nitions, scope, accounting policies,
exceptions and lot of other things. IASB
issued IFRS 1 in June 2003, which
replaced SIC (Standing Interpretations
Committee)-8 First-time Application
of IASs as the primary basis of
accounting. The Board developed the
IFRS to address concerns about the
full retrospective application of IFRSs
required by SIC-8. Subsequently,
IFRS 1 was amended many times
to accommodate first-time adoption
requirements resulting from new or
amended IFRSs. As a result, the IFRS
became more complex and less clear.
In 2007, therefore, the Board proposed
as part of its annual improvements
project to change IFRS 1 to make it
easier for the reader to understand and
to design it to better accommodate
future changes. The version of IFRS 1
issued in 2008 retains the substance
of the previous version, but within a
changed structure. It replaces the
previous version and is effective for
entities applying IFRSs for the first time
for annual periods beginning on or
after July 1, 2009. Earlier application is
permitted.
Thus, before understanding more
about IFRS, we first need to understand
what is IFRS and what is the scope of
IFRS, i.e. which entities need to follow
IFRS.
IFRSs
[IFRS 1 (Appendix A)]
Standards and Interpretations adopted
by the IASB. They comprise:
a) IFRS;
b) IAS; and
c) Interpretations developed by the
IFRIC or the former SIC.
The objective of IFRS 1 is to ensure
that an entity’s first IFRS financial
statements and its interim financial
reports for part of the period covered
by those financial statements contain
high-quality information that:
a) Is transparent for users and
46 THE CHARTERED ACCOUNTANT september 2010
422
comparable over all periods In 2007, the
presented; International
b) Provides a suitable starting point Accounting Standards
for accounting in accordance with Board proposed as part of its
the IFRSs; and annual improvements project
c) Can be generated at a cost that to change the IFRS 1 to make
does not exceed the benefits. it easier for the reader to
understand and to design it to
Use and Scope of IFRS better accommodate future
Recent years have seen a rapid changes. The version of IFRS
expansion in the number of countries 1 issued in 2008 retains the
applying IFRSs. Overall, the IFRS substance of the previous
are used by listed entities in over 110 version, but within a changed
countries, and by unlisted entities in structure. It replaces the
over 80 countries. Detailed country-by- previous version and is effective
country list of the status of adoption of for entities applying IFRSs for
IFRSs is available at www.Isaplus.com. the first time for annual periods
From the Indian perspective, the beginning on or after July 1,
core group constituted by the Ministry of 2009. Earlier application is
Corporate Affairs recently at its meeting permitted.
held on January 11, 2010, has agreed
for two sets of the accounting standards.
The first set converges with the IFRS
applicable to some specified companies
and second set to other companies
including SMEs.
In the first set of standards,
IFRSs would be applicable into three
phases:
a) In phase I, it would be applicable
w.e.f April 1, 2011, to:
i. Companies which are part of
NSE - Nifty 50 & BSE - SENEX
30,
ii. Companies whose shares or
other securities are listed on
stock exchanges outside India
and
iii. Companies, whether listed or
not, which have a net worth in
excess of R1000 crore.
b) In Phase II, it would be applicable
w.e.f April 1, 2013, to the companies
whether listed or not, having a net
worth exceeding `500 crore but
not exceeding `1000 crore.
c) In Phase III, it would also be
applicable w.e.f April 1, 2014, to
all the remaining listed companies
having net worth less than `500
crore.
 423
Under the second set, IFRS
would not be applicable to:
a) The non-listed companies which
have net worth of `500 crore or
less and whose shares or other
securities are not listed on stock
exchanges outside India
b) Small-size companies [Investment
in plant and machinery > `25 lakh
< `5 crore]
c) Medium-size companies [Invest-
ment in plant and machinery > `5
crore < `10 crore]
Please note above companies need to
follow International Generally Accepted
Accounting Principles (IGAAP) as
issued by The Institute of Chartered
Accountants India (ICAI).
If any country has agreed to adopt
IFRS, the IFRS 1 defined the Scope of
IFRS as below for eligible entities in the
country.
An entity shall apply IFRS 1 in:
a) Its first IFRS financial statements,
and
b) Each interim financial report, if any,
that it presents in accordance with
IAS 34 Interim Financial Reporting
for part of the period covered by its
first IFRS financial statements.
An entity’s first IFRS financial
statements are the first annual financial
statements in which the entity adopts
the IFRSs by an explicit and unreserved
statement in those financial statements
of compliance with the IFRSs. Financial
statements in accordance with the
IFRSs are an entity’s first IFRS financial
statements if, for example, the entity:
a) Presented its most recent previous
financial statements:
i. In accordance with national
requirements that are not
consistent with the IFRSs in all
respects;
ii. In conformity with the IFRSs
in all respects except that
the financial statements did
not contain an explicit and
unreserved statement that they
complied with the IFRSs;
iii. Containing an explicit statement
of compliance with some, but
not all IFRSs;
iv. In accordance with national
requirements inconsistent with
the IFRSs using some individual
IFRSs to account for items for
which national requirements
did not exist; or
v. In accordance with national
requirements, with a recon-
ciliation of some amounts to
september 2010
ACCOUNTING
the amounts determined in
accordance with IFRSs;
b) Prepared financial statements in
accordance with the IFRSs for
internal use only without making
them available to the entity’s
owners or any other external
users;
c) Prepared a reporting package
in accordance with the IFRSs for
consolidation purposes without
preparing a complete set of
financial statements as
d) Did not present financial state-
ments for previous periods.
IFRS 1 also gives example of
when it does not apply. These
are when an entity:
a) Stops presenting financial
statements in accordance with
national requirements, having
previously presented them as
well as another set of financial
statements that contained an
explicit and unreserved statement
of compliance with the IFRSs;
b) Presented financial statements in
the previous year in accordance
with national requirements
and those financial statements
contained an explicit and
unreserved statement of
compliance with the IFRSs; or
c) Presented financial statements in
the previous year that contained an
explicit and unreserved statement
of compliance with the IFRSs, even
if the auditors qualified their audit
report on those financial statements.
IFRS 1 does not apply to changes
in accounting policies made by an entity
that already applies the IFRSs. Such
changes are the subject of:
a) Requirements on changes in
the accounting policies in IAS 8
accounting policies, changes in
accounting estimates and errors;
and
b) Specific transitional requirements
in other IFRSs. n
THE CHARTERED ACCOUNTANT 47
 ACCOUNTING 424

International Financial Reporting Standards:

The Future of Indian GAAP
Accounting and business are interrelated in IFRS. Changes in IFRS are pervasive and not limited to accounts
department. IFRS is a principle-based model as compared to rule-based Indian GAAP. IFRS requires
extensive use of fair valuations for measurement of assets and liabilities. The objective of IFRS is to set the
balance sheet right, and hence a significant volatility may come in profit & loss statement. There are three
principles laid down in IFRS, i.e. substance over form, use of fair value and recognising time value of money.
This article presents an analysis of the concept.

IFRS is a principle-based model as Under IFRS, there is need to apply

CA. Shalini Tibe
(The author is a member of the Institute.
She can be reached at eboard@icai.org)
compared to rule-based Indian GAAP.
IFRS requires extensive use of fair
valuations for measurement of assets
and liabilities. The objective of IFRS
is to set the balance sheet right, and
hence a significant volatility may come
in profit & loss statement.
There are three principles laid down
in IFRS, i.e. substance over form, use
of fair value and recognising time value
of money.
Profit planning and budgeting
need to be tuned to incorporate the
expected increase in income volatility,
arising out of fair valuation system.
Staff would need training not only in
IFRS accounting but also the changes
in the products and processes entailed
by the conversion
professional judgment consistent with
intent and spirit of standards.
Various countries have adapted to
IFRS in different ways, often embedding
local cultures and that is why there are
no standard rules but broad principles
which define the outer boundary of
accounting.
IFRS questions valuation of
fixed assets on historical cost basis,
questions application of uniform rates
of depreciation on all components of a
fixed asset as also the amortisation of
intangible assets such as goodwill or
patents.
In IFRS off-balance sheet trans-
actions had been made as part of
accounts; it brings a whole new
meaning to the reported numbers.

48 THE CHARTERED ACCOUNTANT september 2010

 425 ACCOUNTING

It defines control of entities not Effect of Dividend:

through percentage of holdings but by
the decision-making power inherent in Areas of IFRS Indian GAAP
difference
the parent company.
Time of Year in which Year for which it
Top management has, thus, to work accounting it is proposed. is proposed. It is
out new targets of earnings depending of Final It is non- adjusting event
Dividend adjusting
on the direction of impact caused by
event
the new accounting principles.
Disclosure Deduction in Appropriation of
Earnings will no more be a steady Statement of Profits
figure that can be easily targeted changes in

depending as it is not just on sales and

expenses but also changes in asset
values and the ability to measure those
correctly.
Key Differences in IFRS vis-
a-vis Indian GAAP
• Concept of group – Companies
Act treats Indian companies as
separate legal entity whereas IFRS
promotes a group concept
• Fair Valuation – IFRS based on fair
value concept and not historical
cost
• Form and Substance of financial
statements
• Correction of past errors – Under
IFRS, these are incorporated in the
accounts of the years it pertains
to, even if audited and adopted
by shareholders whereas, under
Indian GAAP, these are treated as
adjustment in the current year
• Depreciation on revalued assets
needs to be routed through
income statement under IFRS –
Companies Act disallows such a
treatment
• Companies Act defines assets by
classes which can be depreciated
at given rates, whereas as
IFRS promotes the concept of
components of fixed assets based
on their usefulness
• Preference shares are classified
as debt instrument and not equity
effecting profitability and capital
adequacy ratio
• No concept of proposed dividend
– Declaration of dividend only
when approved by shareholders
Shareholders
Equity
With India going global, corporate
management is now feeling the pressure
for reforming accounting practices
and level of transparency arising from
lenders, regulatory agencies, financial
analyst and above all board of directors
who realise that it is the quality of
information which will determine how
efficiently they have discharged their
responsibilities towards the good
corporate governance.
There is no doubt in that the IFRS
results into better accounting quality.
There is more detailed disclosure under
IFRS as compared to what companies
do under the Indian GAAP.
Every organisation will have to
review their business policy and
procedures, valuation models,
agreements, etc. Instead in many
organisations, most of them are carried
forward from year to year.
Financial statement will
include:
• Consolidated income statement
• Consolidated statement of other
comprehensive income
• Consolidated balance sheet
• Consolidated statement of cha-
nges in equity
• Consolidated cash flow statement
Comprehensive income
includes:
• Profit/loss for the year
continuing operations
• Profit/loss for the year
discontinuing operations
There are differences
in IFRS vis-a-vis
Indian GAAP in
respect of many areas such as
concept of group, fair valuation,
treatment of fixed assets,
prior period items, proposed
dividend, preference share
capital, etc. There is no doubt in
that the IFRS results into better
accounting quality. There is more
detailed disclosure under IFRS as
compared to what companies do
under the Indian GAAP.
• Other Comprehensive income
• Exchange differences in trans-
lating foreign operations
• Gain/loss on fair value changes
in AFS financial instruments,
cash flow hedges
• Actuarial gain/loss on defined
benefit pension plans
• Share of other comprehensive
income of associates
• Income tax relating to items of
other comprehensive income
• Total comprehensive income for
the year
In the Indian GAAP, the balance
sheet format is to start with liabilities.
Within the liabilities, the capital is
shown first. After the liabilities, the
asset is shown.
Under IFRS, the treatment is
reverse:
• First assets in the order of liquidity.
from • Next is liability and to start with all
the borrowings are taken first.
from • Last item will be equity capital, which
is the net worth of the entities.

september 2010 THE CHARTERED ACCOUNTANT 49

 ACCOUNTING
Treatment of Tangible
Assets Under IFRS
Property, plant and equipment (PPE)
represent assets that the enterprise
uses for production or administration.
It does not intend to sell those assets
in the normal course of business.
Examples of PPE are land, building,
machinery, furniture, vehicles and
computer.
First time adoption of IFRS for
PPE
An entity can use fair value as deemed
cost on first-time adoption of IFRS.
Or,
It has to apply retrospective
application which means recalculate
carrying amount of each PPE item
according to IFRS since its purchase
date including transaction cost, useful
life and residual value.
Suggestion: However, fair value as
deemed cost is more appropriate since
there would be practical difficulties
for companies to do retrospective
application from the date when the
asset has been purchased.
Fair value for PPE
Fair value for land and buildings is
usually determined from market-
based evidence by appraisal normally
undertaken by professionally qualified
valuation officers and for other items of
PPE their market value is determined
by appraisal.
If there is no market-based evidence
of fair value because of special nature
of asset, it has to be determined on
basis of either Income Approach
or Depreciated Replacement Cost
Approach.
Methods for subsequent
measurement of PPE
There are two methods available for
subsequent measurement of PPE, i.e.
Revaluation Model and Cost Model.
However, most of the LSE-listed
companies have adopted Cost Model.
50 THE CHARTERED ACCOUNTANT september 2010
Generally, companies who are in
business of Investment property prefer
revaluation model.
Suggestion: Cost model is pref-
erable over revaluation model mainly
because of the following reasons:
• Once revaluation model is adopted
one has to do frequent revaluation
as prescribed by IAS 16 which
requires expertise of professional
valuer which may not be cost
effective for companies.
• Also if the property prices changes
drastically one has to book the
difference in Income Statement
resulting in huge volatility
which may not be accepted to
management of company.
Reclassification
Movement from Cost Model to
revaluation model is permitted however
vice versa is not permitted which means
if Revaluation model once followed
cannot move to Cost Model.
Suggestion:Companies should
care-fully examine the impact before
making policy and procedures in
respect of the same.
Main Difference between
Indian GAAP and IFRS for
Fixed Assets/Property, Plant
& Equipment
1. Under Indian GAAP, the
terminology used is Fixed Assets
whereas, under IFRS, it is termed
as Property, Plant and Equipment.
2. Standard IAS 16 covers Property,
Plant and Equipment (PPE)
whereas there are two standards
for Fixed Assets under Indian
GAAP, i.e. AS-10 Fixed Assets and
AS-6 Depreciation.
3. As per Indian GAAP, subsequent
expenditure related to item of fixed
assets are to be capitalised only
if they increase the future benefit
from the existing asset beyond its
previously assessed standard of
performance whereas, under IFRS,
426
Component
accounting requires
that if an asset has
several components, which can
be physically separated from
the principal asset and which
have significantly different
useful life. These should be
recognised separately and
should be depreciated based
on their respective useful lives.
Firstly start allocating amount to
significant parts and depreciate
separately. Then group together
significant parts with same
useful life and depreciation
methods. The remainder of the
item is to be also depreciated
separately.
subsequent costs are evaluated
on the basis of same recognition
principles as that of initial cost for
recognising as item of PPE.
4. Under IFRS, cost of major inspe-
ctions should be capitalised
whereas, under the Indian GAAP,
there is no specific provision for the
same.
5. IFRS for PPE is based on
component approach. Under this
approach, “Each part of an item of
PPE with a cost that is significant
in relation to the total cost of
the item shall be depreciated
separately” whereas the Indian
GAAP does not mandatory require
full adoption of the component
approach.
6. Under IFRS, the residual value and
useful life of an asset be reviewed
at least each financial year end and
if it differs from previous estimate,
it is considered as change in
accounting estimate whereas such
a review is not required under the
Indian GAAP.
7. Change in depreciation method
is considered as change in
accounting estimate under IFRS,
whereas, under the Indian GAAP,
 427 ACCOUNTING

it is considered as change in the purpose of separate recognition. is removed.

accounting policy.
8. IFRS requires an entity to choose
either the cost model or the
revaluation model as its accounting
policy and to apply that policy
to entire class of PPE. Under
Revaluation model, revaluation
will be with respect to fair value
of item of PPE. It also says that
revaluation shall be made with
sufficient regularity to ensure
that the carrying amount does
not materially differ from the fair
value as at the balance sheet date
whereas, under the Indian GAAP,
Revaluation Approach does not
specifically state adoption of
fair value basis and also about
frequency of revaluation of
assets.
Judgment required for
applying depreciation rates
and method:
When deciding on depreciation rates
and method, most common factors that
can be taken into account are expected
rate of technological developments,
expected market requirement and
the expected pattern of usage of the
assets.
Review of residual life
When reviewing residual values, an
entity would estimate the amount that it
would currently obtain for the disposal of
the asset after deducting the estimated
cost of disposal if the asset were already
of the age and condition expected
at the end of its useful economic
life.
IFRS for PPE is based on
Component Approach. Under this
approach, “Each part of an item of PPE
with a cost that is significant in relation
to the total cost of the item shall be
depreciated separately.”
The challenge is to determine
the extent to which the asset should
be broken down into components for
How to Do Component
Accounting?
Component accounting requires that
if an asset has several components,
which can be physically separated
from the principal asset and which
have significantly different useful lives,
the components should be recognised
separately and depreciated based on
their respective useful lives.
Firstly, start allocating amount
to significant parts and depreciate
separately. Then group together
significant parts with same useful life
and depreciation methods.
The remainder of the items is
to be also depreciated separately.
Remainder consists of parts that are
individually not significant.
Regular major inspection perf-
ormed can also be considered as
component of an item of PPE and can
be depreciated separately.
For instance:
Suppose cost of acquisition of building
is `100,000 allocated to following
components:
Component Amount Depreciation
period
Interior 10000 5 years
Restoration 12000 10 years
Elevators 15000 15 years
Building 63000 30 years
Above is an illustrative example.
An opinion of expert valuers has
to be sought for above information
by companies for component
accounting.
Replacement of components
of PPE:
• Capitalise the cost of replacing
major component as separate
assets such as replacement of
elevators.
• Net book value of old component
• Routine repair and maintenance
expenditure is to be expensed as
incurred.
Link between Depreciation
and Impairment under IFRS
When an item of Property, Plant
and Equipment (PPE) is impaired,
i.e. recoverable amount < carrying
amount, carrying amount is reduced to
the amount of recoverable amount.
Asset should no more be carried
more than their recoverable amount.
Such a decrease in carrying amount
is impairment and is booked in profit
and loss.
After recognition of an impairment
loss, the depreciation charge of the
asset shall be adjusted in the future
periods to allocate the asset’s revised
carrying amount over its remaining
useful life.
Example 1:
An entity acquires equipment for `100.
Economic life of equipment is 10 years
but entity’s policy is to renew such
equipment every 5 years, i.e. useful life
is 5 years.
Residual value = 20
Depreciation Plan:
Year Depreciation Accumulated Carrying
Charge Depreciation amount at
year end
1 (100-20)/5 = 16 16x1 = 16 100-16 = 84
2 (100-20)/5 = 16 16x2 = 32 100-32 = 68
3 (100-20)/5 = 16 16x3 = 48 100-48 = 52
4 (100-20)/5 = 16 16x4 = 64 100-64 = 36
5 (100-20)/5 = 16 16x5 = 80 100-80 = 20
Under IFRS, there is need to
review estimate of residual value at
each financial year end whereas,
under Indian GAAP, there is no need
for an annual review. Below example
illustrates depreciation plan when
there is change in estimate of residual
value.
Suppose in Example 1, residual value
estimated in year 4 is 10:

september 2010 THE CHARTERED ACCOUNTANT 51

 ACCOUNTING 428

There are three Suppose in Example 1, depreciation Recognition of Intangible

approaches to value
intangible assets
which are ‘Market Approach’,
‘Cost Approach,’ and ‘Income
Approach’. Market approach
is considered first in hierarchy
for determining fair value. It
assumes comparable market
transactions, comparable
company transaction or stock
market quotations. But this
approach is not considered
as effective most intangible
assets and intellectual property
because of lack of market
information available. Income
approach is mostly suitable
for appraisal for assets such as
contracts, licenses and royalty
agreements, patents and
trademarks.
Depreciation Plan:
Year Depreciation Accumulated
Charge Depreciation
1 (100-20)/5 = 16 16x1 = 16
2 (100-20)/5 = 16 16x2 = 32
test is performed in year 3 and Assets
estimation of recoverable amount at An intangible asset shall be recognised
year end is 45. if, and only if:
Now, if you see in Example 1 above • It is probable that the expected
the Net book value at year end 3 is 52. future economic benefits or service
potential that are attributable to the
Thus Impairment is 52-45 = 7 asset will flow to the entity and
Year Depreciation Accumulated Carrying • The cost or fair value of the asset
Charge Depreciation amount at
year end
can be measured reliably.
1 (100-20)/5 = 16 16x1 = 16 100-16 = 84 An entity shall assess the probability
2 (100-20)/5 = 16 16x2 = 32 100-32 = 68
of expected future economic benefits
or service potential using reasonable
3 (100-20)/5 = 16 16x3 = 48 100-55 = 45
16 + 7 = 23 48+7 =55 and supportable assumptions that
4 (45-20)/2 = 12.5 55+12.5 = 100-67.5 = represent management’s best estimate
67.5 32.5
of the set of economic conditions
5 (45-20)/2 = 12.5 67.5+12.5 100-80 = 20
= 80 that will exist over the useful life of the
asset.
Intangible Assets An intangible asset shall be
An intangible asset is an identifiable measured initially at cost. Where an
non-monetary asset without physical intangible asset is acquired through
substance and shall have control a non-exchange transaction, its initial
over a resource, and existence of cost at the date of acquisition shall
future economic benefits or service be measured at its fair value as at that
potential. date.
Carrying An entity controls an asset if the
amount at
year end
entity has the power to obtain the Valuation of intangible assets
future economic benefits or service There are three approaches to value
100-16 = 84
potential flowing from the underlying intangible assets:
100-32 = 68

3 (100-20)/5 = 16 16x3 = 48 100-48 = 52

4 (100-48-10)/2 = 21 48+21 = 69
5 100-69-10 = 21 69+21 = 90
Under IFRS, there is a need to
review the estimate of useful life at
each financial year end whereas,
under Indian GAAP, there is no need
for an annual review. Below example
illustrates depreciation plan when there
is change in estimate of useful life.
Suppose now in Example 1, the useful
life is revised in year 3 as 4 years:
Depreciatiotn Plan:
Year Depreciation Accumulated
Charge Depreciation
1 (100-20)/5 = 16 16x1 = 16
2 (100-20)/5 = 16 16x2 = 32
3 (68-20)/2 = 24 32+24 = 56
4 (44-20)/2 = 24 56+24=80
resource and to restrict the access of
others to those benefits or that service
100-69 = 31
potential.
100-90 = 10
The capacity of an entity to control
the future economic benefits or
service potential from an intangible
asset would normally stem from legal
rights that are enforceable in a court
of law. In the absence of legal rights,
it is more difficult to demonstrate
control. However, legal enforceability
of a right is not a necessary condition
for control because an entity may be
able to control the future economic
benefits or service potential in some
other way.
Carrying Common examples are computer
amount at
year end
software, patents, copyrights, motion
100-16 = 84
picture films, lists of users of a service,
100-32 = 68
acquired licences, acquired import
quotas and relationships with users of
100-56 = 44
a service.
100-80 = 20
• Market approach
• Cost approach
• Income approach
Market approach is considered
first in hierarchy for determining fair
value. It assumes comparable market
transactions, comparable company
transaction or stock market quotations.
But this approach is not considered as
effective most intangible assets and
intellectual property because of lack of
market information available.
There are two techniques for
valuation of Intangible assets under
Cost approach: consider the historical
cost of creating the assets, or, consider
the current re-creation cost.
Income approach is mostly
suitable for appraisal for assets such
as contracts, licenses and royalty
agreements, patents and trademarks.
It is highly dependent on accuracy

52 THE CHARTERED ACCOUNTANT september 2010

 429
of future sales forecasts and earning
projections. Generally forecast over a
five year period is used.
Concept of Revenue under
IFRS
As per IAS 18, “Revenue is the
gross inflow of economic benefits
during the period arising in course
of ordinary activities of an enterprise
when those inflow result in increases
in equity, other than increases
relating to contributions from equity
participants”
IAS 18 applies in accounting for
revenue arising from:
• Sale of goods
• Rendering of services
• Royalties, dividends
• Interest (Effective Interest Rate)
Main exclusion from IAS 18:
• Revenue arising from construction
contract
• Lease income
• Dividend arising from equity
method investments
• Insurance contracts
• Changes in fair value of financial
assets and liabilities
Revenue shall be measured at fair
value of the consideration received /
receivable. Fair value has been defined
as the amount for which an asset
could be exchanged or liability settled
between knowledgeable, willing parties
in an arm’s length transaction.
IFRS – Effective Interest
Rate (EIR)
The Effective Interest Rate (EIR)
method is a method of calculating the
amortised cost of a financial asset or
a financial liability and of allocating the
interest income or interest expense
over the relevant period. It is a new
concept to the existing Indian GAAP.
This method is a method of
calculating the amortised cost of a
financial asset or a financial liability
and of allocating the interest income
As per IAS 18,
“Revenue is the gross
inflow of economic
benefits during the period
arising in course of ordinary
activities of an enterprise when
those inflow result in increases
in equity, other than increases
relating to contributions from
equity participants.” IAS 18
applies in accounting for
revenue arising from ‘sale of
goods’, ‘rendering of services,’
‘royalties & dividends,’ and
‘Interest (Effective Interest
Rate)’.
september 2010
ACCOUNTING
or interest expense over the relevant
period. The EIR used in the allocation
process is the rate that exactly
discounts estimated future cash
flows (receipts or payments) to the
net carrying amount of the financial
instrument through the expected life of
this instrument.
EIR calculation is not the same
as for Yield to Maturity (YTM). YTM is
nothing but the IRR of the bond. But
EIR may also include some non-interest
components such as loan origination
charges and processing fees as part
of the effective rate.
Under IFRS, income from loans
and receivables has to be recognised
through application of effective interest
rate.
An illustration given below gives
better clarity for calculation of EIR:
Given Data:
Nominal value (payable in 5 years'
time)
INR 1,250
Loan origination fee (inflow) INR 40
Transaction costs (directly related to INR (90)
loan origination, outflow)
Net transaction costs (40-90) INR (50)
Fair value (net of transaction costs and INR 1,300
fees) (1250+50)
Coupon Rate 4.70%
Calculation of Internal Rate of
Return based on above data:
Year 0 -1300
Year 1 (1250*4.7%) 59
Year 2 (1250*4.7%) 59
Year 3 (1250*4.7%) 59
Year 4 (1250*4.7%) 59
Year 5 1250 + (1250*4.7%) 1309
Thus, IRR will work out to 3.83 per
cent.
Thus, companies have to maintain
coupon rate as well as EIR which
practically for each transaction will be
a major task and will add significantly
load on the IT systems. n
THE CHARTERED ACCOUNTANT 53
 AUDITING 430

An Overview of Attestation Services in India

The attestation function is a core
competence area of chartered
accountant professionals. The
society at large is relying on the
attestation services for ensuring
that the public funds are utilised
properly. In case where scams are
discovered and millions of dollars
gets into wrong hands, we should
realise that either there were
no attestation services utilised
or, if they were, then there were
lapses. The need of the hour is to
ensure that a significant section
of economic activities in the
country come under the ambit of
independent attestation services.
If all the financial transactions
are audited properly, no scam
can take place in the country, and
by ensuring proper utilisation of
funds we can improve the lot of
our citizens.

New Dawn of Accountancy accountants involves checking of

CA. K. L. Chandak
(The author is a member of the Institute.
He can be reached at eboard@icai.org)
Profession in India
After India got Independence in the
year 1947, the national leaders realised
the need of an organised accounting
profession to contribute towards the
economic growth and development of
the country. Therefore, The Institute of
Chartered Accountants of India (ICAI)
was established as a statutory body
under the Chartered Accountants
Act, 1949 (Act No. XXXVII of 1949) for
regulating the profession of chartered
accountants in India.
Significance of CAs in
Attestation Services
The key role of profession of chartered
all types of financial statements and
certifying them. It inter-alia includes
services in the nature of Statutory
Audit, Internal Audit, Inspection Audit,
Tax Audit, Stock Audit, Certification and
allied various other attestation services.
Since the establishment of ICAI in the
year 1949, only the practicing members
who are holding either the part time
or full time certificate of practice, are
empowered to attest and certify various
financial statements which are then
relied upon by the society/stakeholders.
Thus, in a way, this entrusts an absolute
exclusivity to chartered accountants
in the field of attestation services as
described above.

54 THE CHARTERED ACCOUNTANT september 2010

 431
Expertise in the Field of
Attestation Services
The primary area of expertise rendered
to a student of chartered accountancy
is with respect to auditing and
accounts. But due to exceptional
quality of the course, the student gains
substantial expertise in the allied areas
of the Companies Act, Income Tax,
Wealth Tax, Gift Tax, Service Tax, Excise
& Customs, Sales Tax, FEMA and lot
of other enactments which directly or
indirectly affects financial transactions.
The reason for such a vast course
being that a chartered accountant has
to take a view in totality and need to
be capable of understanding the larger
picture before forming a view on the
micro topic. This provides him ability
to understanding complex situation
involving various enactments effecting
a certain transaction and ensures that
the position is reflected as desired and
any violation of any provisions can be
highlighted.
Expanded Area of Services
in Various Allied Areas
As the path to chartered accountancy
enables a professional student clear
At the time of setting
up of the ICAI, it
was thought beyond
doubt that the attestation
services shall be carried out and
treated as profession and not as
a business. Therefore, there was
no scope for advertisement, etc.,
for attestation services. Even the
size of name board was kept to
a limited size just to reach the
location of the member and not
for his publicity. It was presumed
that the clients will avail the
services of a professional by
considering the experience,
credibility, integrity and
capability. This basic theme was
very critical as the attestation
services were considered the
need of the society at large.
edge on various peers, the services
of chartered accountants are being
availed by many sectors in India as
well as abroad both in private- and
public-sector companies as well as in
the administration of the Central and
State Governments. These sectors
not only look forward to their expertise
in attestation services, but utilise the
overall capability of the chartered
accountants.
Since the setting up of the Institute
more than 60 years ago, till date about
165,000 candidates have qualified
as chartered accountants. Nearly 50
per cent thereof are in service and
a significant number thereof have
occupied eminent positions in their
respective organisations such as
chairperson at regulatory bodies,
chairperson of banks and insurance
companies, members of ITAT, etc.
The remaining about 50 per cent
members are in full time practice.
Because of their expertise, they not
only render attestation services but
have engaged themselves in other
areas such as providing services in the
field of Accounting, Taxation, Company
Law Matters, Financial Consultancy,
Corporate Governance, Due Diligence,
Transfer Pricing and various other
areas.
Need for Attestation
Services
With the rapid economic development
in the country in the last 63 years,
large sums are being spent on its
developmental projects both in
private as well as in public sector and
therefore so far as economic activities
are concerned they have increased
manifold. Billions are being spent
every year by the Central Government,
the State Governments and municipal
corporations, panchayats, etc., on
various developmental projects and on
providing civic amenities as well as on
the administration. Private sector in the
country has also grown tremendously.
september 2010
AUDITING
Indian industrialists are expanding
throughout the world.
India produces 900,000 engineers
annually and the total number of CAs
has reached only to about 165,000
over a period of 61 years. For any
project where the services of engineers
are required, there must be a need for
the services of a chartered accountant,
although not be in same ratio/
framework. Where there is expenditure
whether revenue as capital, there is a
need of the services of the chartered
accountant to check the transaction to
control any misuse or misappropriation
of funds. Thus, both in the private as
well as in the public sector there are
ample opportunities for work for CAs.
And if entire spectrum of financial
transactions in the country is brought
under the ambit of audit, it is for sure
that the current strength of CAs will
be far insufficient to carry out just the
attestation services.
Attestation Services:
Serving the Society
At the time of setting up of the ICAI,
it was thought beyond doubt that the
attestation services shall be carried
out and treated as profession and
not as a business. Therefore, there
was no scope for advertisement, etc.,
for attestation services. Even the size
of name board was kept to a limited
size just to reach the location of the
members and not for their publicity.
It was presumed that the clients will
avail the services of a professional
by considering the experience,
credibility, integrity and capability. This
basic theme was very critical as the
attestation services were considered
the need of the society at large. Just
like the code of conduct of medical
profession doesn’t allow a doctor to
carry on his profession like a business,
CAs are expected to follow the dignity
of their profession to the society.
Let’s understand the criticality of
distinction between profession and
THE CHARTERED ACCOUNTANT 55
 AUDITING
While the Institute
has been trying to
help the members in
developing other practice areas,
it is equally important to note
that the basic area of operation
or dominance for CAs is the
attestation services. Thus, we
should do our best to ensure that
a significant section of economic
activities in the country move
under the ambit of independent
attestation services and the
entire work is distributed evenly
among the members at large
and not concentrated with few
players.
business at this stage. The basic
motive behind profession is to provide
service to the society while maintaining
complete integrity and trust and, thus,
while the professional will charge for
the service, the motive will not be to
earn abnormal profits. On the other
hand, a business focuses primarily
on making profits and while it may be
servicing society indirectly, that’s not
the primary objective of a businessman.
For instance, due to his profession, a
doctor is expected to treat the patient
with right medicine and not refer
medicines purely for making money
from the pharma company. Similarly,
when a bank relies upon audited
financial statements for lending to
a company, its social money at the
bank which is at stake. If CAs consider
this as a way of making money from
any given opportunity, they will be
tempted to sign wrong certificates
which will help the company mislead
the bank. Thus, CAs should strictly
maintain the dignity and high standards
in the profession to maintain social
respect.
No Compromise in
Attestation Function
The society at large is relying on the
attestation services for ensuring that
56 THE CHARTERED ACCOUNTANT september 2010
the public funds are utilised properly.
In case where scams are discovered
and millions of dollars gets into wrong
hands, we should realise that either
there were no attestation services
utilized or, if they were, there were
lapses. In such cases, the society starts
to feel that the chartered accountants
are not performing their duties which
negate the entire purpose of having an
independent eye. It is very important
for the entire profession to ensure that
the quality of attestation is so high that
any stakeholder should be able to
completely rely on the same without a
doubt. This will ensure that the public
as well as private finances are utilized
in the manner they are supposed to.
There is a strict need for the chartered
accountants to follow Code of Ethics in
letter and spirit for everlasting reliability
of the profession and continued trust of
society at large.
Due to the environment of intense
competition, there may be situations
in which few members may find it
difficult to earn in proportion to their
skills and hardwork. In such situations,
some of the members may get ready
to take up an assignment at a lower
remuneration which may not justify
the time/skills required to perform the
same. This may result in compromise
of quality on that assignment, which is
completely unacceptable for the sake
of profession.
The concentration of work with
larger firms may be one of the reasons
for smaller firms/individual practitioner
not getting allocated sufficient work
/ value for their work. While the large
firms are welcome for the infrastructure
they introduce in the system, we must
not ignore the fact that the attestation
services is all about individual
responsibility and an individual
practitioner can perform the same with
same (or better) quality.
We all must ensure that the quality
levels are not compromised upon and
thus society should be able to respect
432
all CAs for their skills, quality and
integrity.
Ensuring Quality of
Attestation Services
We as professional members need
to brainstorm as to how to ensure an
environment that none of the members
is ready to compromise on the quality.
As a backgrounder, the primary
object of establishment of our Institute
as an autonomous body through an
Act of Parliament 61 years ago was to
regulate the accountancy profession
in India and thereby to mean to have
a proper check on its members to
ensure that various attestation services
which are being rendered suit the
needs of the society. To achieve this
object a disciplinary committee is
effectively working in the Institute takes
disciplinary actions against errant
members.
Need to Put More Emphasis
on Attestation Services
Coming back to the basic question of
why are the members diversifying to
other areas from the core attestation
services. As we discussed above, many
members feel that the overall pie of the
assignments available in the economy
are not sufficient and some members
do not get sufficient work. This induces
them to other practice areas.
While the Institute has been trying
to help the members in developing
other practice areas, it is equally
important to note that the basic area of
operation or dominance for CAs is the
attestation services. Thus, we should
do our best to ensure that a significant
section of economic activities in the
country move under the ambit of
independent attestation services and
the entire work is distributed evenly
among the members at large and not
concentrated with few players.
Sometimes, it is noticed at the
study circles, that the value addition for
CAs gets limited to understanding the
 433
technology for filing TDS returns and
VAT. While members of the Institute are
willing to take up additional activities,
let’s not ignore the fact that this is not
our core area of competence and we
have a much larger canvas to work and
serve the society.
The Institute is taking active steps
to ensure that there are ample new
opportunities for members to take
up attestation services and that there
are set processes to ensure proper
distribution of the same among all
members with healthy competition.
Further, there is a need to more strictly
ensure the quality of deliverables from
members, meeting the highest norms
and conforming to related standards.
This fact should be communicated to
the stakeholders at large to re-build
the credibility which was somewhat
lost after the Satyam episode. It’s an
ongoing process where dialogues need
to undergo between the Government
and the Institute, and the Institute and
various stakeholders.
Enhancing the Value of
Attestation Services
The value of attestation services can
be enhanced in the following ways:
(1) By putting more emphasis on
attestation services as the area
of core competence for CAs –
Diversification to other areas of
professional expertise can be
accorded a second priority and
other services can be treated as
incidental.
(2) By expediting disciplinary actions
against errant members.
(3) By educating stakeholders about
the importance of getting their
accounts audited
(4) By giving more importance to
individual’s knowledge, skills,
experience, integrity and credibility
instead of the size of the firm and
infrastructure.
(5) By ensuring allocation of
attestation work in a justifiable and
equitable manner – There should
be a mechanism whereby as far
as the entire audit assignments
available in the country be allotted
to the maximum number of
chartered accountants in practice
in a justifiable manner based on
the skills, knowledge, experience,
integrity, credibility of the members
and not on infrastructure and size
only. It is for this reason that a ceiling
has been fixed as to the number of
audits a firm can audit under the
provisions of the Companies Act,
1956.
(6) By putting more stress on moral
and ethical standards for CAs –
Framing number of Accounting
Standards or enforcing stringent
Rules and Regulations alone
would not serve the desired
purpose unless the principles of
high moral values are adopted to
ensure integrity of our members.
(7) By ensuring that the profession
is not deviating from the path
originally thought.
What Practicing Members
can Contribute
(1) Ensure that attestation is a
profession of service to the
Society: Practicing members
should know that this is a
If all the financial
transactions are
audited properly
no scam can take place in the
country. Corruption shall also
be eliminated altogether and
if corruption is eliminated
India can become one of the
advanced countries in the
world. ICAI and its members
can play a significant role in the
elimination of corruption and at
the same time through proper
utilisation of funds we can
improve the conditions of our
citizens.
september 2010
AUDITING
profession of service to the society
where service is first and profit is
secondary motto. Keeping this
in mind, they should render their
services.
(2) Ensure high moral character,
ethical standards and integrity:
While rendering attestation
services, members must ensure
high moral character, ethical
standard and integrity that alone
can bring good results.
(3) Do not try to snatch the work of
others: Without communicating
the previous member, no member
should accept any attestation
work.
(4) Render the services without
favour and fear: While rendering
services CAs’ report thereon should
be without favour and fear so as to
ensure the public confidence.
(5) Proper utilisation of your
experience, knowledge and
skill: While working on attestation
services, CAs should utilise their full
skills, knowledge and experience.
Conclusion
The need of the hour is to ensure that
the credibility of attestation services
is retained and to ensure that all
financial transactions taking place
in the Government sector as well as
all transactions of private sector in
which public funds are involved are
brought under the ambit of audit by an
independent auditor who should be a
practicing member of ICAI.
If all the financial transactions are
audited properly no scam can take
place in the country. Corruption shall
also be eliminated, altogether and
if corruption is eliminated, India can
become one of the most advanced
countries in the world. ICAI and its
members can play a significant role in
the elimination of corruption and, at the
same time, through proper utilisation of
funds, we can improve the conditions
of our citizens.n
THE CHARTERED ACCOUNTANT 57
 AUDITING
Internal Audit Manual
Internal Audit plays a crucial role
in an organisation’s corporate
governance, internal control
structures, risk management
analysis and financial reporting
process. In the present complex
business scenario, the internal
audit function has assumed all the
more importance. In this article,
the author presents an Internal
Audit Manual that summarizes
the operations of the internal
audit function at a company
and delineates the policies,
standards, and procedures which
will generally govern the internal
audit function. Notwithstanding
the foregoing, these policies,
standards, and procedures
may not be followed for certain
special projects requested by the
Audit Committee of the Board of
Directors and/or the Managing
Director , fraud or financial
irregularity audits, and under
other special circumstances. Read
on to know more.
CA. Surender Pal Bagaria
(The author is a member of the Institute.
He can be reached at eboard@icai.org)
58 THE CHARTERED ACCOUNTANT
Reporting Structure
Chief Internal Auditor reports
functionally to the Audit Committee
and administratively to the Managing
Director and Directors.
Job Description
In discharging his job respon-
sibilities, the Chief Internal Auditor
will:
• Develop, document, implement,
test, and maintain a comprehensive
internal audit plan and system of
internal controls to help provide
assurance that applicable rules,
regulations, and group policies
and procedures are complied with
judiciously;
• Examine financial transactions for
accuracy and compliance with
group policies and applicable rules
and regulations;
• Evaluate financial and operational
procedures to assure adequate
internal controls are present;
• Identify, assess, and evaluate
the group’s risk areas; make
appropriate recommendations
for improved internal controls
and accounting procedures; and
research and adopt industry best
practices where appropriate;
september 2010
434
• Work with the Managing Director
and senior officers of the group
to identify key business risks,
assess those risks, and establish
risk management procedures and
practices based on industry best
practices;
• Identify pertinent and best practices
emerging within the industry
which can assist the company in
producing accurate and reliable
financial reporting information;
• Advise the Group’s senior
management on policy and
procedure developments with
respect to tax issues;
• Provide expert knowledge with
respect to maintaining the group’s
quality status;
• Monitor current tax law
developments which could
potentially adversely impact the
group’s operations;
• Oversee External Auditors audits
and inquiries;
• Prepare necessary reports for the
Audit Committee of the Board of
Directors;
• Research and respond to tax
compliance and internal audit
inquiries from the Board of
Directors, the Managing Director,
 435
and other members of the Board
and
• Complete other projects and
perform other duties as assigned
by the Managing Director
Overview of Internal Audit
Function
(A) Scope of Internal Audits:
The internal audit function’s scope
of operations is by its very nature
quite expansive. The internal audit
function assists the Group in fulfilling
its vision, mission, strategic initiatives,
and objectives, while adhering to its
core values, by bringing a systematic,
disciplined approach to evaluate and
improve the effectiveness of enterprise-
wide risk management, internal control
systems, and governance processes.
Ultimately, the internal audit function
helps ensure:
• Risks are appropriately identified
and managed.
• Significant financial, managerial,
and operating information is
accurate, reliable, and timely.
• Group resources are used efficiently
and adequately safeguarded.
• Group operations are transacted in
accordance with sufficient internal
controls, good business judgment,
and high ethical standards.
• Quality and continuous
improvement are fostered in
the Group’s internal control
processes.
Opportunities for improving the
Group’s internal controls may be
identified during internal audits; these
opportunities will be communicated to
the Audit Committee of the Board of
Directors and the Managing Director
(B) Types of Audits:
In preparing the Annual Internal
Audit Plan, the Chief Internal Auditor
shall determine the type of audit to
be performed for each auditee. The
following is a summary of the various
types of audits which will generally be
conducted:
The internal audit
function’s scope of
operations is by its
very nature quite expansive. The
internal audit function assists
the Group in fulfilling its vision,
mission, strategic initiatives,
and objectives, while adhering
to its core values, by bringing a
systematic, disciplined approach
to evaluate and improve the
effectiveness of enterprise-
wide risk management, internal
control systems, and governance
processes.
(1) Departmental Audits:
Departmental audits are designed
to review and evaluate the activities
and operations of a particular
departmental function, activity,
department, or unit under review.
Departmental audits will evaluate
accounting controls, ensure
compliance with company policies
and procedures, applicable rules
and regulations, and validate the
records and account balances of
the auditee. Departmental audits
may utilise a complete battery
of audit tests and procedures,
including, but not limited to,
functional tests, transaction
reviews, substantive tests, and
analytical reviews.
(2) Financial Audits: Financial
audits are designed to validate
the accuracy and completeness
of records and account balances.
Financial audits may utilise
substantive tests, analytical reviews,
and other validation procedures
which may or may not include
functional tests or transaction
reviews. Financial audits determine
whether the financial information
of the company function, activity,
department, or unit under audit
fairly represents the financial
position, results of operations,
and cash flows or changes in
september 2010
AUDITING
financial position of the auditee
in accordance with Generally
Accepted Accounting Principles.
(3) Operational Audits: Operational
audits are designed to evaluate
procedures and controls which
impact the attainment of the
company’s organisational goals and
objectives. Operational audits also
measure compliance with Group
policies and procedures as well as
applicable rules and regulations.
During operational audits, functional
tests and transaction reviews may
be utilised.
(4) Fraud and Financial Irregularity
Audits: Fraud and financial
irregularity audits are designed
to verify the existence and
magnitude of suspected fraud and
financial irregularities. Fraud and
financial irregularity audits may be
conducted at the request of the
Audit Committee of the Board of
Directors, the Managing Director; as
a result of a tip; or at the discretion
of the Chief Internal Auditor. The
Chief Internal Auditor shall utilise
the highest level of discretion when
undertaking a fraud or financial
irregularity audit. The Chief Internal
Auditor shall promptly notify the
Managing Director, which may
be appropriate, of any significant
findings which result from a fraud
or financial irregularity audit.
(5) Follow-up Audits: Follow-up
audits are designed to determine
whether corrective action has
been taken on previous audit
recommendations. These audits
may be conducted three months
after a Final Audit Report was
issued and usually include only
the deficiencies reported in the
Final Audit Report. The follow-up
audit may include such functional
or substantive tests that are
necessary to verify that logical
and appropriate corrective actions
have been taken.
THE CHARTERED ACCOUNTANT 59
 AUDITING
The first step in the
planning phase is the
development of the
initial audit objectives which
are as precise as possible and
clearly articulate what the audit is
expected to accomplish. The audit
objectives will define the audit
purpose, establish the direction
for detailed audit work, and
provide the focus for formulating
subsequent findings. All planning,
evidence gathering, and data
evaluation begins with the audit
objectives, and the audit ends
when the Auditor has enough
competent and relevant evidence
to write a report which satisfies
the audit objectives.
(C) The Phased Audit Approach
A phased audit approach will generally
used to conduct, monitor, and
complete internal audits in a timely and
professional manner. Notwithstanding
the foregoing, this approach may not
be followed for certain special projects
requested by the Managing Director.
This phased audit approach allows
the Chief Internal Auditor to:
• Establish guidelines for completing
internal audits;
• Identify the entire internal audit
process, rather than emphasizing
the fieldwork component as
the extent of the internal audit
process;
• Establish responsibilities and
outputs for each phase of the
internal audit process; and
• Provide regular communication
that serves to document the
internal audit progress.
As discussed below in more detail,
the phased audit approach consists of
five phases:
• The planning phase;
• The organizing phase;
• The preliminary phase;
• The conducting phase; and
• The reporting phase.
60 THE CHARTERED ACCOUNTANT september 2010
Each phase of the internal audit
process has definite requirements and
produces specific deliverables.
(D) Internal Audit Procedures and
Techniques
During the internal audit process, the
Chief Internal Auditor may employ
one or more audit techniques. Such
techniques include, but are not limited
to:
(1) Observation and Inquiry: The
Chief Internal Auditor may observe
the operation of any function,
activity, department, or unit. The
Auditor may also make reasonable
inquiries of any Group employee in
attempting to carry out the internal
audit process.
(2) Analysis and Review: A principal
means by which the Auditor
administers the company’s
internal audit function is through
careful analysis and critical review
of both financial and operating
data. In some cases this will
be accomplished through the
comparison of current balances
with those from prior periods.
Another common technique which
may be utilized while performing
analysis and review activities is the
breakdown of individual accounts
into their most refined detail so
that unusual or significant items
are more likely to be highlighted
and thus selected for further
review. Other techniques may be
used as necessary to accomplish
an appropriate level of analytical
review during the internal audit
process.
(3) Inspection: At his discretion, the
Auditor shall have the authority
to inspect physical assets,
documents, and other evidence
supporting relevant data of
the auditee under review. This
process is usually accomplished
by verification of transactions
employing the basic audit
techniques, which are:
436
• Vouching­—This is the verification of
entries by comparing them to the
original documents on which they
are based. This technique helps
ensure the accuracy, genuineness,
validity, or truth of the entries under
review.
• Recomputation—This is the
process of recalculating selected
calculations to determine their
accuracy. In applying this technique
an auditee’s footings, adding
machine tapes, and spreadsheets
shall never be assumed to be
correct.
• Retracing of Bookkeeping
Procedures—This includes tracing
postings from original books of
entry to ledgers and vice-versa.
• Physical Examination and Count—
This technique may be used to
substantiate the reliability of the
records under examination. In
applying this technique, the Auditor
shall:
(i) identify what is being
examined;
(ii) determine the existence of the
items being examined;
(iii) determine the condition of the
items being examined; and
(iv) verify the quantity of the items
being examined.
(4) Confirming: The validity of items
shown on company records
may be established by receiving
confirmation directly from a third-
party in a position to verify the
validity of a given item.
(5) Scanning: This is the process of
quickly but carefully scrutinising
a ledger account, document, or
any other record for questionable,
unusual, or improper items.
Scanning will be used in the
internal audit process whenever it
is determined that this process has
a reasonable chance of adding
value.
(E) Internal Control
Internal control is a process which is
 437
ultimately implemented by company
management; it is designed to provide
reasonable assurances regarding the
achievement of company objectives
in the following categories:
• Operations— relating to effective
and efficient use of ABC Company
resources;
• Financial Reporting— relating to
the preparation of reliable financial
statements; and
• Compliance— relating to Company
compliance with applicable rules,
regulations, and policies.
Internal control consists of five
interrelated components which are
as follows:
• Control Environment—These
factors include the integrity,
ethical values, and competence
of company personnel;
management’s philosophy and
operating style; the manner in which
company management assigns
authority and responsibility; and
the attention and direction provided
by company management.
• Risk Assessment— A prerequisite
to risk assessment is the
establishment of objectives which
are internally consistent. Risk
assessment is the identification,
analysis, and management of
relevant risks which may impede
the attainment of the ABC
Company’s goals and objectives.
• Control Activities—These are the
policies and procedures which help
ensure management directives are
carried out. Control activities help
ensure that necessary actions
are taken to address risks which
may impede the attainment
of the company’s goals and
objectives. Ultimately, control
activities include a broad range of
activities including, but not limited
to approvals, authorisations,
verifications, reconciliations,
reviews of operating performance,
and segregation of duties.
• Information and Communi-
cation—Pertinent information
must be identified, captured,
and communicated in a form
and time-frame that enables
people to effectively carry
out their responsibilities.
Information systems produce
reports containing operational,
financial, and compliance-related
information that makes it possible
to manage and control the Group’s
operations.
• Monitoring—Internal control
systems need to be monitored;
this means that over time Group
management must assess the
quality of the internal control
system’s performance.
When is internal control effective?
A system of internal control can be
judged effective if Group management
has reasonable assurance that it
understands the extent to which:
• The Group’s operational objectives
and goals are being achieved;
• The Group’s financial, managerial,
and operational information is
accurate, reliable, and timely;
The Planning Phase
The planning phase begins when
the Chief Internal Auditor begins an
internal audit engagement. During this
phase, audit objectives and scope are
developed, and appropriate Officer of
Company is notified of the planned
audit. The deliverables of the planning
phase include the initial audit objectives
and notification of appropriate Officers
of Company.
A. Phase Objectives and
Procedures
(1) Phase Objectives
• The planning phase will develop
the initial audit objectives and the
requisite audit methodology to
satisfy those objectives.
• Appropriate members of
management will be notified that
september 2010
AUDITING
their function, activity, department,
or unit has been selected for
audit.
(2) Phase Procedures
• The Auditor will develop the initial
audit objectives with consideration
for any concerns expressed
by the Audit Committee of the
Board, the Managing Director,
and other relevant members of
management.
• The Auditor will notify the auditee
of the pending audit in a timely
manner.
B. Development of Audit
Objectives
The first step in the planning phase
is the development of the initial audit
objectives which are as precise as
possible and clearly articulate what
the audit is expected to accomplish.
The audit objectives will define the
audit purpose, establish the direction
for detailed audit work, and provide
the focus for formulating subsequent
findings. All planning, evidence
gathering, and data evaluation begins
with the audit objectives, and the audit
ends when the Auditor has enough
competent and relevant evidence to
write a report which satisfies the audit
objectives.
C. Auditee Notification
After the initial audit objectives are
The conducting phase
of the audit begins
with the finalisation
of the audit programme and
ends with the discussion with
the officers of the unit. The
extent of the tests performed
during this phase is heavily
dependent upon the discretion
and judgment of the Auditor.
The materiality of the amounts
involved and the relative risk of
the existence of errors or other
irregularities will be weighed
heavily when considering and
planning audit tests.
THE CHARTERED ACCOUNTANT 61
 AUDITING
developed by the Auditor, the next
step in the planning phase is to notify
the auditee of the audit, except in
circumstances where fraud and/or
irregularities may be suspected.
In notifying the auditee of a
pending audit, the Auditor will
generally communicate the following
information:
• The activity name or a brief
description of the function, activity,
department, or unit of the Company
to be audited;
• The type of audit to be conducted
and the audit objectives and
scope;
• The dates of the planned audit;
• A request of any required
documentation;
D. Phase Conclusion
The planning phase will conclude the
Auditor’s notification of the auditee of
the pending audit.
The Organising Phase
The organising phase begins when the
audit notification letter is issued and
ends when the Opening discussion
is held. During the organising phase,
the Auditor organises the audit and
prepares detailed audit plans. Moreover,
during this phase the Auditor will
develop a preliminary audit program,
prepare any necessary administrative
documentation, prepare an agenda
for the discussion, and conduct the
discussion where appropriate.
In the performance
of audit work, the
Standards for the
Professional Practice of Internal
Auditing state that “Internal
auditors should collect, analyse,
interpret, and document
information to support audit
results.” The Auditor’s work
papers will provide the principal
evidence that these standards
were met, and the audit was
performed professionally.
62 THE CHARTERED ACCOUNTANT september 2010
This phase includes the process of
the Auditor identifying the various types
of information and documentation
needed from the auditee. This
information and documentation will
generally include items such as:
organizational charts, job descriptions,
department manuals, and relevant
reports.
A. Phase Objectives and
Procedures
(1) Phase Objectives: During the
organising phase the Auditor
will develop the preliminary
audit program and conduct the
discussion, where appropriate.
(2) Phase Procedures: During the
organising phase the auditor will
review appropriate data and request
copies of pertinent information.
Common examples of data which
will likely be requested include:
1. Accounting information not
available from the Company’s
accounting system;
2. Pertinent contracts and
agreements;
3. Established policies,
procedures, and accounting
processes;
4. Minutes of pertinent senior
management meetings; and
5. Pertinent correspondence and
other relevant information.
• During the organizing phase the
Auditor will obtain a copy of the
appropriate organizational chart
and confirm its accuracy during
the discussion, if applicable. If
there is no organisational chart of
the function, activity, department,
or unit of the company under
review, the auditor may facilitate
the development of one.
• During the organising phase an
agenda for the discussion will be
prepared, and the discussion will
be scheduled and conducted,
where appropriate.
• The major output of this phase is
the preliminary audit program.
438
B. Preliminary Audit Programme
The Auditor will develop the
preliminary audit program during the
organizing phase and thereafter make
modifications as necessary.
C. Opening Discussion
The purpose of the Opening Discussion,
where applicable, is to discuss the
plans for the overall conduct of the
audit. During the Opening discussion,
if applicable, the Auditor will:
• Explain the type of audit being
undertaken, the scope of the
planned audit, the audit objectives,
the period to be audited, and the
general approach to the audit;
• Verify that the auditee understands
the role of the Auditor and the
commitment needed from the
auditee to support the audit and
respond to audit requests;
• Ask the appropriate Officers of
management if they have any
particular areas of risk or concern
which they would like reviewed;
• Request management plans,
objectives, or other documents
that may have a material impact
on the audit outcome;
• Review audit findings from previous
internal audits, if applicable;
• Develop a list of key personnel
in the auditee department to
be contacted for meetings or
information;
• Discuss the procedure for
preparing and reviewing the formal
audit report, which is a compilation
of reportable findings and auditee
responses;
• Inquire about current developments
relating to the Company function,
activity, department, or unit under
audit;
• Confirm the location of documents
and records needed during the
audit;
• Explain the preliminary audit
program in general terms and
establish priorities for the audit;
• Prepare a work paper memo which
 439
summarizes the date, time, location,
and persons in attendance at the
Opening discussion, if applicable;
and
• Discuss any other applicable
topics.
D. Phase Conclusion
This phase will be concluded upon the
close of the discussion, if applicable.
Audit work will not begin, nor will
meetings with the auditee be held,
until the preliminary audit program
has been prepared, the auditee has
been properly advised of the planned
audit, and the discussion has been
held, if applicable. Notwithstanding
the foregoing, these procedures may
not be followed in cases of suspected
financial irregularities, fraud, or other
special circumstances.
The Preliminary Phase
The preliminary phase begins upon
the conclusion of the discussion,
if applicable, and ends with the
preparation of the audit programme.
A. Phase Objectives and Proce-
dures
(1) Phase Objectives
• The objective of the preliminary
phase is to gain a basic
understanding of the company
function, activity, department or unit
which is under audit, including the
accounts available for its use, the
types and volumes of transactions
processed, and the systems and
processes used in its operations.
• The preliminary phase will allow
the Auditor to develop a clear
understanding of the events
and practices which may have a
significant impact on the operation
of the Company function, activity,
department, or unit under audit.
• The preliminary phase ultimately
allows the Auditor to obtain a broad
overview of the internal controls in
place in the Company function,
activity, department, or unit which
is under audit. The preliminary
phase also allows the Auditor to
identify any areas of the auditee’s
operations which may require
special attention or consideration.
(2) Phase Procedures
During the preliminary phase the
Auditor will:
• Review correspondence files, prior
work papers (if applicable), and
other relevant information;
• Identify significant changes in
account balances over time or
large variances from expectation
or budget and perform an
analytical review to determine the
significance of these variances;
• Review organisational charts and
job descriptions and the nature
of the auditee’s activities and
functions;
• Evaluate the auditee’s internal
controls;
• Discuss relevant matters with the
auditee;
• Inquire about problem areas which
the auditee would like the Auditor
to review;
• Make arrangements with the
auditee for the preparation of the
data which will be needed during
the audit; and
• Develop preliminary estimates of
materiality levels and acceptable
error rates.
B. Phase Conclusion
This phase concludes with the
preparation of the audit programme.
The Conducting Phase
The conducting phase of the audit
begins with the finalisation of the
audit programme and ends with the
discussion with the officers of the
unit. The extent of the tests performed
during this phase is heavily dependent
upon the discretion and judgment
of the Auditor. The materiality of the
amounts involved and the relative
risk of the existence of errors or other
irregularities will be weighed heavily
september 2010
AUDITING
The Auditor will
prepare a Draft Final
Audit Report prior to
the Closing Discussion. The Draft
Final Audit Report may include
(among others) sections dealing
with the background, scope,
audit objectives, audit findings,
and recommendations. At the
Closing discussion, the Auditor
will request a formal response
to all reportable findings from
management. Management will
be requested to respond in a
timely manner.
when considering and planning audit
tests.
A. Phase Objectives and
Procedures
(1) Phase Objectives
During the conducting phase the
Auditor will:
• Execute the audit program;
• Prepare audit work papers which
detail the necessary audit work
accomplished to satisfy each step
of the audit program;
• Prepare a Draft Final Audit Report;
• Obtain management responses
to preliminary findings, where
appropriate; and
• Hold the Closing discussion.
(2) Phase Procedures
Procedures utilised for the
accomplishment of the audit program
will vary based on the scope and
objectives of the audit. Some
procedures that will regularly be
employed during this phase include
a review of internal controls and the
tracing of transactions through the
company function, activity, department,
or unit under audit.
B. Preliminary Audit Findings
Preliminary audit findings are written
statements of conditions noted during
the audit.
(1) Types of Findings: Deficiencies
and findings noted during the audit
will be classified as reportable
THE CHARTERED ACCOUNTANT 63
 AUDITING
or non-reportable. Reportable
findings will be included in the
Final Audit Report. Non-reportable
findings will not be included in
the Final Audit Report, but may
be discussed briefly during the
Closing discussion. It is important
to note that the category of any
deficiency or finding may change
as additional information becomes
available.
(2) Processing of Findings: If
deficiencies are identified during
the audit, they will be discussed
with the auditee to verify the facts
before any audit reports are drafted.
If these discussions confirm that
a deficiency exists, the Auditor
will draft a preliminary finding.
All findings will be considered
preliminary unless (and until) they
are included in the Final Audit
Report.
C. The Closing Conference
The Closing discussion of each audit
will be scheduled as close as practical
to the last day of fieldwork; i.e., the last
day of the conducting phase. During
the Closing discussion the Auditor will
present his preliminary findings to the
auditee, and he will seek the auditee’s
input where appropriate.
D. Phase Conclusion
This phase will conclude upon
conclusion of the Closing discussion.
The Reporting Phase
The reporting phase begins upon
completion of the Closing discussion
and ends when the Final Audit Report is
issued. The activities completed during
this phase include preparing a Draft
Audit Report; discussing proposed
changes with the appropriate level of
management; preparing a Final Audit
Report; and distributing the Final
Audit Report to the Audit Committee
of the Board, the Managing Director,
and other appropriate staff of senior
management and/or department
management.
64 THE CHARTERED ACCOUNTANT september 2010
There are three
phases in the
fraud programme:
prevention, detection, and
investigation. The Auditor
and the Company’s operating
management are responsible
for recognising the exposures,
control weaknesses, and
situations which foster
fraudulent activity. The
Auditor may learn of known or
suspected fraudulent activities
from many sources, including
routine audits.
Internal Audit Work Papers
In the performance of audit work, the
Standards for the Professional Practice
of Internal Auditing state that “Internal
auditors should collect, analyse,
interpret, and document information
to support audit results.” The Auditor’s
work papers will provide the principal
evidence that these standards were
met, and the audit was performed
professionally. The term “work
papers” includes all documents and
papers collected or prepared during a
given audit. Work papers provide the
basis and support for the conclusions
reached by the Auditor. All relevant
work papers prepared during a review
will be preserved and included in the
work paper files maintained by the
Auditor.
A. Characteristics of Work Papers
Work papers include the evidential
matter that links fieldwork and the Final
Audit Report. Work papers will contain
the necessary evidence to support the
findings, judgments, and conclusions
in the Final Audit Report.
(1) Sufficiency: Work papers will
always be complete and accurate,
and include adequate data to
precisely indicate the audit work
performed. Work papers will also
provide support for findings,
judgments, and the conclusions
reached by the Auditor as a result
440
of the internal audit process. Work
papers will delineate sufficient data
so that the Audit Committee of the
Board of Directors can easily verify
that:
• The audit assignment has been
properly planned;
• The auditee’s system of internal
control has been reviewed
and evaluated in determining
the extent of the audit tests
undertaken; and
• Appropriate audit tests were
performed, and the appropriate
auditing procedures were
followed.
(2) Competency: Work papers will
include only high quality information
and evidence. Accordingly, the
Auditor will take all necessary steps
to help ensure that the information
contained therein is reliable.
(3) Relevance: The information
contained in the work papers will
be restricted to matters that are
materially important and relevant
to the audit objectives.
(4) Clarity and Understandability:
Work papers will be understandable
without detailed supplementary
oral explanations. Work papers will
also be complete and concise.
(5) Principles of Documentation:
Work papers will substantiate
everything included in the Final
Audit Report. Work papers will
clearly identify the documents or
series of documents examined.
It is not necessary to include a
copy of each document examined,
although in some cases, efficiency
may result by utilizing copies of
documents.
B. Indexing and Cross-Referencing
Work Papers
The Auditor may use a standard
numbering and indexing system for all
work papers; it is specifically noted that
this standard numbering and indexing
system may change from time to
time.
 441
C. Standards for Work Papers
All work papers prepared by the Auditor
shall be prepared in good form with
proper attention to layout, design,
and legibility, with complete headings,
explanations of sources, and verification
of work performed. The Auditor will
generally observe the following rules
when preparing work papers:
• Every work paper will be properly
identified. The work paper heading
may include the name of the
auditee, a description of the
information presented, and the
period covered or applicable date.
• Work papers may be linked to the
audit program.
• The source of the data presented
on each work paper will be clearly
stated so as to leave no doubt as
to the source of the information.
• The nature of verification work
performed by the Auditor will be
indicated on each work paper.
• Whenever symbols are employed,
they will be accompanied
by a legend explaining their
significance.
D. Audit Evidence
The Auditor generally gathers evidence
from internal sources, which may require
verification from external sources.
Some of the internal sources of audit
evidence include books of account,
ledgers and records, memoranda,
minutes of meetings, documents that
support transactions, and management
letters. Information gathered from these
sources may be verified from external
sources that include confirmations of
bank balances, accounts receivable,
investment balances, asset held by
third-parties, long-term debt, and other
assets and liabilities.
All of the information gathered to
support the internal audit effort, and the
conclusions drawn therefrom, should
be considered audit evidence which
may be categorised as analytical,
documentary, physical, or testimonial.
(1) Analytical Evidence: Analytical
evidence includes computations,
comparisons, reasoning, and
the separation of information into
components.
(2) Documentary Evidence:
Documentary evidence consists
of letters, contracts, accounting
records, invoices, etc.
(3) Physical Evidence: Physical
evidence is obtained by direct
inspection or observation of (1)
activities, (2) property, or (3)
events. It may take the form of
memoranda, photographs, charts,
or other summary documentation
which recapitulates the subject
matter of the inspection.
(4) Testimonial Evidence: Testimonial
evidence is obtained from others
through statements received in
response to inquiries or through
interviews. The statements critical
to the audit will be corroborated
through independent verification
when feasible.
Audit Communications
The Final Audit Report is designed to
assist management in measuring its
own performance, particularly with
respect to the reliability of established
internal controls.
A. General Standards of Report
Writing
• Findings, recommendations,
and opinions will be expressed
objectively.
• Final Audit Reports will be
organized so as to clearly and
concisely disclose relevant, timely,
and important information that can
be used to enhance or improve
relevant aspects of the Unit
operations.
• Findings, recommendations, and
comments will contain all relevant
information necessary for the
auditee to fully understand the
reported conditions. All Final Audit
reports will present factual matters
accurately and completely.
september 2010
AUDITING
• The Final Audit Report will identify
the most significant conditions
requiring management’s attention.
B. Final Audit Reports
Report Preparation Procedures
and Content: The Auditor will prepare
a Draft Final Audit Report prior to the
Closing Discussion. The Draft Final
Audit Report may include (among
others) sections dealing with the
background, scope, audit objectives,
audit findings, and recommendations.
At the Closing discussion, the Auditor
will request a formal response to all
reportable findings from management.
Management will be requested to
respond in a timely manner.
After reviewing management’s
responses to the Draft Final Audit
Report, the Auditor shall make any
changes he deems necessary. After
processing any necessary changes,
a Final Audit Report will be distributed
to the Audit Committee of the Board,
the Managing Director, and other
members of senior management and/
or department management that may
be appropriate.
Because of the many and varied
activities at the Company, and the
various reporting relationships, the
addressees and distribution list of each
Final Audit Report will be determined
on a case-by-case basis. All Draft Final
Audit Reports and Final Audit Reports
shall be deemed “confidential,” and the
Auditor shall take appropriate measures
to ensure their limited distribution to
those individuals with a legitimate
business need for possessing the
information contained therein.
THE CHARTERED ACCOUNTANT 65
 AUDITING
Purpose of Sampling
Sampling will be used by the Auditor.
Samples are portions of a population
that are used to represent the
population. Samples are very useful
in obtaining information about a
population. There are many types of
samples; however, samples can be
grouped into two main categories,
judgmental samples and statistical
samples.
A. Judgmental Sampling
Judgmental sampling may be used
to select examples of deficiencies
to support a hypothesis that a given
system of internal controls is weak.
Judgmental sampling will in some
cases be used to provide the Auditor
with clues as to whether to proceed
with a statistical sample. If the Auditor
encounters a well-designed and well-
executed internal control system, good
management, well-trained employees,
and a feedback mechanism that
highlights errors, it may be unnecessary
to spend a great deal of time performing
extensive transaction tests. A small
sample selected at random to obtain
some reasonable representation of
the population may suffice. If no errors
are found, the Auditor may reasonably
determine that he sees no basis for
examining the population further or for
suspecting any material error.
B. Statistical Sampling
The main advantages of statistical
(probability) sampling over judgmental
sampling are based on the fact that
there is a significant body of accepted
theory to support and explain statistical
sampling. One of the attractive aspects
of probability sampling is that it is
possible to measure the reliability of the
estimates computed from the sample
results. The ability to measure reliability
furnishes additional desirable features
for statistical sampling. There are
several types of statistical sampling.
(1) Random Number Sampling:
Random number sampling is
generally considered the most
66 THE CHARTERED ACCOUNTANT september 2010
likely to result in a random sample.
It makes use of a computerized
random number generator to
select items to be sampled.
(2) Interval Sampling: Interval
sampling simply means selecting
items at intervals. When using
interval sampling, every item must
have an equal chance of being
selected. Interval sampling is
particularly useful when the records
are in manual form, the items are
unnumbered, or the population
contains some items that are not
applicable to the audit purpose.
(3) Stratified Sampling: In stratified
sampling the Auditor will separate
the population into two or more
strata; i.e., separate populations,
and then takes samples from each.
Typically significant or expensive
items will be set aside in one
stratum for complete examination,
and sampling will generally be used
for the remaining strata. In every
population, the Auditor will look
for wide variations in size, amount,
and characteristics of the items
making up the population. When
such wide variations are found, the
Auditor will consider stratification.
Stratified sampling arranges the
population so as to provide greater
sampling efficiency. Properly used,
stratified sampling will result in a
smaller variance within a given
sample size than simple random
sampling.
(4) Cluster Sampling: When
documents and records are so
scattered or dispersed that it is
too time consuming and costly
to use simple random number
sampling, the Auditor may use
the technique of cluster sampling.
Cluster sampling is what the
name implies; clusters of items
are selected at random, then the
clusters are either examined in
their entirety or are themselves
sampled. Clusters may be based
442
on natural separations; e.g., all
documents in a file cabinet drawer
may be examined. Clusters may
also be artificial.
(5) Dollar Unit Sampling: The dollar
unit sampling technique selects
records according to monetary units
rather than physical attributes. The
advantages of dollar unit sampling
are smaller sample sizes, an almost
infinite degree of stratification and
the greatly increased likelihood of
finding large but infrequent errors.
(6) The Sample Size: Sample sizes
can be determined judgmentally
or statistically. The decision
will be made based on the
audit objectives. In many audit
situations a large audit sample or
a statistically determined sample
size is unnecessary. Where the
Auditor has determined the system
of internal control to be strong,
it may be appropriate to sample
only a few handpicked items
to determine that the system is
actually functioning properly.
Assuming the system functions
as planned, it can then be declared
that the system does indeed have the
purported control points, and they are
in fact working. If a particular system
is found satisfactory from an internal
control standpoint further sampling
may not be necessary or appropriate.
Investigating Suspected
Fraudulent Activities
There are three phases in the fraud
programme: prevention, detection,
and investigation. The Auditor and the
Company’s operating management
are responsible for recognising the
exposures, control weaknesses, and
situations which foster fraudulent
activity. The Auditor may learn of known
or suspected fraudulent activities from
many sources, including routine audits.
Also, the Auditor may be called upon by
the Audit Committee of the Board, the
Managing Director, or other members
 443
of senior management to conduct
investigations of known or suspected
fraudulent activities. Because of the
sensitivity and the potential litigation
exposure for the company, all
investigations of known or suspected
fraudulent activities shall be conducted
carefully and thoroughly.
The purpose of these audit
procedures is to establish a
standardized methodology for the
Auditor to follow when investigating,
processing, and reporting findings of
known or suspected misappropriation
and similar irregularities. These
procedures may be used in the
investigation of fraudulent activities or
financial irregularities at the Company.
A. Objectives
The objectives of investigations
conducted by the Auditor are to
determine whether the suspected
irregularity occurred, to determine and
document the source and amount
of funds involved, to identify the
individuals responsible for the loss,
and to provide recommendations
for corrective actions to improve
prevention and detection procedures.
The Auditor, and anyone engaged
or acting on his behalf, is duly
authorised without limitation by the
Audit Committee of the Board to:
• Have free, full, unrestricted, and
unfettered access to all company
functions, records, property,
activities, manual and automated
systems, and personnel.
• Have free, full, unrestricted, and
unfettered access to all third-party
institutions, organisations, and
individuals who have business
dealings with the company.
• Have free, full, unrestricted, and
unfettered access to the Audit
Committee of the Board and the
Managing Director.
• Allocate resources, set frequencies,
select subjects, determine scopes
of work, and apply appropriate
techniques required to accomplish
the internal audit function’s
objectives.
• Obtain the necessary assistance
of personnel in functions,
departments, and/or units of
the company where audits are
performed, as well as other
specialized services from within or
outside the company.
B. Responsibilities
The Auditor may consult and coordinate
any investigation activities with the Audit
Committee of the Board, the Managing
Director, and other members of senior
management, as appropriate. In order
to avoid damaging the reputation
of innocent persons suspected of
wrongful conduct, and to protect the
company from potential civil liability,
the results of preliminary investigations
by the Auditor will not be disclosed
or discussed with anyone except the
Audit Committee of the Board, the
Managing Director, or other members
of senior management who have a
legitimate need to know such results in
order to perform their assigned duties
and responsibilities.
C. Definitions
The subject of these procedures is
known or suspected losses resulting
from misappropriation or misuse
of company assets entrusted to
employees as part of their job
responsibilities. The terms used
throughout these procedures are:
• Assets: Money, negotiable
securities, data and physical
property of the company, whether
owned or leased.
september 2010
AUDITING
• Conflict of Interest: When
company resources, including staff
time, funds, company reputation,
or other assets are diverted from,
or made less effective in their
intended purposes by virtue of an
individual’s activities, association,
or interests outside his or her
primary company affiliation.
• Defalcation: To appropriate
company assets fraudulently
to ones own uses; defalcation
is synonymous with misappro-
priation.
• Error: Unintentional mistakes in
financial or accounting data. An
error may include:
1. Mathematical or clerical
mistakes in the underlying
records and accounting data;
2. Oversight or misinterpretation
of facts; or
3. Misapplication of accounting
policy.
• Fraud: The intentional misre-
presentation of facts undertaken
to mislead management,
auditors, or other users of
financial statements; i.e., the
misappropriation or misuse of
company assets, and other
similar irregularities. Fraud may
involve:
1. Manipulation, falsification, or
alteration of records, or
documents;
2. Misappropriation of company
assets;
3. Suppression or omission of
transactions or the effects of
transactions from company
records or documents;
4. Recording transactions without
substance;
5. Manipulation of accounting
policies; or
6. Any other act or series of
acts intended to defraud the
company.
• Irregularity: Intentional mistakes or
distortions of financial statements,
THE CHARTERED ACCOUNTANT 67
 AUDITING
such as misrepresentation or
misappropriation of assets.
• Misappropriation: Any dishonest
or fraudulent act which includes
such things as:
1. Unauthorized use, taking,
or destruction of company
property for personal gain, or to
purposely deprive the company
of its use;
2. Forgery or alteration of checks,
drafts, promissory notes, and
securities;
3. Any taking or unauthorized use
of company funds, securities,
supplies, or any other asset;
4. Forgery or alteration of policy-
related items, such as loans,
assignments, changes in
beneficiaries, etc;
5. Any irregularity in the handling or
reporting of cash transactions;
6. Fraudulent or conflict of interest
decisions which result in
financial loss to the company;
or
7. Any similar or related
irregularity.
D. Preliminary Investigations
The Auditor shall initiate a preliminary
investigation of any reported or
suspected misconduct to verify that there
is substance in fact to the suspected
irregularity and whether the company
has sustained any actual losses. In
conducting this preliminary investigation,
the Auditor shall gather sufficient
information to identify the company
function, activity, department, or unit
involved; the individual(s) involved; and
the estimated magnitude of any loss.
During the course of the preliminary
investigation the Chief Internal Auditor
may, where appropriate:
68 THE CHARTERED ACCOUNTANT september 2010
• Identify each account or set of
related accounts that were, or
could be used in or affected by
the defalcation, and determine the
purpose of each account and how
it can be used;
• Identify the types of transactions/
documents used to make entries,
adjustments, and/or inquiries
against each account and who
may initiate and authorize such
transactions/documents;
• Determine the source of funds
involved in the fraudulent activity;
• Determine whether the company
function, activity, department, or
unit involved has experienced
unusual or unexplained losses in
the recent past;
• Determine the types of questionable
activities that have occurred, may
be occurring, or could occur, how
the possible irregularities were
committed, all likely means of
conducting the alleged activities,
and the personnel potentially
involved;
• Determine the degree of reliance
which should be placed on existing
internal controls, and the extent of
testing required;
• Conduct a preliminary meeting with
the Audit Committee of the Board,
the Managing Director, and other
members of senior management,
as appropriate.
If the preliminary findings indicate
that the available evidence has no
substance in fact, the investigation shall
be terminated, and the appropriate
members of company management
will be notified. If the preliminary
findings show the evidence to be of
sufficient strength to justify continued
investigation or immediate action, a
complete audit or investigation shall
be conducted by the Auditor.
E. Investigation
The investigation may be continued
to further substantiate the size and
type of loss and/or to identify the
444
responsible individuals. During this
phase, the Auditor must select the
specific auditing procedures that in his
judgment are necessary to successfully
complete the investigation. To facilitate
a successful result, the Auditor may,
among other things:
• Chart the flow of transactions
and documents identified during
the preliminary investigation and
identify key basic control points
throughout the flow;
• Collect all the necessary
documents, records, files, and
correspondence that will be
examined;
• Copy and catalogue all documents
to develop audit work papers
on which to make notations and
cross-references;
• Examine and evaluate the
documentation collected, looking
specifically for errors, irregularities,
alterations, missing documents,
and how the documents were
processed;
• Review the budgetary control
system in place for developing the
budget and assurance of budget
compliance; or
• Evaluate the effectiveness of
existing internal controls.
F. Disposition
The final responsibility for matters
involving a misappropriation of
company assets rests with company
management. Upon completion of the
investigation and/or audit, a written
report may be submitted to the Audit
Committee of the Board and the
Managing Director. Copies of all such
investigation and/or audit reports
may also be sent to other members
of senior management if appropriate;
these reports shall be deemed
“confidential,” and the Auditor shall
take appropriate measures to ensure
their limited distribution to those
individuals with a legitimate business
need for possessing the information
contained therein.n
 445 INTERNATIONAL TAXATION

Construction PE – Basic Concepts and issues

When a foreign enterprise undertakes any work in India involving construction, assembly, installation, or,
commissioning of any building, project or supervisory activities in connection therewith, a question arises
whether such activities create the foreign enterprise’s Permanent Establishment (PE) in India. The foreign
enterprise will be liable to tax in India only if the PE exists. This article analyses the basic concepts and
certain issues in respect of the concept of Construction PE as enumerated under the tax treaties.

India’s rise in recent years is a enhancements of capacity by the

(Contributed by the Committee of
International Taxation of the ICAI. Com-
ments can be sent to citax@icai.org.)
most prominent development in the
world economy. It has reemerged as
one of the fastest growing economies
in the world. With an upsurge in
investment and robust macroeconomic
fundamentals, its future outlook is
distinctly upbeat. According to many
commentators, India could increase
its growth rate, provided it improves
the infrastructure facilities, which are
at present not sufficient to meet the
growing demand of the economy.
Therefore, Indian Government’s first
priority is rising to the challenge of
maintaining and managing high growth
rate through investment in infrastructure
sector among others.
The demand for infrastructure
investment during the 11th Five Year Plan
(2007-11) has been estimated to be US$
492.5 billion (Planning Commission,
2007). To meet this growing demand,
the Government of India has planned
to raise the investment in infrastructure
from the present 4.7 per cent of GDP to
around 7.5 to 8 per cent of GDP in this
Plan. With the increased focus on the
development of infrastructure sector,
there is an increased activity in private
investments through foreign direct
investment (FDI) and development/
Indian groups also.
Double taxation
Foreign companies executing infra-
structure projects in India would be
subject to several direct and indirect
tax exposures. One of the principal
direct tax exposures arising in the
construction projects is taxing of the
income of the foreign entity arising from
the construction project in India. In such
a scenario, the income of a foreign
entity from a construction project could
be subject to taxation in India on the
source basis as well as the same could
be taxable in the foreign country on
the residency basis. To prevent double
taxation of income, normally countries
enter into an agreement known as
Double Taxation Avoidance Agreement
(DTAA), which generally allocates rights
of taxing a particular income between
residence country and source country.
Normally, such activities may
constitute a business connection under
the Indian Income-tax Act, 1961 (Act).
Under the Act, there is no distinction
between construction PE and non
construction PE while defining the term
business connection. In this article,
the concept of Construction PE as

september 2010 THE CHARTERED ACCOUNTANT 69

 INTERNATIONAL TAXATION
enumerated under the DTAA has been
analysed and the readers are also
required to analyze the taxability under
the Act before arriving at a conclusion.
Concept of Permanent
Establishment (PE)
The concept of PE has gained
considerable importance with the
growing trend of globalization. The
concept of a PE is important for several
Articles of the DTAA; the concept or its
cognate also appears in the domestic
laws of some countries. For example, in
India we have the concept of ‘business
connection’. The PE concept marks the
dividing line for businesses between
doing business with a country and
doing a business within that country.
As the Indian judiciary puts it, the words
permanent establishment postulate the
existence of a substantial element of
an enduring or permanent nature of a
foreign enterprise in another country,
which can be attributed to a fixed place
of business in that country. It should be
of such a nature that it would amount
to a virtual projection of the foreign
enterprise of one country into the soil of
another country. The primary use of the
PE concept is to determine the right of a
country to tax the profits of an enterprise
of another country. In short, PE is a term
defined in tax conventions to determine
when a non-resident is taxable in a
source country.
A. Construction PE – basic
concept
In the case of construction/installation
projects, taxable event will arise in the
source country only when the foreign
entity has a construction permanent
establishment (construction PE) in
the source country. Construction PE
would be triggered if a construction
site or installation project is executed
in a host country beyond a particular
threshold period. Thus, it can be said
that the concept of construction PE is an
extension of the normal PE.
70 THE CHARTERED ACCOUNTANT september 2010
I. Definition of Construction PE:
Different tax treaties define
Construction PE in different
manners. However, normally a
tax treaty follows any one of the
following Model Conventions:
a) The United Nations Model
Convention (UNMC);
b) The OECD Model Convention
(OECD MC); and
c) The United States Model
Convention.
Article 5(3) of OECD MC defines
the construction PE as “A building site
or construction or installation project
constitutes a permanent establishment
only if it lasts more than twelve months.”
Further, Article 5(3) of UNMC states
that the term PE also encompasses “A
building site, a construction, assembly
or installation project or supervisory
activities in connection therewith, but
only if such site, project or activities last
more than six months.”
In this regards, it is interesting to
note the concept that in case a foreign
entity is carrying on a construction
activities, it would be covered by
construction PE clause and not the fixed
place PE clause, i.e. specific provisions
of construction PE will override the
general provisions of Fixed Place PE.
Hence, even if there is a fixed place of
business through which a foreign entity
is carrying on activities, any project for
construction or installation work carried
on by such enterprise would fall under
the Article 5(3) of construction PE and
not under Article 5(1) relating to fixed
place PE. This principle has also been
applied by Mumbai ITAT in the case of
ADIT vs Valentine Maritime (Mauritius)
Ltd (2010-TIOL-195-ITAT-MUM) wherein
it has been held that when there is
construction activity carried on through
a fixed place, unless the specified
activity crosses the time threshold of
construction PE, there would not be a
PE even if there is a fixed place PE. The
relevant observations of Mumbai ITAT
are reproduced hereunder:
446
…in India we have
the concept of
‘business connection’.
The PE concept marks
the dividing line for businesses
between doing business with
a country and doing a business
within that country. As the
Indian judiciary puts it, the
words permanent establishment
postulate the existence of
a substantial element of an
enduring or permanent nature of
a foreign enterprise in another
country, which can be attributed
to a fixed place of business in
that country.
“In a way, thus, the permanence
test for existence of a PE stands
substituted, to this limited extent,
by a duration test for certain types
of business activities, i.e. building
construction, construction or
assembly project, or supervisory
activity connected therewith. There
is also a valid, and more holistic
view of the matter, that this duration
test does not really substitute
permanence test, but only limits
the application of general principle
of permanence test in as much as
unless the activities of the specified
nature cross the threshold time
limit of nine months, even if there
exists a PE under the general rule
of Article 5(1), it will be outside the
ambit of definition of PE by the virtue
of Article 5(2)(i)”
Similar interpretations have also
been made by Authority of Advance
Ruling (AAR) in the case of Cal Dive
Marine Construction (Mauritius) Ltd
[315 ITR 334 (AAR)], wherein the AAR
made the following observations:
“…If the opening para of Art.5 is
to be read on stand-alone basis,
then clause (i) of para 2 will be
rendered ineffectual and perhaps
otiose. Such construction should
be avoided especially while reading
 447 INTERNATIONAL TAXATION

and understanding a Treaty provision DTAAs entered by the supervisory activities rendered
... In relation to a building site and India with US, UK, in relation to construction activities
construction/assembly project, the Hungary, UAE, etc., would constitute a construction PE
prescribed minimum period should include supervisory if the charges relating to supervisory
be read into the expression ‘fixed activities also as a part of activities exceed 10 per cent of the sale
place of business’ occurring in para Construction PE, whereas the price of machinery even if the threshold
1. As clarified earlier, it is implicit DTAAs with Greece, France, limit is not crossed.
in the very concept of PE and the Egypt, Netherlands, etc., do not
expression ‘fixed place of business’ include this clause. Further, in B. Issues arising in
that it should be in existence for a some DTAAs entered by India, Construction PE
fairly long time and merely carrying e.g. in the India-UK DTAA, the 1. Beginning of Threshold Period:
on some activities intermittently or supervisory activities rendered A building site or construction,
for a short while does not impress in relation to construction assembly or installation project
the place with the character of activities would constitute a becomes a PE, if the site,
a fixed place through which the construction PE if the charges construction or project lasts in
business of the enterprise is carried relating to supervisory activities excess of the time limit specified
on.” exceed 10 per cent of the sale in the relevant DTAAs. However,
Similar observations have also price of machinery even if the in different DTAAs entered by
been made in the following judicial threshold limit is not crossed. India, the time limit for determining
precedents: words, building site, construction construction projects varies from
i) Hyundai Heavy Industries Co. Ltd. or installation project may include: being 3 months in the case of
(2009-TIOL-394-ITAT-DEL) (Delhi • Construction / renovation of Norway to 12 months in the case
ITAT) buildings, roads, bridges or canals of Cyprus. Thus, the provisions of
ii) Brown and Root Inc [(1999) 103 • Onsite planning and supervision respective DTAA would need to
Taxman 515 (AAR)] activities be examined while determining
iii) P. No. 11 [(1995) 228 ITR 55 (AAR)] • Demolition and clearing operations existence of a construction PE in
iv) P. No. 24 [(1996) 237 ITR 798 not necessarily followed by building India.
(AAR)] or construction work Here, it is interesting to note that in
v) Horizontal Drilling International S.A. • Laying of pipelines the DTAA entered into with Greece, no
v CIT [(1999) 237 ITR 142 (AAR)] • Excavating, dredging and incidental specific number of days is prescribed
activities for determining the construction PE.
Difference between OECD • Installation projects Accordingly, a Greek company carrying
MC and UNMC • Assembly projects on construction work even for single
OECD MC UNMC Further, the OECD MC also states day would give rise to construction PE
Definition under OECD Definition
that if an office or a workshop is used in India. In computation of time limit,
MC is wider that under UNMC is for a number of construction projects following points should be considered:
includes “assembly slightly narrower
and the activities performed in the Commencement of threshold time
project” and and restricted
“supervisory activities” Construction PE office crosses the threshold limit of limit: Threshold time limit begins when
under the Construction to building site, construction PE, the office would the enterprise starts to perform business
PE construction project
and installation be considered as PE even if none of activities on the spot in connection
project only the projects involves a building site, with a building site, construction or
OECD refers to the UNMC defines construction or installation project that assembly project. Further, OECD MC
activities which are constitution of PE if lasts for more than 12 months. states that while computing the time
carried on over a activities are carried
period of twelve on for the period of DTAAs entered by India with period, time previously spent by the
months as PE six months US, UK, Hungary, UAE, etc., include contractor concerned on other sites or
Note: Majority of the Indian DTAAs is based on supervisory activities also as a part projects which are totally unconnected
the UNMC model. It defines construction PE if the of Construction PE, whereas the with it should not be included. The day,
project has duration exceeding six months.
DTAAs with Greece, France, Egypt, when an employee of the contractor
Netherlands, etc., do not include this arrives at the building site, can be
II. Inclusions: The term Construction clause. Further, in some DTAAs entered taken as a practical starting point for
PE is widely defined and the by India, e.g. in the India-UK DTAA, computing the time limit. The time

september 2010 THE CHARTERED ACCOUNTANT 71

 INTERNATIONAL TAXATION
limit so begin would continue till the
work is completed or permanently
abandoned.
Further, if the planning and
supervision activity is carried out
by other enterprise whose activities
in connection with the construction
concerned are restricted to only
planning and supervisory work, time
spent by the other agency should
be excluded while computing the
threshold time period.
Judicial Precedents
• In the case of BKI/HAM VOF, (70
TTJ 480) (Delhi), the ITAT held
that a dredging contract does not
start from the date of arrival of the
dredger in the country, but it starts
from the commencement of the
dredging activity.
• AAR in the case of Cal Dive
Marine Construction (Mauritius)
Ltd. vs DIT (315 ITR 334) has
held that occasional short visits
of contractor’s personnel for
negotiations or doing some paper
work in connection with the project
or for taking the soil samples,
broadly speaking, will not trigger
the start of the time-limit. Also,
the date of signing the contract is
not relevant while computing the
time period for determining the
construction PE.
• It is also interesting to note the
judgment of Delhi ITAT in the case
of Hyundai Heavy Industries Co.
Ltd. (2009-TIOL-394-ITAT-DEL),
wherein the ITAT held that no PE of
the Taxpayer could be held to be in
existence in India until the Taxpayer
began its project of undertaking
installation activities. The ITAT
observed that the designated work
outside India was carried on much
before the dates of the structures
coming into existence in India. In
this regard, reliance was placed on
the decision of the Supreme Court
(SC) in the case of CIT vs. Hyundai
72 THE CHARTERED ACCOUNTANT september 2010
Heavy Industries Co. Ltd.[291 ITR
482], wherein it was held that where
the PE came into existence after
fabrication but, before installation,
the profits relating to fabrication
outside India cannot be taxable.
2. Aggregation of Sites: Whether
various building sites in one country
should be aggregated at the time
of determining threshold period
given in the DTAA is the issue of
debate. As per Para 18 of OECD
MC and UNMC, the time limit for
determining construction PE, the
time limit of 6 months or 12 months
as the case may be, applies to each
individual site or project (which are
not connected with each other) and
should not be aggregated.
In this regard, it is interesting to note
Article 5(4) of OECD MC which states
that business activities performed by
the same foreign entity at different sites
(none of which individually constitute
a PE) cannot lead to a PE if they are
aggregated together. Hence, applying
similar analogy, if a particular site is not
a PE, aggregation of all similar sites
cannot constitute a PE. The same view
has been advocated by the learned
authors Klaus Vogel and Arvid Skaar
also. However, a building site should
be regarded as a single unit, even if it is
based on several contracts, provided
that it forms a coherent activity/site
commercially and geographically.
Judicial Precedents
• In the case of Sumitomo Corpo-
ration, (110 TTJ 302), Delhi, ITAT
held that there could be different
PEs with reference to different un-
connected contracts even though
each contracts may be entered into
by the same parties. In the given
case, Maruti Udyog Limited award-
ed various supervisory contracts
on Sumitumo Corporation which
were to be executed independently
at different sites in the factory of
Maruti Udyog Ltd. Since there was
448
no effective connection between
such contracts, it was held that
minimum period of number of days
was to be counted separately for
each contract and could not be ag-
gregated.
• Mumbai ITAT in the case of Krupp
Uhde GMBH vs Addl. CIT (28 SOT
254) followed the above judgment of
Sumitomo and held that time spent
on unconnected projects cannot
be clubbed while determining the
time period for construction PE.
• Further, Mumbai ITAT in the
case ADIT vs Valentine Maritime
(Mauritius) Ltd (2010-TIOL-195-ITAT-
MUM) made following interesting
observations:
“Coming back to the provisions of
Article 5(2)(i), even a plain reading
of Article 5(2)(i) would show that,
for the purpose of computing the
threshold time limit, what is to be
taken into account is activities of a
foreign enterprise on a particular site
or a particular project, or supervisory
activity connected therewith, and
not on all the activities in a tax
jurisdiction as whole…
…Unless the activities are of
such a nature as to be viewed
only in conjunction and as a
coherent whole, in our humble
understanding, there is no
justification in aggregation of time
spent on various business activities,
sites or projects of the enterprise.
In this view of the matter, strictly
…it is interesting
to note Article 5(4)
of OECD MC which
states that business
activities performed by the
same foreign entity at different
sites (none of which individually
constitute a PE) cannot lead
to a PE if they are aggregated
together. Hence, applying similar
analogy, if a particular site is not
a PE, aggregation of all similar
sites cannot constitute a PE.
 449
speaking, it is not really relevant
whether the activities so carried out
by the enterprise are for the same
principal or different principals.
The relevant considerations, in our
considered view, are the nature
of activities, their interconnection
and interrelationship and whether
these activities are required to be
essentially regarded as a coherent
whole in conjunction with each
other.”
Thus, if the sites are not
connected with each other and there
is no interrelationship between the
different sites though executed by
the same contractor the same cannot
be aggregated for the purpose of
computing the threshold limit for PE
perspective.
India’s Comments on OECD
MC
However, India does not agree with this
position and in its latest comments in
the OECD report has observed that a
series of consecutive short term sites or
projects operated by a contractor would
give rise to the existence of a permanent
establishment in the country concerned.
Thus, according to India, the time limit
would not apply to each individual site
or project but for all projects combined
together.
3. Time Spent by Sub-Contractor:
Another point of discussion while
deciding construction PE is the
time spent by the sub-contractors
on the site/project. As per the
OECD MC and views of the authors
Vogel and Skaar, the period spent
by a subcontractor working on the
building site must be considered
as being time spent by the general
contractor on the building project.
Further, time spent by sub-
contractor can be counted only for
the purpose of deciding whether
the project/site have exceeded
the minimum threshold limit as
given in the respective DTAA. In
INTERNATIONAL TAXATION
However, India does
not agree with this
position and in its
latest comments in
the OECD report has observed
that a series of consecutive
short term sites or projects
operated by a contractor would
give rise to the existence of a
permanent establishment in
the country concerned. Thus,
according to India, the time
limit would not apply to each
individual site or project but for
all projects combined
together.
any case, the sub-contractor itself
can constitute a construction PE
if his activities last for more than
threshold time limit.
Further, attention can be drawn
to the recent decision of AAR in the
case of PINTSCH BAMAG (2009-TIOL-
23-ARA-IT) wherein AAR held that
sub-contractor’s activities, which are
not carried on on-site and which are
separable from the work carried out
at site, cannot be considered as a
PE for the main contractor. Relevant
observation of AAR is reproduced
hereunder:
“11.1. The context in which the
passage occurs is important. The
said passage, as I understand it,
covers a situation where a building
site has been set up by the main
contractor and the services of the
sub-contractor are also deployed in
aiding the execution of the building
project. Apparently, it applies to a
situation where there is conjoint
effort of both the contractor and the
sub-contractor at the building site.
In such a case, the building site of
the contractor and sub-contractor is
inseparable. Here, the fact situation
is entirely different. The entirety of
work of fabrication and assembly
is carried out by the sub-contractor
at the workshop set up by him at
september 2010
a place for away from installation
site and run by him independent
of any control of the applicant.
Such a place of business of sub-
contractor cannot be regarded as
the PE of applicant. In any case,
the language of section 5(1) being
clear and as the concept of PE does
not take in the establishment of an
independent contractor or agent,
the contention of the Revenue must
fail.”
Thus, unless the activities of
sub-contractor/time spent by sub-
contractor are inseparable from the
building site/construction project, time
spent by them cannot be counted while
computing the threshold limited.
4. Temporary Suspension of Activities:
Sometimes due to unavoidable
circumstances, there are delays
in the execution of project or
temporary suspension of the
activities. Issue is whether time lost
due to the stoppage or temporary
suspension of activities is to be
counted while computing the
threshold limit for the constitution
of PE.
As per OECD MC and commentary
by Prof. Vogel, a site does not cease
to exist when the work is temporarily
discontinued. Interruptions, which are
usual in the normal course of activity,
constitute part of minimum period. The
examples of temporary interruptions are
interruptions due to bad weather, normal
snowfall, temporary interruptions due
to shortage of material, labour difficulty,
etc. Thus, for example, if a contractor
started work for a construction of
a road on May 1 and stopped on
November 1 because of bad weather
conditions or a lack of materials, but
resumed work later on February 1 the
following year completing the road on
June 1, his construction project should
be counted from May 1 to June 1 and it
would result into a PE, as it would cross
the 12-month time limit laid under the
OECD MC.
THE CHARTERED ACCOUNTANT 73
 INTERNATIONAL TAXATION
With regard to intentional
interruptions, a view is that such
interruptions would not suspend
the time limit. One of the examples
mentioned has been that a sub-
contractor may suspend his work
due to lack of progress in other parts
of the project. There is a possibility
that this view may be applied to
planned interruptions. However, as
per the Skaar’s commentary, time
limit can be suspended in a case
where the interruption is caused by
extraordinary circumstances which
are neither avoidable by efforts of the
contracting parties nor foreseen by the
contractor. The examples dealt with
are extraordinary weather conditions,
strikes, riots, war, etc.
5. Continuing Projects – Roads and
Pipelines Keep on Moving: In
cases like roads, canals, laying
of pipelines, etc., nature of
construction or installation project
is such that the activities are not
fixed at a single location and has
to be relocated continuously from
74 THE CHARTERED ACCOUNTANT september 2010
one place to another. In such
cases, the fact that the work force
is not present for threshold time
limit in one particular location is
immaterial. The activities performed
at each particular spot are part of
a single project, and that project
must be regarded as a permanent
establishment if, as a whole, it lasts
more than prescribed time limit.
In cases like roads,
canals, laying of
pipelines, etc., nature
of construction or
installation project is such that
the activities are not fixed at
a single location and has to be
relocated continuously from one
place to another. In such cases,
the fact that the work force is
not present for threshold time
limit in one particular location
is immaterial. The activities
performed at each particular
spot are part of a single project,
and…
450
6. Ending of Threshold Time Period:
The PE would normally cease to
exist when all activities relating
thereto are completed and the
site is no longer required. OECD
Commentary Para 19, page 93 says
that in general, the site continues
to exist until the work is completed
or permanently abandoned.
However, as mentioned above,
a site should not be regarded
as ceasing to exist when work is
temporarily discontinued. Thus,
when trial run is over for installation
or assembly projects or when
building or construction is found to
be complete without any defects,
threshold period should end there.
Further, any repairs and
maintenance work performed or after
sale services after the construction or
installation project is completed should
not be counted while computing the
time limit of PE.
Judicial Precedents
• Attention is drawn to a decision of
 451
It may happen that
a project or site may
last for more than
the months specified
in a particular DTAA, but the
presence extends over two
different financial or taxable
years, e.g. let us assume that
DTAA specifies the time limit of
six months and the time taken
by the project is eight months
out of which three months are
in first financial year and the
rest five months are in the next
financial year.
AAR in the case of Cal Dive Marine
Construction (Mauritius) Ltd (supra),
wherein it was held:
“8.3. As regards the termination
of the construction project, Mr. Skaar
observed that:
“The end of the construction
project determines the end of the
source state’s jurisdiction over the
contractor’s activity. The point of
departure is that the construction
task is terminated when the
work is completed, permanently
discontinued, or the building site is
permanently abandoned. The end
of the “physical” work could be an
alternative end of the construction
period.”
Thus, as soon as the construction
project is completed, the PE would
cease to exist. Thus, ending of
threshold limit is quite subjective and
depends on the facts of each case.
7. Presence over two years: An
interesting issue would arise when a
contract is spilled over two different
fiscal years. It may happen that a
project or site may last for more
than the months specified in a
particular DTAA, but the presence
extends over two different financial
or taxable years, e.g. let us assume
that DTAA specifies the time limit of
six months and the time taken by the
project is eight months out of which
INTERNATIONAL TAXATION
three months are in first financial
year and the rest five months are
in the next financial year. In such
a case, the provisions of relevant
DTAA should be evaluated while
determining whether the project
constitutes PE or not and if yes,
from which date.
View expressed by OECD MC is
that the time limit has to be computed
in totality irrespective of number of
days. Hence, in total if the threshold
limit is crossed than it would give rise
to PE irrespective of the fact that in a
particular year, the threshold limit was
crossed or not.
Commentary by Prof. Vogel
advocates the view that if the threshold
limit is crossed than PE is deemed to
have existed from the day one the PE
commenced its activities. Hence, the
threshold limit has to be seen in totality
over a period of time and it makes no
difference whether the part of period
falls in one year and part period in
next year. However, one may need to
carefully examine the wordings of the
relevant DTAA before taking any view.
The above view is also corroborated
by the decision of Mumbai ITAT in the
case of Krupp Uhde GMBH vs Addl.
CIT (28 SOT 254) wherein it is held
that the threshold limit is to be counted
irrespective of the financial year.
Thus, Mumbai ITAT held that the time
threshold has to be seen in aggregate
irrespective of the number of years
involved. The relevant observations of
Mumbai ITAT are:
“33. The next question for our
consideration is whether the
period under Article 5 should be
calculated with reference to each
year. There is no case law on this
point. But considering the rule
that period commences when the
activity commence and ends on the
completion of the contract, we are
of the view that the minimum period
of six months has to be counted
irrespective of the years involved. An
september 2010
activity may start in January and may
end in July. In such case the total
period is more than 6 months but falls
under two financial years. If the period
of each year is to be counted then
in each year period would be less
then 6 months. Such construction,
in our opinion, would defeat the
object behind such provisions. In
this connection, we may also usefully
refer to page 307 of Commentary by
Klause Vogel wherein in para (c) it is
stated as under:
“c) .........It makes no difference to
the time test whether the activities in
question extend over more than one
calendar year or one assessment
period. If part of the period were to
be in one year, and the remainder
in the next, this would not prevent
a permanent establishment from
coming into existence. For the
calculation of the time limit when
applying a DTC in the new German
Lander (former GDR), see FinMin
Sachsen - Anhalt of 12 February
1992, St Ed 157 (1992).”
In view of the above discussion, it is
held that the minimum period of six
months is to be counted from the
date when activity starts till the date
when the contract is completed
irrespective of the year/years to
which such period relates.”
Conclusion
Infrastructure projects are a key to the
development of India’s economy; there
are many taxation issues which are
either evolving or still to be determined.
Therefore, adopting the correct tax
position is critical. Further, there are
various other important issues such
as permanent establishments and the
taxability of EPC contracts, which need
to be considered at the time of entering
into a contract. Tax efficient structuring of
contracts can have a potentially decisive
impact, especially in the bid process,
and can provide a clear competitive
advantage. n
THE CHARTERED ACCOUNTANT 75
 TAXATION 452

Treatment of Price Difference Between

the Date of Removal and Revised Price
There is an obligation on part of
the assessee under the provisions
of Central Excise Act, 1944 to
levy and remit excise duty to the
credit of the Central Government
on self-assessment basis. Failure
to deposit central excise duty
or short levy of duty or short
payment of service tax will attract
the payment of such duty along
with the interest as prescribed
by the Central Government now
and then. Central Excise duty is
assessed on the transaction value
of the goods at the time removal
of the same. What treatment
should be given in case any
revision of price in the price of the
goods. Revision of price may lead
to reduction in price or increase
Interest on Delayed payment. Section 4(3)(d) of the Central
in price. This article discusses Payment Excise Act defines transaction value
the treatment to be given in such Rule 8 of the Central Excise Rules as the price actually paid or payable
situation and the liability of the provides that the duty on the goods for the goods when sold and includes
removed from the factory or the in addition to the amount charged
assessee to pay the differential
warehouse during a month shall be as price, any amount that the buyer
duty on differential price and
paid by the 5th day of the following is liable to pay to, or on behalf of the
interest, if any, and also penalty. assessee, by reason or in connection
month. In case of goods removed
during the month of March, the duty with the sale, whether payable at the
shall be paid by 31st day of March itself. time of the sale or at any other time
If the assessee fails to pay the amount including, but not limited to, any amount
of duty by due date he shall be liable charged for or to make provision for,
to pay the outstanding amount along advertising or publicity, marketing and
with interest at the rate specified by the selling organisation expenses, storage,
Central Government vide Notification outward handling, servicing, warranty,
under Section 11AB of the Act on the commission or any other matter; but
outstanding amount, for the period does not include amount of duty of
starting with the first day after the due excise, sales tax and other taxes, if
date till the date of actual payment of any, actually paid or actually payable
the outstanding amount. on such goods.
Rule 6 provides that the assessee
CA. M. Govindarajan shall himself assess the duty payable Issue
(The author is a member of the Institute. on all excisable goods. The transaction Excise duty is levied on the transaction
He can be reached at eboard@icai.org) value plays a vital role in excise duty value. The issue taken for this article

76 THE CHARTERED ACCOUNTANT september 2010

 453
is in case of any revision in the price
of the product in the later period after
removal of the goods what treatment
should be given in this situation. There
is a possibility of revision of the prices
due to various reasons. The prices may
increase or decrease.
Decrease in Price:
In case of decrease in price, the liability
of the assessee will not be affected.
The Supreme Court in MRF Limited
V. Commissioner of Central Excise,
Madras 1997 (92) ELT 309 (SC) held
that any reduction in price subsequent
clearance of goods on payment of duty
for whatever reason did not affect the
manufacturer’s liability for the payment
of duty. In this case the judgment
was on interpretation of Section 11B
of the Act, which concerns claim for
refund of duty by the assessee. That
judgment was in the context of the
price list approved on May 14, 1983.
In that case, assessee had made a
claim for refund of excise duty on the
differential between the price on the
date of removal and the reduced price
at which tyres were sold. The price was
approved by the Government. The
assessee submitted that its price list
was approved by the Government on
May 14, 1983, but subsequent thereto,
on account of consumer resistance,
the Government of India directed the
assessee to roll back the price to pre-
May 14, 1983 level and, on that account,
price differential arose on the basis of
which the assessee claimed refund of
excise duty which stood rejected by
this Court on the ground that once the
assessee had cleared the goods on
classification, the assessee became
liable to payment of duty on the date of
removal and subsequent reduction in
the prices of whatever reason cannot
be made a matter of concern to the
Department insofar as the liability to
pay excise duty was concerned.
Increase in Price:
In case of increase in price after
clearance of goods either by escalation
clause or by negotiation, the seller will
collect the differential price from the
buyer. Then the seller is to pay the
excise duty on the differential price
to the credit of the Department. Is
the assessee in such cases liable to
pay interest for the differential duty?
Discussed below are some cases in
this regard.
In the following cases, it was held
that the assessee is not liable to pay
interest in such cases:
The Commissioner of Central
Excise, Aurangabad vs. M/s Rucha
Engineering Pvt. Ltd., - 2008 (223) ELT
161 (Bom), the High Court observed that
it is evident that Section 11AB comes
into play if the duty paid/levied is short.
Both the Commissioner (Appeals) and
the CESTAT have observed that the
Assessee paid the duty on its own
accord immediately when the revised
rates became known to them from their
customers. The differential duty was
due at that time, i.e. when the revised
rates applicable with retrospective
effect were learnt by the Assessee,
which was much after the clearance
of the goods and, therefore, question
of payment of interest does not arise
as the duty was paid as soon as it
was learnt that it was payable. Finding
that provisions of Sections 11A(2) and
11A(2B) were not applicable as the
situation occurred in the instant case
was quite different, Section 11AB(1)
was not at all applicable and therefore
the assessee was not required to pay
interest.
In ‘Commissioner of Central Excise,
Panchkula vs. Polyplastics’ – 2009
(236) ELT 210 (P&H), the High Court
held that it is well settled that in order to
raise a demand for payment of interest
under Section 11AB of the Act the
condition precedent is the existence
of an order determining the duty under
Section 11A(2) of the Act or the duty
must have been paid on their own
accounts in the manner prescribed
under Section 11AB(2) of the Act.
september 2010
TAXATION
Rule 8 of the
Central Excise
Rules provides
that the duty on
the goods removed from the
factory or the warehouse
during a month shall be
paid by the 5th day of the
following month. In case of
goods removed during the
month of March, the duty
shall be paid by 31st day of
March itself. If the assessee
fails to pay the amount of
duty by due date he shall be
liable to pay the outstanding
amount along with interest
at the rate specified by the
Central Government vide
Notification under Section
11AB of the Act on the
outstanding amount, for the
period starting with the first
day after the due date till the
date of actual payment of
the outstanding amount.
The Commissioner in his order has
observed that the dealer had made
himself liable to pay interest in terms of
Section 11AB of the Act on differential
amount of duty which has been paid
later. The aforesaid approach is not
correct because there is no cause of
any non payment, short levy or short
payment as envisaged under Section
11A(1) of the Act. Section 11A(2) of the
Act contemplates entirely a different
situation than the one in hand and
therefore it has to be held that the
provisions of Section 11AB(2)(b) of the
Act are not attracted to the facts of the
present case.
In ‘Commissioner of Central Excise,
Vadodara – I vs. Chloritech Industries
Ltd.,’ – 2009 (235) ELT 17 (Guj), the
High Court held that if at the given
point of time when the transaction
took place the additional price was not
fixed, the liability of the buyer to pay the
additional amount was not known to the
THE CHARTERED ACCOUNTANT 77
 TAXATION
buyer, mere existence of an escalation
clause in the contract between the
parties cannot bring the subsequent
escalation with the meaning of the
definition for the purposes of levying
interest. Duty of excise would become
payable even subsequently in point of
time and that is the admitted position
between the parties, the assessee
having already discharged the liability.
Section 11AB of the Act itself says that
interest is to be paid on the amount
short paid from the first date of the
month succeeding the month in which
the duty ought to have been paid under
the Act. Therefore, the provisions of
Section 4 of the Act have to be read
in context of the requirement, namely,
whether there was any liability to pay
duty under the Act at the point of time
when the transaction was entered into.
If neither side to the transaction was
aware as to the amount which was to
be charged and which was to be paid
under the escalation clause on the
date when the transaction was entered
into, no liability to pay interest can arise
In case of
decrease of price,
the liability of
the assessee will not be
affected. The Supreme
Court in MRF Limited vs.
Commissioner of Central
Excise, Madras 1997 (92)
ELT 309 (SC) held that
any reduction in price
subsequent clearance
of goods on payment
of duty for whatever
reason did not affect the
manufacturer’s liability for
the payment of duty. In this
case the judgment was on
interpretation of Section 11B
of the Act, which concerns
claim for refund of duty
by the assessee. That
judgment was in the context
of the price list approved on
May 14, 1983.
78 THE CHARTERED ACCOUNTANT september 2010
under the provisions of Section 11AB
of the Act.
In ‘Klassic Wheels Private Ltd.,
vs. Commissioner of Central Excise,
Aurangabad’ – 2009 (240) ELT 47 (Tri.
Mumbai), there is no challenge against
the demand of differential duty. The
challenge is against the demand of
interest on the differential duty as also
against the imposition of the penalty.
The appellant relied on the High Court
judgments in ‘Commissioner of Central
Excise, Panchkula vs. Polyplastics’
(supra) and Klassic of Wheels Private
Ltd., vs. Commissioner Central Excise,
Aurangabad’ (supra). The High Court
held that it appears from the records
that the assessee paid differential duty
promptly upon receipt of differential
price from their buyers. There was
no delay whatsoever in this matter.
Therefore, it can hardly be said that
they indulged in suppression of
facts with intent to evade payment of
differential duty. The allegation to the
contrary levelled against the assessee
in the show cause notice is baseless
and, therefore, there is no question of
the assessee being penalised under
Section 11AC of the Act. The High
Court vacated the penalty imposed.
In the following cases, it was held
that the assessee is liable to pay
interest in such cases:
In ‘Lucas TVS Limited vs.
Commissioner of Central Excise,
Chennai’ – 2009 (233) ELT 192 (Tri.
LB), the Larger Bench discussed
the issue in detail. The assessees
are engaged in the manufacture of
excisable goods. During the material
period they had paid duty of excise
on the goods manufactured in the
manner laid down under Rule 8(1) of
Central Excise Rules. Such payments
at the time and place of removal of the
goods were made on the assessable
value based on the price originally
agreed between the assessees and
their buyers. Subsequently there was
upward price revision of the goods
454
due to increase of cost of raw material
and/or other factors and, consequently
the assessees issued supplementary
invoice for realising the differential
price from the buyer and paying
differential duty. Such payment of
differential duty was made without
payment of interest. In most of the
cases there was no express provision
for variation of price in the contract
between the assessee and the buyer.
In each case, the Department issued
show cause notice demanding interest
on such duty under Section 11AB for
the period from the first day of the
month succeeding the month in which
the original duty payment was made to
the date of payment of differential duty.
The show cause notice also proposed
the penalty for the default of payment
of interest. The assessees contended
that the additional duty paid under
supplementary invoice consequent to
revision of price was not an amount of
duty which ought to have been paid
at the time and place of removal and,
therefore, it was not a duty ‘short paid’
or short levied’ within the meaning of
these expressions used in Section
11A(2B) and, hence, Section 11AB
was not applicable.
The Tribunal referred the matter
to the Larger Bench to consider and
decide the following issues:
1. Whether, to the facts and
circumstances of these cases, the
additional amount paid by the buyer
towards the price of the goods
in terms of the supplementary
invoice issued by the assessee
after the removal of the goods can
be considered to be part of the
‘transaction value’ under Section 4
of the Central Excise Act?
2. Whether the payment of duty
under the supplementary invoice
by the assessee is covered by
sub-Section 2B of Section 11A of
the Act?
3. Whether, on the amount of duty
paid under the supplementary
 455
invoice, interest is leviable under
Section 11AB from the first date of
the month succeeding the month
in which duty was paid in the first
instance in terms of the original
invoice?
4. Whether the Central Excise Act or
the Central Excise Rules contain
any provision for recovery of interest
payable under Section 11AB of the
said Act on any amount of duty
paid under supplementary invoice
to in (1), (2) and (3) above?
The Revenue put forth the following
contentions:
• The differential value realised
by the assessees from their
buyers under supplementary
invoices was an integral part
of the transaction value of
the goods and, therefore, the
differential duty paid on the
differential value would be a
duty which ‘ought to have been
paid’ at the time of removal of
the goods;
• There was a short payment of
duty at the time of clearance of
the goods which attracted sub-
Section (2B) of Section 11A of
the Act;
• Consequently interest under
Section 11AB was also payable
on the differential duty paid
under supplementary invoice,
for the period from the first day
of the month succeeding the
month in which the duty ought
to have been paid to the date
of actual payment of the duty;
• The Circular of CBEC (F.No.
6/20/2005-CX 1, dated
14.3.2006 clarifies that
interest under Section 11AB
is chargeable from the date
of original clearance in cases
where supplementary invoices
were raised due to upward
revision of price of the goods;
• The assessees were under the
regime of self assessment
and had to pay duty on the
transaction value, paid or
payable, to be determined
by them at the time of
removal of the goods. For
self assessment under Rule
6, it was for them to ascertain
whether the price available at
the time of removal was final
or provisional;
• Whether the contract
contained price escalation
clause or not, negotiations
were held between the
assessees and the buyers
after the removal of the
goods. Such negotiations
resulted in enhancement of
price of the goods already
cleared by the assessees and
the differential price was paid
to them by the buyers under
amended purchase orders.
In such circumstances, the
assessees ought to have
invoked Rule 7 for provisional
assessment of the goods;
• Had they done so they are
liable to pay interest on the
differential amount of duty;
• The assessments made at
the time of removal of the
goods should be deemed to
be provisional;
• Levy of interest under
Section 11AB was in the
nature of compensation as
the Revenue was deprived of
the benefit of the differential
duty for the period during
which it was remain unpaid.
The assessees contended the
following:
• Section 4(1)(a) of the Act
provides that time and place
of removal are essential
for determining transaction
value. ;
• What was collected as
differential price consequent
september 2010
TAXATION
In ‘Commissioner
of Central Excise,
Vadodara – I vs.
Chloritech Industries Ltd.,’
– 2009 (235) ELT 17 (Guj.),
the High Court held that if at
the given point of time when
the transaction took place
the additional price was
not fixed, the liability of the
buyer to pay the additional
amount was not known to
the buyer, mere existence
of an escalation clause in
the contract between the
parties cannot bring the
subsequent escalation with
the meaning of the definition
for the purposes of levying
interest. Duty of excise
would become payable
even subsequently in point
of time and that is the
admitted position between
the parties, the assessee
having already discharged
the liability.
to clearance of the goods was
not a part of transaction value
defined under Section 4(3)(d)
of the Act and therefore, the
amount paid to the Revenue
in terms of supplementary
invoices was not duty;
• In ‘Commissioner vs. Arvind
Mills’ – 2006 (204) ELT 570 (Tri.
LB), it was held by the Larger
Bench that the price payable
at a later date could not be
said to be price payable at the
time of removal and, therefore,
could not be considered as
‘transaction value’ at the time
and place of removal;
• This payment was the one
falling under Section 11D of the
Act; As the duty collected from
the buyer under supplementary
invoice in excess of the duty
paid at the time of removal of
the goods was paid forth with
THE CHARTERED ACCOUNTANT 79
 TAXATION
the Government, no demand of
interest can be under Section
11DD either;
• As duty was promptly paid by
the assessees on differential
amounts of price collected
by them from their buyers
subsequent to the clearance
of goods, the Revenue
did not incur any loss and
therefore the they were not
liable to pay interest by way of
compensation;
• As the price initially fixed for
the goods and indicated in
the purchase order was firm,
the assessment made at the
time and place of removal
was not provisional. There
was no provision for deemed
provisional assessment under
the Central Excise Act or Rules
made there under;
• As such it is not open to the
Department to allege short levy
or short payment of duty and
to invoke Section 11AB with
reference to Section 11A(2B)
for levy of interest;
According to the
transaction value
given under Section
4(3)(d), the ‘transaction
value’ includes, in addition to
the amount charged as price,
any amount that the buyer is
liable to pay to the assessee
in connection with the sale
of goods, whether payable
at the time of the sale or at
any other time. The Larger
Bench held that any amount
that the buyer is liable to pay
to the assessee by reason
of, or in connection with, the
sale of the goods, whether
payable at the time of sale or
at any other time, is part of
the transaction value of the
goods.
80 THE CHARTERED ACCOUNTANT september 2010
The Larger Bench while considering
the issues from (1) to (3) analyzed
the provisions of Section 4(3)(d)
(transaction value), Section 11A(2B)
(short payment/non levy/short levy of
duty etc.,), Section 11AB (interest on
delayed payment of duty), Section 11D
(duties of excise collected from the
buyer to be deposited with the Central
Government), Rule 2 (definition for
‘assessment’), Rule 6 (assessment of
duty), Rule 7 (provisional assessment)
and Rule 8 (manner of payment).
At the outset the Larger Bench
rejected the proposition of the
assessees that the duty paid under
supplementary invoices is an amount
collected in excess from the buyer and
is, therefore, recoverable only in terms
of Section 11D of the Act. Section 11D
applies where a person who is liable to
pay duty of excise on the goods sold
by him collects from the buyer any
amount in excess of duty assessed/
determined and paid on such goods,
as representing duty of excise. The
excess amount collected as duty
without the sanction of the law is not
recognized as duty of excise and the
same is required to be paid to the
Central Government under Section
11D along with the interest under
Section 11DD. In the present case it is
not the case of the assessees that they
collected from the buyers any amount
(as representing duty of excise) in
excess of the duty assessed and paid.
The expression ‘duty assessed and
paid’ found in Section 11D(1) covers
not only the duty assessed and paid at
the time of removal of the goods but
also the differential duty assessed and
paid later.
According to the transaction
value given under Section 4(3)(d), the
‘transaction value’ includes, in addition
to the amount charged as price, any
amount that the buyer is liable to pay
to the assessee in connection with
the sale of goods, whether payable
at the time of the sale or at any other
456
time. The Larger Bench held that any
amount that the buyer is liable to pay
to the assessee by reason of, or in
connection with, the sale of the goods,
whether payable at the time of sale or at
any other time, is part of the transaction
value of the goods. In other words,
the price collected by the assessee
from the buyer at the time of removal
of the goods and the differential price
collected subsequently in the wake of
price revision would together constitute
‘the amount charged as price’ and
shall be the core of the transaction
value. As this value is referable to the
time and removal of the goods, the
differential amount of duty paid under
supplementary invoice by the assessee
is an amount of duty short paid with
reference to the time of removal of the
goods.
The Larger Bench observed that
the assessees in the present case self
ascertained the amount of duty payable
on the differential price of the goods
(upon on the buyer having agreed to
increase the price of the goods) and
paid such duty forth with. Of course,
there was no delay in this payment with
reference to the time at which the price
was increased. The assessees are
challenging the demand of interest on
this basis. But there was a delay in the
payment of such duty with reference
to the time of removal of the goods
and this is the basis of the Revenue’s
demand of interest. The levy of interest
on tax is in the nature of compensation
as held by the Hon’ble Supreme Court.
One’s liability to pay compensation
arises from his nonfeasance or
misfeasance in discharging contractual
or statutory obligations. The liability of
the assessees in the present cases
to pay interest to the Government
under Section 11AB of the Act has to
be examined with reference to their
conduct. They were aware, at the time
of removal of the goods from factory,
that the originally agreed price was not
sufficient to provide a reasonable profit
 457
after meeting the costs incurred in
connection with the manufacture and
sale of the goods. This is the reason
they invoked the price escalation clause
in the contract, or, in the absence of
such clause, initiated negotiations
with the buyer for enhancement of
the price. In none of these cases did
any assessee claim interest from
their buyers on the differential price
belatedly paid. This would mean that,
between the assessee and the buyer,
the differential price was deemed to
have been paid at the time of removal
of the goods itself. If that is so between
the assessee and the department
also, the differential price should be
deemed to have been paid at the time
of removal of the goods.
Thus, the Larger Bench held the
issues (1), (2) and (3) in favor of the
assessee. While considering the issue
(4), the Larger Bench considered the
submissions of both the side. The
assessees contended that there was no
mechanism under the Act for recovery
of interest on the differential duty. Unlike
Section 28 of the Customs Act, there is
no provision in Section 11A of the Act
for demanding interest on duty. On the
other hand the Department contended
that there is a recovery mechanism in
sub-Rule (4) of Rule 8 of Central Excise
Rule, 2002 which reads as follows:
“The provisions of Section 11 of the
Act shall be applicable for recovery of
the duty as assessed under Rule 6 and
the interest under sub-Rule (3) in the
same manner as they are applicable
for recovery of any duty or other sums
payable to the Central Government.” It
was held that where an assessee pays
differential duty (self-assessed under
Rule 6) under supplementary invoice
september 2010
TAXATION
consequent upon upward revision of
price after clearance of the goods,
such duty, being duty which ought to
have been paid at the time and place
of clearance of the goods, would attract
interest under sub-Rule (3) of Rule
8 as well as under sub-Section (1) of
Section 11AB. If the assessee does not
pay such interest, it can be recovered
by the proper Officer of the Central
Excise in terms of Section 11 of the Act.
The Larger Bench is also of the view
that the power to issue demand notice
to the defaulter of interest is also inbuilt
in Section 11. Thus the argument of the
assessees that there was no provision
for recovery of interest payable under
Section 11AB is not acceptable.
In Commissioner of Central Excise,
Pune vs. SKF India Limited – 2009
(239) ELT 385, the Court analysed the
provisions of Sections 11A, 11AA, 11AB
THE CHARTERED ACCOUNTANT 81
 TAXATION
and 11AC. Section 11A puts the cases
of non levy or short levy, non payment
or short payment or erroneous refund
of duty in two categories. One in which
the non payment or short payment
etc., of duty is for a reason other than
deceit; the default is due to oversight
or some mistake and it not intentional.
The second in which the non payment
or short payment, etc., of duty is ‘by
reason of fraud, collusion or any willful
misstatement or suppression of facts,
or contravention of any of the provisions
of the Act or of Rules made there under
with intent to evade payment of duty,
that is to say, it is intentional, deliberate
and/or by deceitful means. Naturally,
the cases falling in the two groups
lead to differential consequences and
are dealt with differently. Section 11A,
however, allows the assessee in default
in both kinds of cases to make amends,
subject of course to certain terms and
conditions. The cases where the non
payment or short payment, etc., of duty
is by reason of fraud, collusion etc., are
dealt with under sub-Section (1A) of
Section 11A and the case where non
payment or short payment of duty is
not intentional under sub-Section (2B).
Section 11A(2B) provides that the
assessee in default may, before the
notice issued under sub-Section (1) is
served on him, make payment of the
unpaid duty on the basis of his own
ascertainment or as ascertained by a
Central Excise Officer and inform the
Central Excise Officer in writing about
the payment made by him and that in
that event he would not be given the
demand notice under sub-Section (1).
But Explanation 2 to the sub-Section
makes it expressly clear that such
payment would not be exempt from
interest chargeable under Section
11AB, that is, for the period from the
first date of the month succeeding the
month in which the duty ought to have
been paid till the date of payment of
duty. What is stated in Explanation 2 to
sub-Section (2B) is reiterated in Section
82 THE CHARTERED ACCOUNTANT september 2010
Section 11A(2B)
provides that the
assessee in default
may, before the notice issued
under sub-Section (1) is
served on him, make payment
of the unpaid duty on the basis
of his own ascertainment or
as ascertained by a Central
Excise Officer and inform
the Central Excise Officer in
writing about the payment
made by him and that in that
event he would not be given
the demand notice under sub-
Section (1). But Explanation
2 to the sub-Section makes
it expressly clear that such
payment would not be exempt
from interest chargeable under
Section 11AB, that is, for the
period from the first date of the
month succeeding the month
in which the duty ought to
have been paid till the date of
payment of duty.
11AB that states where any duty of
excise has not been levied or paid or
has been short levied or short paid or
erroneously refunded, the person what
paid the duty under sub-Section (2B)
of Section 11A, shall, in addition to the
duty, be liable to pay interest. The Court
held that the payment of differential
duty by the assessee at the time of
issuance of supplementary invoices to
the customers demanding the balance
of the revised prices clearly falls under
the provision of sub-Section (2B) of
Section 11A of the Act.
In Commissioner of Central Excise
vs. International Auto Ltd., - 2010 (250)
ELT 3 (SC), the assessee, during the
relevant assessment years, supplied
auto parts to their customers. Since
price difference arose between the
price on the date of removal and the
enhanced price at which the goods
stood ultimately sold, the Department
issued a show cause notice proposing
to levy interest on the differential duty,
paid by the assessee, under Section
11AB of the Central Excise Act, 1994.
458
The assessee submitted the following:
• Interest was not leviable under
Section 11AB of the Act, in view
of the fact that prices indicated
in the purchase orders were
final during the period of supply
of goods;
• The department has accepted
the position that the prices in
the purchase orders were final;
• There is no price variation
clause in the purchase orders,
therefore, there was no
scope for increase in prices
subsequently and that too,
retrospectively;
The Supreme Court endorsed the
views of the Court in ‘Commissioner of
Central Excise, Pune vs. SKF (supra).
The Supreme Court held that it is clear
that the interest is levied for loss of
revenue on any count. In the present
case, one fact remains undisputed,
namely, accrual of price differential.
What does price differential price
signify? It signifies that value, which is
the function of the price, on the date of
removal/clearance of the goods, was
not correct. That, it was understated.
Therefore, the price indicated by the
supplementary invoice is directly
relatable to the value of the goods on
the date of clearance, hence, enhanced
duty. This enhanced duty is on the
corrected value of the goods on the
date of removal. When the differential
duty is paid after the date of clearance,
it indicates short payment/short levy
on the date of removal, hence, interest,
which is for loss of revenue, becomes
leviable under Section 11AB of
the Act.
Conclusion
From the above discussions it can
be inferred that the assessee is liable to
pay interest when he pays differential
duty after clearance of goods on the
differential price of the goods and the
provisions of the Central Act and Rules
are very clear in this regard. n
 459 TAXATION

Overview of Goods and Service Tax Legislation

There is an obligation on part of the assessee under the provisions of Central Excise Act, 1944 to levy and
remit excise duty to the credit of the Central Government on self assessment basis. Failure to deposit central
excise duty or short levy of duty or short payment of service tax will attract the payment of such duty along
with the interest as prescribed by the Central Government now and then. Central Excise duty is assessed on
the transaction value of the goods at the time removal of the same. What treatment should be given in case
any revision of price in the price of the goods? Revision of price may lead to reduction in price or increase in
price. This article discusses the treatment to be given in such situation and the liability of the assessee to pay
the differential duty on differential price and interest, if any, and also penalty.

1. Introduction taxable person, taxable transaction,

CA. Rajat Mohan
(The author is a member of the Institute.
He can be reached at eboard@icai.in.)
Tax base of Goods and Service tax
(GST) would be very wide and would
comprehensively extend over all
goods and services up to the final
consumer point. The GST would have
two components:
1. Central Goods and Service tax
(CGST) – It would be levied by the
Centre; and
2. State Goods and Service tax
(SGST) – It would be levied by a
State.
The basic features of law, e.g.
chargeability, definition of taxable event,
basis of classification, etc., would
be uniform for both the CGST and
the SGST, i.e. the basis of taxability
would be same for both the CGST and
the SGST, thereby wiping out all the
disputes currently taken up by VAT/
sales tax authorities and service tax
authorities to tax a single transaction.
2. GST Legislation
After carefully reading the Finance
Minister Mr. Pranab Mukherjee’s
Budget speech of 2009-2010 and first
discussion paper of the Empowered

september 2010 THE CHARTERED ACCOUNTANT 83

 TAXATION 460

Committee, we deduce that there
would be one act for levy of central tax,
i.e. CGST, and one act for levy of state
tax in each state, i.e. SGST. Therefore,
there would be multiple tax statues in
India for levy of one GST. This could
again bring same problems in the GST
tax structure that existed in the VAT tax
structure.
3. Taxes That Would Be
Foregone
The GST would take place of all the
major indirect taxes currently applicable
in India. Central Taxes that would be
subsumed under the GST:
a) Central Excise Duty – Levied under
Excise Act,1944;
b) Additional Excise Duties – Levied
under Excise Act,1944;
c) Excise Duty levied under the
Medicinal and Toiletries Preparation
Act – Levied under Medicinal and
Toiletries Preparation Act,1955;
d) Service Tax – Levied under Chapter
V of Finance Act,1994;
e) Additional Customs Duty commonly
known as Countervailing Duty
–Levied under Customs Act,1962;
f) Special Additional Duty of Customs
– 4 per cent – Levied under
Customs Act,1962;
g) Surcharge – Levied under on
any of above taxes or any other
surcharges; and
Following State taxes and levies would
be subsumed under the GST:
a) VAT – Levied by any state in India;
b) Sales tax – Levied under Central
Sales Tax Act, 1956;
c) Entertainment tax (unless it is
levied by the local bodies) – Levied
by any state in India;
d) Luxury tax – Levied by any state in
India;
e) Taxes on lottery, betting and
gambling – Levied by any state in
India;
f) State Cesses and Surcharges
as far as they relate to supply of
goods and services – Levied under
on any of above taxes or any other
cesses and surcharges; and
g) Entry tax not in lieu of Octroi –
Levied by any state in India.
All the taxes listed above would
be consolidated under the new GST
regime thereby reducing compliance
costs of taxpayers and administrative
costs of the government. However,
there are few other indirect taxes that
may or may not be summed under the
GST regime as there is no consensus
among States themselves or between
the Centre and the States:
1) Purchase Tax: States themselves
are of the opinion that purchase
tax should be subsumed within the
GST framework and no exception
should be given to any state to
per cent and, finally, in the year 3,
stamp duty should be completely
wiped out and subsumed under the
GST regime.
3) Vehicle Tax: The Empowered
Committee of the State Finance
Ministers is silent on the issue
of inclusion or exclusion of the
vehicle taxes levied by the State.
However, the tax on vehicles
levied by the State Governments
could be subsumed in the GST
as recommended in the report of
Thirteenth Finance Commission.
4) Electricity Duty: The Empowered
Committee is silent over the
issue of inclusion or exclusion
of the electricity duty. However,
electricity duty levied by the State
Governments could be subsumed
in the GST as recommended in
the report of Thirteenth Finance
Commission.
4. Tax Rates
Until now, there has been no official
announcement regarding the GST rate
for India. There are disputes among the
State heads and Central Government
regarding fixation of the GST rate.
Proposed rates of GST in various
reports and news items
Particulars CGST SGST GST
Working Paper
12% 8% 20%
No.1/2009-DEA

h) Cess – Levied under on any continue the levy of purchase State Minister(mass
- 8% - 9%
of above taxes or any other tax. However, few States are goods)
surcharges. getting substantial revenue from
After carefully the purchase tax and, therefore, Task force implemen-
tation report (Non-SIN 5% 7% 12%
reading the Finance they are of the view that it should Goods)
Minister Mr. Pranab not be subsumed under the GST.
Mukherjee’s Budget There is intra-State dispute on this RNR 5% 6% 11%

speech of 2009-2010 and issue. Even the Centre is of the News update 8% 8% 16%

first discussion paper of the opinion that purchase tax is to be

Empowered Committee, we
deduce that there would be
one act for levy of central tax,
i.e. CGST, and one act for levy
of state tax in each state, i.e.
SGST. Therefore, there would be
multiple tax statues in India for
levy of one GST.
subsumed under GST regime.
2) Stamp Duty: It is recommended that
the stamp duty would be phased out
over a period of 3 years. Initially rate
of stamp duty in all states should
be restricted to 4 per cent. In year
2, stamp duty is to be reduced to 2

84 THE CHARTERED ACCOUNTANT september 2010

 461 TAXATION

In the current scenario, there is hardly any indication

towards the proposed tax rates, however, the GST can
be expected to be around 16 per cent to 18 per cent.

5. Valuation
The GST would be levied on the value of goods and
services transacted. Valuation provision would be
common for both the CGST as well as the SGST. There
is no specific information on this issue in any of the
reports except that provisions would be simpler and
more transparent.

6. Inter-State Transactions
The Centre would levy inter-State Goods and Service Tax
(IGST), which would be the CGST plus the SGST on all
inter-State transactions of taxable goods and services.
The inter-State sellers will pay the IGST on value addition
after adjusting available credit of the IGST, the CGST,
and the SGST on their purchases.

Illustration:
Mr. A manufactures goods. He bought goods for Rs.
56,000 and incurred expenses of Rs. 74,000. These
manufactured goods were sold inter-State at Rs.
1,45,000 plus applicable GST. Rate of SGST and CGST
is 7 per cent and 5 per cent respectively. Compute GST
payable.
Solution:

Particulars Amount (R)

Cost of Goods 56000
Add: Expenses 74000
Add: Profit 15000
Sales 145000
IGST* 145000 @ 12% 17400
Sales Price 162400
* IGST (12%) = CGST (5%) + SGST (7%)

7. Tax Credit
Credit would be admissible in respect of both the
components of the GST, i.e. the CGST and the SGST.
The CGST and the SGST are to be treated separately for
the purpose of tax credit. The scheme of tax credit would
be:
(a) Taxes paid against the CGST shall be allowed to be
taken as input tax credit for the CGST and could be
utilized only against the payment of the CGST.
(b) Taxes paid against the SGST shall be allowed to be
taken as input tax credit for the SGST and could be
utilized only against the payment of the SGST.
Cross utilization of input tax credit between the
CGST and the SGST would not be allowed except under
the IGST model.

september 2010 THE CHARTERED ACCOUNTANT 85

 TAXATION 462

Example: BASIC R3+R2+R1) as GST on the value addition The introduction of

Let us understand the working of along the entire value chain from the GST will bring about
GST on a manufactured commodity producer to the retailer, after setting-off a macroeconomic
from point of view of a manufacturer, GST paid at the earlier stages. That is to dividend by reducing
wholesaler, retailer, and final consumer say, the final price paid by consumer is: what have been called the
assuming the GST rate is 10 per cent: R160 + 10% x 160 = R176. negative grey area dynamic
Stage of Purchase Value Value of Rate Of GST on
ITC
Net GST = GST effects of cascading taxation. The
GST output on Output – ITC
Supply Chain Value of Input Addition supply flawless GST subsumes all indirect
Manufacturer 100 30 130 10% 13 10 13-10 = 3 taxes on goods and services,
Wholesaler 130 20 150 10% 15 13 15-13 = 2 which is the most elegant method
Retailer 150 10 160 10% 16 15 16-15 = 1 of taxing consumption. Under this
structure, all different stages of
Manufacturer 8. Threshold production and distribution can
The manufacturer making value 8.a. As suggested in Empowered be interpreted as a mere tax pass-
addition of R30 on his purchases worth Committee Report through, and the tax essentially
R100 of input of goods and services Turnover of Goods
Applicable sticks on final consumption within
Taxes
used in the manufacturing process. the taxing jurisdiction.
Neither SGST
The manufacturer will then pay net Below R10 lac
nor CGST
GST of R3 after setting-off R10 as the consumption. The introduction of GST
Between R10 lac and R150 lac Only SGST
GST paid on his inputs, i.e. Input Tax Both SGST
will bring about a macroeconomic
Above R150 lac
Credit, from the gross GST of R13. The and CGST dividend by reducing what have been
manufacturer sells the goods to the called the negative grey area dynamic
wholesaler. Turnover of Services Applicable Taxes effects of cascading taxation. The
Wholesaler Below R10 lac
Neither SGST nor flawless GST subsumes all indirect
CGST
When the wholesaler sells the same taxes on goods and services, which
Between R10 lac and RΒ Only SGST
goods after making value addition of Both SGST and
is the most elegant method of taxing
Above Rβ
R20, he pays the net GST of only R2 CGST consumption. Under this structure,
after setting-off of the Input Tax Credit
*Note: R β would be appropriately high, may be at all different stages of production and
or around R150 lac
of R13 from the gross GST of R15 to distribution can be interpreted as a
8.b. As suggested in Task Force mere tax pass-through, and the tax
the manufacturer.
Report essentially sticks on final consumption
Retailer Turnover of Goods Applicable Taxes
When the retailer sells the same goods within the taxing jurisdiction. So,
Below R10 lac Neither SGST nor CGST
after a value addition of R10, he pays Above R10 lac Both SGST and CGST
following are the benefits of the GST
the net GST of only R1, after setting-off over the present Indirect Tax system:
R15 from his gross GST of R16 paid to Turnover of Services Applicable Taxes 1. Economic Growth
wholesaler. Below R10 lac Neither SGST nor CGST 2. Uniform Tax Structure
Thus, the manufacturer, wholesaler Above R10 lac Both SGST and CGST 3. Lower and Combined Single Tax
and retailer have to pay only R6 (i.e. From the above discussion, we see Rate
and predict that Task Force version of 4. Gain’s in GDP
States themselves threshold limit is more logical and easy 5. Benefits to Manufacturing Sectors
are of the opinion to manage. Therefore, the proposed 6. Rise in Exports
that Purchase tax threshold limit for both the CGST and 7. Poverty Reduction
should be subsumed the SGST for goods as well as services 8. Better Employment Opportunities
within the GST framework and would be R10 lac. However, taxpayers 9. Reduced Cost of Housing
no exception should be given to below the threshold limit may be To conclude, the implications of
any state to continue the levy allowed to register voluntarily. a switch over to the flawless GST as
of Purchase tax. However, few recommended by us are indeed far-
States are getting substantial 9. Conclusion reaching. Every stakeholder stands
revenue from the Purchase The problem of the present distorted to gain. The GST has the potential to
Tax and, therefore, they are of indirect tax system can be effectively transform not only the tax system in the
the view that it should not be addressed by shifting the tax burden country but it also shows the way we
subsumed under the GST. from production and trade to final organize and do business. n

86 THE CHARTERED ACCOUNTANT september 2010

 463 MANAGEMENT

Leadership Approach and Attributes in

Strategy Implementation in Indian Companies

In a fiercely competitive environment, leadership is the driving force to decide the future of an organisation.
That is why it is a challenge to appoint the right person to run the organisation in the right direction. There are
many companies that are known by their leadership style and value systems that contribute to organisational
performance. Through a survey of 250 executives, the authors have found out that out of seven top crises
identified, five are about leadership. Leadership is a difficult concept to explain, which is about emotions,
morality, character and values. Nowadays, many companies have put in order their leadership philosophy
like vision and mission statements and they have explained this philosophy to their employees as well. They
believe that leadership drives a culture and a value system that has the ability to foster a motivational and
innovative environment in organisations. Do you want to improve the quality of your organisation? Read on…
A survey was conducted and it was large magnitude that needs to be
found out that a crisis of leadership addressed. Out of the seven
was being experienced in our nation. crises identified, five were about
In the survey, 250 executives were leadership.
asked to rank the main crises facing In a competitive environment,
Dr. S. K. Sharma, us. 240 respondents named a lack of leadership becomes a driving force
Dr. Sunil Giri, and political leadership as the main crisis, to decide the future of organizations,
Dr. A. K. Sharma followed by a crisis of leadership in all which is why it is a challenging task on
(Dr. S. K. Sharma is a Professor and
Head of the Department of Management walks of life by 238, global warming their part to appoint the right people
Studies at The Technological Institute of as the next big crisis by 235, the to lead them in the right direction.
Textile and Sciences, Bhiwani and Dr. crisis of faith in government by 230, There are many companies that
A. K. Sharma is a Lecturer in the same corporate governance as the next are known by their leadership style
Department. Dr. Sunil Giri is an Assistant
Professor in the College of Management biggest problem by 228, increasing and values systems. Leadership is
Studies, Shri Mata Vaishno Devi Univer- corruption at all levels identified by 210 an important factor that contributes
sity, Kakryal, Jammu & Kashmir. They may as the next big crisis and finally water to the organizational performance.
be reached at sharmask210@rediffmail. crisis named by 204 as a problem of Leadership is one of the most difficult
com.)

september 2010 THE CHARTERED ACCOUNTANT 87

 MANAGEMENT
concepts to explain. It’s about
emotions, morality, character and
values. Nowadays, majority of
companies have put in order their
leadership philosophy like vision
and mission, and made it clear
to their employees. A prominent
organization believes the leadership
philosophy as one “that drives a
culture and a value system that
fosters an energetic, motivational and
innovative environment succeed in
building sustainable organizations.
Leaders who walk the talk and base
decisions on experiential learnings
with a strong foresight make a big
difference”.
While some believe that leaders
are born not made, others believe
that leadership can be learned. Leaders
need to outline a vision – they should
have the ability to look far into the
future and should be able to project
the direction of different trends. After
setting the vision, leaders need to
communicate it to every one in the
organization with the zeal of an
evangelist. Vision tends to get distorted
as it is communicated through the
ranks, therefore, it has to be commun-
icated in such a manner that employees
are enthused and energized to
achieve, do their best and overtake
others while doing so. Leaders must
possess the following characteristics:
• They need to be mentally and
physically fit.
• They need to exhibit total integrity
– within themselves and with
those around them and with their
employers.
• They should have the courage to
take challenges, to make choices,
focus and prioritise.
• They should have the ability to
take initiative. Initiative is not about
being reckless; it’s about going
with prudence.
• They should be a good listener
and have an eye for detail.
• They should have enough confi-
88 THE CHARTERED ACCOUNTANT september 2010
464
dence that the people empowered
Vision tends to
have a detailed plan.
get distorted as it
is communicated
Strategy Implementation through the ranks, therefore,
and Leadership it has to be communicated in
Strategy implementation is the
such a manner that employees
sum total of the activities and choices
are enthused and energized
required for the execution of a
to achieve, do their best and
strategic plan. It is the process by
overtake others while
which strategies and policies are put
doing so.
into action through the development
of programmes, budgets and
procedures. Poor imple-mentation has
been blamed for a number of strategic
failures. Majority of organisations
failed due to poor leadership approach
in strategy implementation. Studies
show that half of all acquisitions fail to
achieve what is expected of them, and
one out of four international ventures do
not succeed. A study of the 700 largest
mergers from 1996 to 1998 found that
83 per cent of the mergers failed to
increase the acquirer’s shareholders
value within a year of completing the
merger. At this juncture, leadership
plays a very prominent role.
Objective of the Study
The main objective of this study is to
know the leadership approach and
attributes in strategy implementation in
Indian companies.
Sample Size and Profile
The present study provides a picture
of the perceptions of 50 companies
about the role of leadership in
strategy implementation in term of 50 have shown their turnover in between
their approach and attributes. Out R200 crore to R400 crore, whereas
of 50 companies 40, i.e. 80 per cent, only 9 companies are covered under
companies have mentioned that the category of below R200 crore; it
product manufacturing is their main shows the representation of medium-
area of business whereas 5, i.e. 10 per and large-size companies in the study.
cent, companies belong to the service On the basis of corporate image as
sector. There are only 5, i.e. 10 per well as performance is concerned, the
cent, companies who claimed for both researcher has received the response
the areas, i.e. manufacturing as well from well-known companies of India
as service. Majority of the companies, including Reliance Industries, Indian Oil
i.e. 24, are having turnover above R400 Corporation, Bharat Heavy Electricals,
crore per annum. 17 companies out of Bharat Petroleum Corporation, etc.
 465
Leadership Styles and
Organizational Performance
In excellent companies, leadership
is not about recognizing a distinctive
individual as leader. A group of
individuals provides the energizing
force. Leadership styles are patterns
of behaviour, which leaders adopt
in influencing the behaviour of their
followers or subordinates in the
organisational context. Spreier, Fontaine
& Malloy identify six styles of leadership
that managers and executives use to
motivate, reward, direct and develop
others:
1. Directive: This style entails
command and control behaviour
that at times become coercive.
When executives use this
approach, they tell people what
to do, when to do it and what will
happen if they fail. It is appropriate
in crises and when poor performers
must be managed, but it eventually
stifles creativity and initiative. High
achievers under stress favor it.
2. Visionary: This style is autho-
ritative. But rather than simply
telling people what to do, leaders
gain employee support by clearly
expressing their challenges and
responsibilities in the context of the
organization’s overall direction and
strategy. This makes goals clear,
Participative style
of leadership is
collaborative and
democratic. Executives using
this style engage others in the
decision-making process. It’s
great for building trust and
consensus, especially when
the team consists of highly
competent individuals and
when the leaders have limited
knowledge or lack formal power
and authority.
increases employee commitment,
and energies a team. People with
a high-personalized power drive
under low-stress situations and
people with a high socialized-
power driven when stress is high
commonly use it.
3. Affiliative: Leaders with this style
emphasise employees and their
emotional needs over the job, and
tend to avoid conflict. The approach
is effective when managers are
dealing with employees who are
in the midst of personal crises or
in high-stress situations such as
layoffs. It is most effective when
used in combination with visionary,
participative, or coaching styles. It
is seldom effective alone.
4. Participative: This style of
leadership is collaborative and
september 2010
MANAGEMENT
democratic. Executives using
this style engage others in the
decision-making process. It’s great
for building trust and consensus,
especially when the team consists
of highly competent individuals
and when the leader has limited
knowledge or lack formal power
and authority, such as within highly
matrixes organizations. It is favored
under high-stress conditions by
leaders with high affiliation drives.
5. Pacesetting: This style involves
leading by example and personal
heroics. Executives using this
style typically have high standards
and make sure those standards
are met, even if they have to do
the work themselves, which they
frequently do. It can be effective
temporarily and can demoralize
employees over the long haul.
It is a typical go-to style for high
achievers, at least under relatively
low-stress conditions.
6. Coaching: This style involves the
executives in long-term professional
development and mentoring of
employees. It’s a powerful but
underused approach that should be
part of all leaders’ regular repertoire.
Leaders who score high on the
socialised-power motive prefer it
under low-stress conditions.
THE CHARTERED ACCOUNTANT 89
 MANAGEMENT
Leadership Style in Indian
Companies: A Factual
Picture
Sumantra Ghoshal, former Professor
of Strategic Leadership at London
Business School, says: ‘Effective
leaders intuitively understand people’s
feelings and have the ability to shape
and leverage those feelings to attain
collective goals. They create and
manage pride, fear, shame, anxiety,
anger and other strong and weak
feelings that move people to do things.’
Mr. N. R. Narayanan Murthy and
Mr. Azim Premji may be considered
inspiring role models for their values
and leadership styles. Majority of the
respondents, i.e. 46 out of 50, claimed
that they believe in participative
leadership style whereas 4 respondents
visualised the need of authoritarian
leadership style. It was felt that the
strategists must adopt the participative
leadership style (see Table I).
Table I: Adoption of
Leadership Style
Leadership Style Number of
Strategists
A. Authoritarian 04 (08%)
B. Participative 46 (92%)
Total 50 (100%)
Source: Personal Survey
All respondents from the selected
companies have acknowledged that
the leadership affects the organisational
performance and gave their comments
on leadership:
1. Leadership gives direction to
achieve the objectives.
2. Leadership leads to the right
90 THE CHARTERED ACCOUNTANT september 2010
466
direction and make the things
happened.
3. Leadership helps to motivate
employees.
4. Organisations perform as per
their inherent position in industry.
Leaders help in getting the
optimum performance.
5. Leadership can make efforts to
develop teamwork to improve
productivity and quality.
6. The knowledge and working style of
leaders motivates the subordinates,
Mr. N. R. Narayanan
increases the morale and creates a
Murthy and Mr.
healthy work environment.
Azim Premji may
7. Good leaders can guide their
be considered inspiring role
teams well and teams can achieve
models for their values and
goal easily.
leadership styles. Majority of
8. Leaders co-ordinate/motivate/
the respondents, i.e. 46 out of
keep the bunch together/build
50, claimed that they believe
teams/show light.
in participative leadership
9. Leaders lead and finally achieve
style whereas 4 respondents
the organisational objectives.
visualized the need of
10. Leadership provides right direction
authoritarian leadership style.
to employees motivating and
It was felt that the strategists
energising people.
must adopt the participative
11. Growth, positive thinking, optimism
leadership style.
coupled with reality in realistic
assessment.
12. The quality of leadership affects leaders keep them trained and
the quality of the organisation. motivated. They should be capable
13. Leadership sets examples, to lead by example.
20. If leaders walk the talk, they build
supports staff, guides, motivates
and gives credit to implementers, the trust.
supports in times of low 21. Leaders should lead from the front.
performance. 22. Leaders set direction to achieve
14. Leadership determines the values goals.
to be pursued. 23. Leaders become a driving force,
15. Leadership determines the so that the combined efforts of
success or failure of the all human resources achieve
organisational performance right objectives.
in the beginning. 24. Leadership gives direction and
16. Leadership provides direction and vision to the organisation.
motivates the team in implementing 25. Leaders have clarity in approach.
the strategy. 26. Leaders believe in team-building.
17. Decision-making is the role of 27. Leaders’ commitment sets
leaders. the direction. If ever leaders’
18. Leaders act as expert captains. commitment is perceived to
19. Leaders evolve vision of the be low, organisations start
organization and identify the right sinking.
talents. To activate such vision, 28. Yes, leadership sets direction;
 467 MANAGEMENT

Table II: Leadership Attributes at Strategy Implementation

Attributes Frequency/Weighted Score on Scale basis VI to I Wtd. Rank

Mean
VI V IV III II I

Behaviour 16x6=096 13x5=65 10x4=40 04x3=12 03x2=06 04x1=04 4.5 I

Personality 21x6=126 05x5=25 05x4=20 08x3=24 05x2=10 03x1=03 4.4 II

Motivation 06x6=036 08x5=40 13x4=52 09x3=27 12x2=24 ------------ 3.7 III

Culture 01x6=006 14x5=70 14x4=56 10x3=30 06x2=12 05x1=05 3.6 IV
Influence 04x6=024 05x5=25 04x4=16 06x3=18 13x2=26 15x1=15 2.6 V
Communication 02x6=012 02x5=10 01x4=04 11x3=33 10x2=20 21x1=21 2.1 VI

said that the organization’s ability

good leaders carve plans for
organisational growth and drive
the organisation with their vision to
achieve the strategy and goals.
29. Leadership means achieving target/
goal in a systematic manner.
30. Leadership means motivating and
controlling individual and team
performance.
31. Leaders look top-down philosophy.
32. Leaders lead by example, walk the
talk.
33. Leaders are like the engine pulling
the train.
34. Leaders affect overall organisation
culture.
Leadership Attributes at
Strategy Implementation
Personality, influence, behaviour,
motivation, culture and communication
are the important attributes of
leadership in terms of strategy implem-
entation, ability of managers in an
organisation. In the present study, it
has been observed that behaviour is
an important attribute and secured
first rank with the weighted mean of
4.5 followed by personality, motivation,
culture, influence and communication
with the weighted means of 4.4,
3.7, 3.6, 2.6 and 2.1 respectively
(see Table II).
to mobilise thousands and millions
of employees, and our trade
partners and suppliers to execute
its relentlessly and vigorously
every minute and everywhere in
the world is hugely challenging,
i.e. where the role of leadership
becomes more important.
Source: Personal Survey
Conclusion
In the context of the results, it
The success and failure of any
was the quite satisfying to take up
organization depend on the approach
this study because it mainly reflects
and attributes of leadership in the
the behavioural aspects. In this
organization. The knowledge and
situation behaviour controls and
working style of leaders motivates
input controls can be given due
the subordinates, increases the
importance.
morale and creates a healthy work
a. Behaviour controls specify
environment. Leadership skills pro-
how something is to be done
mote the participation of employees
through policies, rules, standard
in the decision-making process at
operating procedures and orders
different levels of organizations and
from superior. Behaviour controls
help to inculcate skills of supervision
are most appropriate when
and control in subordinates.n
performance results are hard to
measure but the cause-effect
connection between activities and
results is clear.
b. Input controls focus on resources
such as knowledge, skill,
abilities, values and motives of
employees. Input controls are
most appropriate when output
is difficult to be measured and
there is no clear cause-effect
relationship between behavior and
performance. Leadership acts as a
process of mobilising people. It is

september 2010 THE CHARTERED ACCOUNTANT 91

 BANKING AND FINANCE 468

Reverse Mortgage Facilities in India —

For Cash Poor–Home Rich Senior Citizens

There has been a limited academic debate on the prospects and problems attributable to reverse mortgage
facility (RMF) in India. Still, there is a scope of improvement in the RMF market. The market may be
developed and promoted, if all the constituents like governments, lenders and other intermediaries design
and implement favourable policy guidelines. In view of low uptake of the product, this paper examines
reverse mortgage as one of the ways of unlocking housing equity to supplement retirement income if any
for cash poor elderly citizens and provides in-depth review and analysis of reverse mortgage programme in
India. It briefly explains the salient features of Reverse Mortgage Scheme, 2008, and operational guidelines
issued by the National Housing Bank. It also describes available home equity conversion product in India
and abroad. Some of the suggested key policies like counselling have also been listed. An attempt has been
made to enumerate emerging trends and forward-looking actions in RMF in this article.

About Reverse Mortgage of children to look after their parents

CA. Ashok K. Malhotra
(The author is a member of the Institute.
He can be reached at eboard@icai.org.)
The status of parents is that of a God
as per the Indian culture. Even in
the ancient Indian history, we come
across sayings like Matrudeo Bhava,
Pitrudeo Bhava, etc. The famous
Shravankumar’s story which was stated
in the Ramayana establishes this status.
The Indian culture considers parents
as the first teachers of their children.
The foundation of their life is built by
them. So, it should be the moral duty
and support their needs. In joint-family
system, all members are cared for by
the family itself. But nowadays, the
concept of a joint family is collapsing.
Because of industrialisation, money-
mindedness and an increase in market
prices, children have started neglecting
their parents. They have no time to
look after their parents because of
their busy schedule. Besides, there are
many elderly childless couples. Some

92 THE CHARTERED ACCOUNTANT september 2010

 469
of these elderly people have cash
poor - home rich status. Consequently,
under the Maintenance and Welfare of
Parents and Senior Citizens Act, 2007,
the Central and State Governments
have been empowered to implement
various programmes for the betterment
of the senior citizens.
The main objective of old age
security programmes is to ensure the
financial independence and dignity of
the senior citizens of India. In addition
to this Act, financial programmes
were announced to achieve old age
security. Two such schemes are the
reverse mortgage facility and the new
pension scheme. It has been over two
years since a contemporary product
reverse mortgage facility (RMF) was
announced by the Hon’ble Finance
Minister of India in his budget speech in
2007-08. As per the speech, some of the
reputed organisations may introduce
reverse mortgage facility under which
house-owner senior citizens can avail
of finance against the mortgage of
their house equity, while still occupying
and staying in the house. RMF in India
is still in an infancy stage. It is yet to
gain significant acceptance by senior
citizens.
Reverse mortgage facilities are
home-loan products designed for
senior citizens of over 60 years of
age by converting their home equity
into liquid form. It is a way of getting
the benefits of the home equity by
retaining the home ownership and
also without having to make any
repayments. The borrowers, especially
after retirement will definitely find the
RMF a useful financial product that
provides them financial independence.
In case of married couples, at least
one of them should be above 60 years
in a joint borrowing to avail of this
product. Normally, loan is offered for a
maximum period of 20 years. There are
no income qualifications to avail RMF
unlike regular mortgages as borrowers
are not required to repay outstanding
Reverse mortgage
facilities are home-
loan products
designed for senior citizens
of over 60 years of age by
converting their home equity
into liquid form. It is a way of
getting the benefits of the home
equity by retaining the home
ownership and also without
having to make any
repayments.
loan. The lender, besides scrutinising
the property papers, ensures that the
borrowers pay all the taxes and charges
towards the property regularly. The
property is free from any encumbrance
and is maintained in the saleable
condition with adequate insurance
cover against fire and other perils.
There has been a limited academic
debate on the prospects and
problems attributable to the RMF in
India. Nevertheless, there is a great
scope of improvement in its market.
Its market can only be developed
and patronised, if all the constituents
like governments, lenders and other
intermediaries design and implement
favourable policy guidelines. We will
examine reverse mortgage as one of
the ways of unlocking housing equity
to supplement retirement income for
cash poor elderly citizens and provides
an in-depth review and analysis of the
programme in India.
Design and Features of
Various Reverse Mortgage
Facilities
Central Government, in the exercise of
powers conferred by the Clause (xvi) of
the Section 47 of the Income-tax Act,
1961, has come out with the Notification
No. 93/2008, dated September 30,
2008, with a scheme, i.e. Reverse
Mortgage Scheme, 2008, which came
into effect from April 1, 2008. Currently,
under the scheme, the National
Housing Bank established under the
Section 3 of the National Housing
september 2010
BANKING AND FINANCE
Bank Act, 1987, any scheduled bank
included in the second schedule to the
Reserve Bank of India Act, 1934, or a
housing finance company registered
with the National Housing Bank will
be the approved lending institute. The
borrower under the scheme is known as
reverse mortgagor. The disbursement
of loan to eligible reverse mortgagor
can be in any of the following modes:
(I) Periodic payments to be decided
mutually between the approved
lending institution and the reverse
mortgagor
(II) Lump sum payment in one or
more trenches to the extent that
the aggregate of the amount
disbursed as lump sum payments
do not exceed 50 per cent of the
total loan amount sanctioned
(III) Committed line of credit with an
availability period agreed upon
mutually to be drawn down by the
borrower
The tenure of the loan shall not
be beyond 20 years from the date of
signing the agreement by the borrower
and the approved lending institution.
The reverse mortgagors or their legal
heirs or estate shall be liable for
repayment of the principal amount
of loan along with the interest to the
approved lending institution at the time
of foreclosure of the loan agreement.
In US, there are three types of
reverse mortgages: federally insured,
lender insured and uninsured.
Moreover, three distinct products are
- Home Equity Conversion Mortgage
(HECM), Fannie Mae Home Keeper
Reverse Mortgage and Cash Account.
These products differ according to the
residential property to be mortgaged,
payment types, loan amount,
processing fees and interest on the
loan balance. Another variation in the
product can be the payment of annual
accrued interest once in a year based
on the convenience of the borrower.
National Housing Bank, a subsidiary
of the Reserve Bank of India (RBI) has
THE CHARTERED ACCOUNTANT 93
 BANKING AND FINANCE
also announced operational guidelines
for granting of the RMF. The guidelines
are applicable to the housing finance
companies registered with the NHB
within the overall framework of the RMF.
Primary lending institutes have the
discretion to place suitable safeguards
keeping into view the inherent risks.
One of the eligibility criteria under
the scheme is that the title of the
residential property to be mortgaged
should be free from encumbrances
and mortgagor should have a clear title
or ownership. This criterion is vague
as it is left to the discretion of primary
lending institutions (PLIs) to decide the
extent of existing loan which under the
normal mortgage will be treated as free
from encumbrances. Moreover, most
of the residential houses sold earlier
by government bodies like the DDA or
the GDA are on a 90-year lease. It has
not been made clear in the guidelines
as to whether senior citizens owning
such residential properties are eligible
prospects under the RMF.
The maximum amount of loan
that can be approved depends on
the market value, age of the youngest
borrower and the prevalent interest
rate. However, the PLIs will have to
apply prudence to determine the loan
quantum reckoning the no-negative-
equity guarantee being provided
by the PLIs. The PLIs may consider
ensuring that the equity to value ratio
does not at any time during the tenor
of the loan fall below 10 per cent and
considering revaluing the property
mortgaged at least once every five
years. The quantum of loan may
undergo revisions based on such re-
valuation of property at the discretion
of the lender. The RMF can not be used
for speculative, trading and business
purposes. However, the document has
provided a list of end use of funds as
per the NHB guidelines which are:
(I) Upgradation, renovation and
extension of residential property
(II) For uses associated with home
94 THE CHARTERED ACCOUNTANT september 2010
improvement, maintenance/
insurance of residential property
(III) Medical, emergency expenditure
for maintenance of family
(IV) For supplementing pension/other
income
(V) Repayment of an existing loan
taken for the residential property to
be mortgaged
(VI) Meeting any other genuine need
Counselling consideration for
such a complex financial product is
to be taken up seriously. The senior
citizens should be treated more fairly
in explaining important terms of the
agreement. For example, the lenders
must clarify the implication of fixed and
floating rate of interest in a transparent
manner, upfront to the borrowers.
Similarly, the methodology of the
revaluation process of mortgaged
property and the frequency/schedule
of such revaluations should be clearly
specified to the borrowers upfront.
As a customer-friendly gesture and
in keeping with international best
practices, after the documents have
been executed and loan transaction
finalised, the borrowers may be
given at least three business days to
cancel the transaction under the right
of rescission clause. Besides, the
rationale behind the decision of mode
of payment and fixation of the loan
tenure shall be clearly disclosed to
the borrowers. A detailed schedule of
verification charges of external firms,
National Housing
Bank, a subsidiary
of the RBI has
also announced operational
guidelines for granting of
the RMF. The guidelines are
applicable to the housing
finance companies registered
with the NHB within the overall
framework of the RMF. Primary
lending institutes have the
discretion to place suitable
safeguards keeping into view
the inherent risks.
470
title examination fees, legal charges,
stamp duty and registration charges,
property survey and valuation charges
should be specified and provided to
the prospective borrowers upfront by
the lenders without any ambiguity. The
lenders are required to observe and
maintain high standards of conduct
in dealing with senior citizens and
their families and to treat them with
special care. The borrowers may be
suggested to nominate their personal
representatives usually a close relative.
Most of the code of conducts should
be observed pre & post finalisation of
the loan agreement.
There are many income-generating
competing products consuming home
equity in the markets. They include the
reverse mortgage (RM), subletting,
downsizing and lease buyback
scheme (LBS). Since acceptability of
any innovative financial product takes
time and in order to make it viable,
focused attention is required. Lenders,
borrowers, intermediaries and even
the regulators may not understand
completely the implications or risks
associated with it because of lack
of data and experience in handling
these products. That is the reason why
conventional financial products are
adopted without much resistance by
the investors and the borrowers. Over
a period of time, different variations of
financial products have been evolved
wherein home equity can be converted
in to liquid forms that are suitable to
borrowers. Some such schemes are
not offered in India. Such schemes are
available in advanced countries:
1. Sale and lease back of residential
property: The homeowner sells the
house but keeps the right to live in
the house till the time that it is his
prime residence. The amount could
be used for home improvement or
a health need, etc. The investor’s
return is the periodic lease money.
2. Interest-only Mortgage: The
borrower takes lump sum amount
 471
and pays only interest during his
lifetime. The principal is recovered
at the time of sale from the
proceeds of the home.
3. Mortgage Annuity: The loan against
the mortgage is used to purchase
an annuity for the homeowner.
The advantage is that even if the
homeowner moves out of the
home, the annuity will continue till
his death.
4. Shared Appreciation Mortgages
provide interest free loan or loan at
a very low rate with no repayment
date. The lender gets a pre-
agreed share in any appreciation
in the property value over the
accumulated value of the loan at
the time of sale or death of the
borrower, but does not share any
decline in value. Shared Equity
Mortgages (SEMs) are similar in
effect to housing partnerships.
SEMs are occasionally arranged
among family members and
sometimes with third party
investors. With SEMs, there are
three parties to the mortgage
contract, the homeowner, an
investor, and a mortgage lender.
In effect, both the homeowner
and the investor buy shares in
the property. In some cases the
investor and mortgage lender may
be the same.
In developed countries like USA,
Europe and Australia, there are also
some private reverse mortgages that
are not insured by the government, e.g.
Lenders, borrowers,
intermediaries and
even the regulators
may not understand completely
the implications or risk
associated with it because of
the lack of data and experience
in handling these products. That
is the reason why conventional
financial products are adopted
without much resistance by the
investors and the borrowers.
the Home Keeper for Home Purchase
program recently begun by Fannie Mae
under which the homeowner’s price
risk is shared with other investors.
In nutshell, the multiple reverse
mortgage products are offered with
similar structural features. There are
different costs involved with various
degree of flexibility:
Risks Associated with
Various Reverse Mortgage
Facilities
There are diversifiable and non-
diversifiable risks in RMF transactions.
As noted above, borrower longevity,
interest rates and future property values
are the primary sources of collateral
risk for the reverse mortgage lender.
Diversifiable risks, based on the law
of large numbers, can be pooled and
managed through insurance. So far,
there is no insurance product in India
to cover longevity risk completely. This
is managed by the lender to a limited
extent.
Longevity: The lenders have to
evaluate the risk of the individuals
outliving the agreement of reverse
mortgage, as the borrowers are not
required to vacate the house. Only
the annuity payments will stop. This is
one of the scenarios in the decision-
making process for the lenders. As
stated above, longevity as a risk can
be managed through insurance. This
is one of the reasons for not having
life-time annuity product in India under
the reverse mortgage scheme. Central
Bank of India has signed up a strategic
alliance with Star Union Dai-ichi Life
Insurance for a life-long annuity. One
of the problems attributed to longevity
risk is that of adverse selection of
the borrowers. Adverse selection is a
problem of asymmetric information.
Normally, life insurance contracts take
care of the risk of adverse selection
by medical examination carried out
on the individuals. Reverse Mortgage
Facilities are primarily meant for old
september 2010
BANKING AND FINANCE
age security. The problem of adverse
selection can not be completely
mitigated as there is no provision of
medical examination in the scheme.
Longevity risk is to be managed by the
lenders in collaboration with insurance
companies who have knowledge
and experience in dealing with the
risk.
Interest Rates: The lenders of
RMF are responsible for managing
non-diversifiable interest rate risk that
is appearing on the balance sheet, by
adopting Asset-Liabilities matching
techniques. Most of the lenders
normally manage interest risks in
two ways. If the RML is at fixed rate
facilities, the lenders may incorporate
interest rate reset clause in the reverse
mortgage documents. A reset clause
permits banks to review rates at the
end of certain number of years. The
lenders should formulate the Reset
Clause policy as the policy depends
on the quantum and tenure of the loan
as well as on shape and level of the
interest yield curve. The implications
of the reset clause are shared with the
borrowers. Effectively, this makes the
fixed rate loans equivalent to floating
rate ones. The guidelines on the
subject published by the Corporation
Bank cover both fixed and floating
rate of interest. In either case, it is not
beneficial to the borrower, hence the
risk. The second way to manage the
risk is to reduce the loan commitment
or annuity amount. Alternatively, loan
margin can be adjusted in such a
manner that the impact of interest rate
risk on the outstanding loan is reduced.
Nevertheless, the NHB, in order to
promote the RMF, should absorb losses
in extreme cases eventually. As such,
the insurers of reverse mortgages are
partially hedged from interest rate risk
by the security interest that the lenders
have in the property. The insurers are
hedged to the extent that property
appreciation is positively correlated
with interest rate changes.
THE CHARTERED ACCOUNTANT 95
 BANKING AND FINANCE
Property Value: Value of the
property is exposed to two kinds of risks.
Diversifiable risk can be considered
through large number of mortgage
cases. But non-diversifiable risks like
economy recession at the national level
can be mitigated through reinsurance.
Variation of individual property values
around the average, or expected value
increases over time. In other words,
the likely error of estimation of the
property value is greater if the period of
prediction is longer.
Aforementioned risks are being
managed in developed countries
mainly through insurance and with the
terms of the agreement with borrowers.
The viability of managing risk through
insurance may not be feasible as of now
in India for the simple reason that the
number of reverse mortgage borrowers
is limited and pooling of the risk may
not be adequate to sustain insurance
business. We examine how far the
risks borne by the lenders in India are
managed through different techniques.
The PLIs are able to minimize the risks
in the RMF transactions by adopting
the following techniques:
(I) PLIs compute eligible amount by
an overall cap of loan amount.
(II) PLIs estimate the loan to value
ratio in such a way that there is no
negative equity guarantee.
(III) Equity to value ratio is always
greater than 10 per cent during the
tenor of the loan in the RMF.
(IV) The maximum lump-sum payment
is restricted to 50 per cent of the
total eligible amount of loan subject
to a cap of R15 lakh.
(V) The borrowers do not have the
discretion to use funds beyond the
specified applications.
Moral Hazard in Reverse
Mortgage
Agency Issue: The valuation of the
residential property is required to be
done at such frequency and intervals
as decided by the PLIs, which in any
96 THE CHARTERED ACCOUNTANT september 2010
case shall be at least once every five
years. The PLIs shall determine the
market value of the residential property
through their external/in-house
valuers. Also, there will be agency
problems in getting appraisers to give
unbiased appraisals when they know
that their appraisal feeds directly to a
disadvantage for the homeowners. But
these appraisals of the real value of a
home are subject to substantial errors,
10 per cent, 20 per cent, or, even more
are quite common.
Renovation and Maintenance of
the Property: In most of the reverse
mortgage transactions, the owners’ equity
in percentage terms gradually keeps
on reducing over time unless the rate
of appreciation in value is higher. There
is no incentive to maintain the house
properly after the owners’ home equity
is reduced below, say, 10 per cent. To
overcome this category of moral hazard,
the RML may be foreclosed as per the
guidelines of the NHB. Alternatively, the
primary lending institute may reserve the
option to pay for insurance premium,
taxes or repairs by reducing the eligible
loan advances and using the difference
to meet the obligations/expenditures. In
practice, it may be very difficult to enforce
such contract provisions.
Reverse Mortgage borrowers may
undertake upgradation, renovation
and extension of residential property in
such a manner that has deteriorated the
value of the house. The borrowers will
undertake only those improvements,
the lack of which causes a lot of
inconvenience. Consider a case, a
borrower constructs a balcony in
an unconventional manner to get
sun during winter and the value of
the property may go down. Another
source of moral hazard on the part of
the borrowers is to utilise loan amount
for a purpose where the legitimacy
is debatable. Subjectivity about the
genuineness of expenditure can not be
ruled out. This may have an effect on
the interest of the lenders.
472
Central Bank of India
has signed up a
strategic alliance with
Star Union Dai-ichi Life Insurance
for a life-long annuity. One
of the problems attributed to
longevity risk is that of adverse
selection of the borrowers.
Adverse selection is a problem
of asymmetric information.
Normally, life insurance
contracts take care of the risk
of adverse selection by medical
examination carried out on the
individuals.
Off-the-Contract Transactions:
Instead of renovation or proper
maintenance, the owners have
incentive to sell the expensive branded
electrical and sanitary fittings of the
property with the intention to replace
the same with cheaper ones. Such
an off-the-contract deal may not even
come to the knowledge of the official
valuators. Likewise, the evidence of
subletting of the property during the
tenure of the loan is most difficult task
to establish by the lenders.
Demand Side of RMF
The NHB, the regulator for home finance
institutions in India, has estimated
home finance to grow to nearly $100
billion ( R4.52 lakh crore) by 2015 from
the current $39 billion. The Registrar
General of India forecasts the share
of senior citizens (age 60 years and
above) in the total population to rise
from 6.9 per cent in 2001 to 12.4 per
cent in 2026. According to Reverse
Mortgage Market: Early Days for India
report released by a Boston-based
consulting firm for financial institutions,
the current market size for reverse
mortgage of 3 million homesteads is
expected to grow to 6 million by 2015.
Unfortunately, only 5700 have
availed of the reverse mortgage
scheme. This can be gauged from
the fact that 20 home lenders together
 473
have disbursed only around R1050
crore worth of loans up to December
2008, since the scheme was launched.
The poor response on the demand side
is because of a number of reasons.
First, unlike USA, Europe, or, Australia,
where reverse mortgage facilities are
very much understood and welcomed
as a product, awareness and
understanding of the product in India is
less and complex in nature. People in
India have to really work hard to buy or
construct their own house. Because of
difficulty in having one’s dream home
there is a very strong bonding between
owner and their property. They avoid
the RMF as they can not move out the
current house for more then one year.
As per the guidelines, the borrowers or
co-borrowers cannot move out of the
house for more than one year
continuously. If they move out of
house, the loan dues are to be settled
immediately. Senior people like to go
and stay with their children for long
periods especially if the children live
overseas. Moreover, there is a social
stigma attached to a home mortgaged.
We may rename the product other than
RMF.
Another very important reason for
lukewarm response to the RMF is the
saving habits of Indians in general.
Many Indians retire with sufficient
funds to lead a comfortable life after
retirement. Despite the fact that the
system of nuclear family is evolving
in urban regions, bonding amongst
family members is so strong that
senior citizens who are not able to
amass significant wealth, are taken
care of by other members of the family.
There may be reason for low demand if
the potential borrowers have powerful
bequest motives.
Basically, the psyche of the Indian
does not make them comfortable with
the very idea of selling their home.
On the other hand, there are people
who would like to stay put in their own
home. Once they enter in to a reverse
Reverse Mortgage
borrowers
may undertake
upgradation, renovation
and extension of residential
property in such a manner that
has deteriorated the value
of the house. The borrowers
will undertake only those
improvements, the lack of which
causes a lot of inconvenience.
Consider a case, a borrower
constructs a balcony in an
unconventional manner to get sun
during winter and the value of the
property may go down.
mortgage transaction, it would be
quite difficult to move out and shift
to a new and better house. One may
understand the insight on the demand
by studying the actual trend of mobility
of home owners. The awareness drive
may be necessary especially for senior
citizens without any heir, who suffer due
to low level of consumptions during
their later part of life. The means for
bringing awareness about the benefits
of the RMF to people are negligible.
Some bankers are of the opinion
that, at this stage, the RMF is not very
compatible with the social environment
of India. Even if senior citizens apply
for an RMF, their sons/daughters may
come forward and convince them to
withdraw their application as, in the
Indian society, children (especially
sons) are supposed to take care of
their old parents. Also, a tradition of
keeping the property for children free
from any encumbrance in addition to
unclear laws and regulations relating
to reverse mortgage are the stumbling
block for the market to pick up. The
idea of taking over the possession of
the home by the bank or the insurance
at the end of the contract does not gel
in the minds of the borrowers.
Current Market Status
Mainly, the RMFs providers are the
september 2010
BANKING AND FINANCE
banks and housing finance companies
in India. The implications of the scheme
and the operational guidelines have
not been well understood by the other
lenders yet. NHB has already held
one round of meeting with insurance
companies including Life Insurance
Corporation of India to design an
annuity product so that the funds can
be invested and a monthly income is
obtained for the borrowers. With the
limited number of borrowers, quantum
of loan sanctioned and disbursed are
not quite satisfactory. The scheme has
been adopted by 23 scheduled banks
and two housing finance companies in
the country. Except the Central Bank of
India, other PLIs have not shown any
significance initiative to promote or
patronise the RMF.
The Central Bank of India has
tied up with Star Union Dai-ichi Life
Insurance to launch a unique product
that assures life-time annuity for
senior citizens opting for an RMF. In
December 2009, the improved version
CENT Swabhiman Plus was launched.
One of the improvements is the
availability of lifetime regular income
as against the maximum of 20 years
in the existing reverse mortgage loans
offered by various banks. It is estimated
annual business of R30-40 crore. This
is a good model wherein insurance
companies are also participating in the
business of reverse mortgage. Many
more life insurance companies may
have strategic alliances with housing
finance institutions and banks. This
is the first time in the country that an
annuity product assuming life-time
payments is being made available to
senior citizens under reverse mortgage
loans. Senior citizens are likely to get
higher monthly payments as the Star
Union Dai-ichi Life Insurance Company
will be in a better position to assess life
risk and provide better terms through
annuities.
Broadly speaking, the response of
the banks has not been satisfactory
THE CHARTERED ACCOUNTANT 97
 BANKING AND FINANCE
to the potential customers when they
visited the branch to inquire about
the product. The staffs are not in a
position to clarify some of the doubts
that a prospect may ask relating to
an RMF. The lenders should have in-
depth knowledge about the product.
In the absence of understanding about
the product, customers can not be
convinced to go for the scheme. Clearly,
a lack of understanding of lenders
about the importance of training their
staffs is a matter of concern.
Government & NHB
Initiatives
With effect from April 1, 2008, as
per the Section 47(xvi) of the Income-
tax Act, 1961, any transfer of a capital
asset in a transaction of reverse
mortgage under the announced
scheme will not be regarded as transfer
for the purpose of capital gain tax.
Another issue as to the loan received,
either in lump sum or in instalments,
under a reverse mortgage scheme has
been addressed under the Income-tax
Act. The amount received under the
scheme by the borrower is not treated
as income under the Section 10(43).
However, currently annuity payment
for life time is taxable. The government
should discontinue tax on an annuity
under reverse mortgage-backed
annuity schemes.
…unlike USA,
Europe, or, Australia,
where reverse
mortgage facilities are very
much understood and welcomed
as a product, awareness and
understanding of the product
in India is less and complex in
nature. People in India have
to really work hard to buy or
construct their own house.
Because of difficulty in having
one’s dream home there is a very
strong bonding between owner
and their property.
98 THE CHARTERED ACCOUNTANT september 2010
The provisions of Transfer of
Property Act, 1982, Registration Act,
1908 and Stamp Duty Act are applied
when absolute ownership in the
property is transferred to a lender or to
a prospective purchaser at the time of
the death of the borrower and the co-
borrower.
However, there is no direct
implication on the borrowers.
As stated earlier, senior citizens are
to be treated with special care. PLIs
should go extra mile to explain fine
points of the RMF. In reverse mortgage
facilities, great deal of counselling is
needed. A positive step has been taken
by a non-profit organisation registered
under the Societies’ Registration Act
of 1860, and National Housing Bank
jointly with an opening of counselling
centres in Delhi, Hyderabad, Kolkata
and Chandigarh and a training of
their staffs to provide details about
the scheme of reverse mortgage.
Another admirable initiative taken
by Consumers Association of India
(CAI) in association with the NHB is
the commencement of a counselling
centre in Chennai in April 2009.
The NHB should plan a dedicated
fund to refinance reverse mortgage
loans provided by the PLIs. It may
issue a secondary market product
by offering bonds to public in reverse
mortgage market. The investors of such
bonds should get exemption under the
Section 80 C of the Income-tax Act,
1961. With this proposition, confidence
level of the market players will get
heightened. The market for reverse
mortgage should be augmented
with support of the Central and State
Governments as the social security
program is inadequate in the country.
A recent World Bank study found that
only 10 per cent of the population had
any sort of social coverage. Since there
no effective social security scheme
in India, it is necessary to refinance
the RML to promote the financial
product.
474
In the Union budget 2007-08, the
announcement of the introduction of
mortgage guarantee companies was a
welcome step in the right direction. Such
a move is all the more important as the
guarantee firm will enhance comfort
level to the PLIs. It is recommended to
form a joint venture with any reputed
risk guarantee company. The NHB
may seek equity participation from the
World Bank and the Asian Development
Bank. World Bank has been promoting
projects for development of the RMF.
In 2002, the World Bank undertook a
housing project in Latvia. One of the
project’s objectives was to provide
guarantees to financial institutions that
issue reverse mortgage loans to the
elderly for home improvements. Like
in the USA, the Central Government
should sponsor reverse mortgage
program by announcing pilot program
wherein at least first 5000 RMLs should
be provided by the National Housing
Bank. With the pilot program, the risk
of lenders and mortgagees will have
to be absorbed ultimately by the
government. A suitable budgetary
support is to be provided by
the government. Promoting
the pilot project bring about
awareness in general and boost
confidence of the elderly, as it displays
commitment of the government in the
RMF scheme. The joint venture may
also scale up overall increase the
size of the market as with guarantee
features bank may be able to offer the
RMF at a lower interest.
The NHB has launched a new
reverse mortgage loan-enabled
annuity (RMLEA) scheme in December
2009. As per the scheme, borrowers
may opt for an annuity for a lifetime,
compared with 20 years cap on the
old scheme. The bank has already
approached the State Governments to
sponsor insurance schemes to expand
the scheme to people who are covered
under the government’s housing
projects.
 475
Emerging Trends
1. The role of counsellor should not
be underestimated. Extensive
explanatoryandadvisoryworkshould
be carried out by the government to
provide the necessary counselling
to the elderly in understanding the
scheme. There is a need and desire
to develop policy guidelines for a
much broader and deeper public-
private partnership (PPP) in the area
of counseling. It generates interest,
willingness and understanding
about RMF in lending institutions
and encourages them to adopt new
approaches to RMF. Counseling
to the borrowers is another area
that requires additional efforts. The
scope of PPP can be increased to
cover many functional area such
as:
• Offering certificate programme
for training to the prospective
counselors by B-schools
• Considering possibility of using
office premises of non-profit
organisation as the counseling
centre
• Utilising resident welfare
associations as important
vehicles for counseling as they
are in better position to discuss
features and benefits of the
RMF in community gatherings
and lenders can also seek help
of resident welfare associations
to bring about awareness about
RMF
2. As per the present guidelines, RMF
With the limited
number of borrowers,
quantum of loan
sanctioned and disbursed are not
quite satisfactory. The scheme has
been adopted by 23 scheduled
banks and two housing finance
companies in the country.
Except the Central Bank of India,
other PLIs have not shown any
significance initiative to promote
or patronise the RMF.
is available for a maximum period
of 20 years. Market for RM loans
can be developed, if life insurance
companies start providing annuity
payment beyond 20 years. The
product becomes attractive and
is comparable with international
product. The NHB has been
talking to insurance companies
on providing annuities on reverse
mortgage. The RM products are
quite popular in the developed
countries, wherein the senior
citizens are able to earn income
from their property till death.
3. The NHB should propose to the
government to create appropriate
institutional framework to design
and promote measures like
guarantee support schemes
wherein adverse movement of the
property value is protected and
guaranteed. Likewise, the NHB is
working on title indemnity, wherein
lenders and buyers get protection
against defective titles.
4. Most of the reverse mortgage
contracts are of long duration
loans funded by banks in India.
The banks are not encouraged to
go ahead with the RMF because
of possibilities of asset-liability
mismatch in the balance sheet. The
RBI should come out with take-out
financing scheme. It is a method of
providing finance for longer duration
reverse mortgage loans by banks
by sanctioning medium term loans.
Under the scheme, the loan will be
taken out of books of the financing
bank within pre-fixed period by
another institution thus preventing
any possible asset-liability mismatch.
After taking out the loans from the
banks, the institution could offload
them to another bank or keep it. The
scheme needs to be designed very
carefully in view of complexity of
an RMF especially considering the
issues of risks, pricing of product,
etc.
september 2010
BANKING AND FINANCE
The NHB has
launched a new
reverse mortgage
loan-enabled annuity (RMLEA)
scheme in December 2009. As
per the scheme, borrowers may
opt for an annuity for a lifetime,
compared with 20 years cap
on the old scheme. The bank
has already approached the
State Governments to sponsor
insurance schemes to expand
the scheme to people who are
covered under the government’s
housing projects.
5. Though it has been made quite
clear in the guidelines that PLIs
will not earn profit from the closing
cost of the agreement and the
costs should be collected from the
borrowers rather than adjusting the
same from eligible agreed amount.
This may be suggested that cash
strain on account of the cost on
the part of the borrowers can be
removed if the costs are adjusted
from the loan amount instead of
collecting them.
6. Real estate agents are completely
unorganised sector in India.
Their public image is not very
encouraging and the quality of
their service is non-satisfactory, as
there is no control on their shady
transactions. In order to change
this, the State Governments should
bring about a Code of Conduct for
the real estate agents. If this works
out effectively, real estate agents
may effectively promote the RMF
as they operate in an around the
residential colonies.
7. The provisions of Transfer of
Property Act, 1982, Registration
Act 1908 and Stamp Duty Act
should be amended to incorporate
treatment of reverse mortgage
transactions at the time of loan
and at the time of termination of
contract. n
THE CHARTERED ACCOUNTANT 99
 BANKING AND FINANCE 476

How to Manage Our Money: An Introduction to

Personal Financial Planning

Personal financial planning tells us how to manage our money properly to fulfill our financial goals. This
article, written in common-man diction, focuses on financial planning needs and requirements for common
people. The objective of this article is to spread financial literacy and discipline among the common man,
without going in to too much technical aspects of the subject. This subject seems to be a matter of general
knowledge, but actually it is a specialised science and a matter of art. It is actively practised by hundreds of
chartered accountant professionals across the world. It provides lot of professional opportunities to them
in both urban as well as mufassil areas. Hence, there is a need to popularise this area of practice in the CA
community. Read on:

Introduction to Planning 3. Rogi means a financially sick

Our wants are unlimited. But money
is limited. So, every one needs to
know, how to use limited money to
fulfill unlimited wants. Subject of this
article is “how to manage our money”,
technically called, “personal financial
planning”.
Our elders described three types of
persons:
1. Yogi means a saint with attitude of
simple living and high thinking like
Buddha and Gandhiji had. And,
it is not possible for everyone to
have that.
2. Bhogi means a common and
earthly person who uses money
properly and leads a satisfied life
CA. Sangameshwar C. Shirol on this earth. And, we have to aim
(The author is a member of the Institute.
at that.
He can be reached at eboard@icai.in)
and undisciplined person who
does not use money properly.
And, hence, she/he faces various
financial problems like not
achieving her/his goals, failing in
her/his responsibilities and finally
becoming insolvent. Even recent
recession in the USA is due to
mismanagement of money. We
can avoid all these, by proper
planning.
Personal financial planning tells us
how to manage our money properly
to fulfill our financial goals. It is not
just selling financial products such
as insurance policies, postal saving
schemes and mutual funds. Similar to
our physical health, our financial health
is also important. Personal financial

100 THE CHARTERED ACCOUNTANT september 2010

 477
planner is our financial health doctor.
Hence, we have to obtain, good and
honest advice from personal financial
planner, to be financially healthy. We
also need professional help in this
planning process, as lot of calculations
are involved in it. When we build a
house, we first prepare a plan, a map,
or, a blueprint. Similarly, when we earn,
spend, save and invest, we have to first
prepare a plan or a roadmap. Random
approach towards our finance cannot
take care of all our financial goals.
Personal financial planning covers
lot of topics such as: Introduction
to Planning, Planning Process,
Wants and Goals, Income, Taxation,
Allocation of Income, Spending and
Saving, Loan, Insurance, Emergency
Fund, Investment, Cash, Bank Savings
Account, Gold, Real Estate, Debt,
Equity, Shares, Mutual Funds, Own
Business or Profession, Debt-Equity
Ratio, Willingness to Take Risk, Ability
to Take Risk, Asset Allocation, and
Utilisation of Funds and Inheritance.
Let us discuss each of the above
topics in little detail to have a general
idea of the subject while keeping in
view the needs and requirements of a
common man.
Planning Process
The process of personal financial
planning, involves the following steps:
1. Collecting and analyzing the
information on our needs and
goals, income and expense, and
assets and liabilities
2. Selecting the goals based on our
needs and priorities, which are
within our budget
3. Deciding our allocation of income
towards various goals
4. Deciding our debt-equity ratio,
after assessing our risk profile
based on our willingness to take
risk and ability to take risk
5. Deciding our investments and
assets as per our asset allocation
6. Preparing a detailed plan or
We can have proper
planning to achieve
all our financial goals,
only if we have sufficient time
to earn, save and invest and
time to take risk. The best is to
start planning as soon as we
start earning. This planning is
for the purpose and benefit of
all our family members. Hence,
we have to involve all our
family members in this planning
process.
budget and cash-flow statements
of our personal finance similar to
any other business project
7. Implementing and monitoring
the plan and revising the plan, if
necessary
We have to start personal financial
planning as early as possible. We can
have proper planning to achieve all our
financial goals, only if we have sufficient
time to earn, save and invest and time
to take risk. The best is to start planning
as soon as we start earning. This
planning is for the purpose and benefit
of all our family members. Hence, we
have to involve all our family members
in this planning process. It cannot be
achieved without their cooperation.
Personal financial planning differs
from person to person, according to
his needs, goals, income, budget, risk
profile and detailed breakups required
by him. Hence separate customised
personal financial planning is to be
done for each person separately, only
after one-to-one discussion as per
the above planning process. But in
this article, we try to study this subject
in general taking an example of a
common man.
Wants and Goals
The first step in personal financial
planning is selecting the goals out of
our unlimited wants. Money is only a
means to achieve our financial goals.
Just accumulating money would not
serve any purpose. Hence, we should
september 2010
BANKING AND FINANCE
have some goals to achieve. These
goals will motivate us to work further.
First, list all our needs and financial
goals in consultation with all our family
members that we want to achieve in
our life. Find out when and in how many
installments and how much money
required for each goal taking into
account the average inflation. Finally,
select the goals, again, in consultation
with all our family members based
on our needs and priorities, which
are within our budget. Classify and
further breakup the selected goals in
to present expenses, future expenses
(medium-term and long-term goals)
and owning assets. Let us assume the
financial goals of a common man as
follows:
[A] Present expenses:
1. Domestic expenses
2. Insurance premiums
3. Emergency fund
[B] Future expenses:
1. Medium-term goals that are less
than 10 years far away: children’s
education, marriage and purchase
of vehicle.
2. Long-term goals that are more than
10 years far away: Self-retirement
pension fund and tour and travel
after retirement.
[C] Owning assets:
1. Gold for personal use and
children’s marriage
2. Owning real estate such as house,
shop, office, etc., for personal use
We can have further detailed
breakups of each of the above financial
goals for detailed planning. Our basic
needs and goals are actually limited, and
can be achieved by thorough planning.
But, we have to accept that luxuries are
unlimited and all of them cannot be
fulfilled. Therefore, let us not compare
ourselves with others. This change in
possessions is not to be ashamed of,
till we live independently. The aim must
be to lead an independent, dignified,
satisfied and peaceful life and not to
show off.
THE CHARTERED ACCOUNTANT 101
 BANKING AND FINANCE
So it is said: Live within your means.
Our elders say: stretch your legs as far
as the bed is and be satisfied with what
you have. Greed is the root cause of
sorrow. Once we decide our goals, we
should not divert frequently. Always be
focused to achieve the decided goals
and start working on them.
Income
To achieve our financial goals, we
require an income. Naturally, more the
income, easier is the planning. Do not
be satisfied that we already have lot of
inherited property and need not work. It
is said: Easy money will not last long. It
is said, if we don’t earn, no matter how
much wealth we have is insufficient. So,
we have to earn to know the value of
money and to understand to manage
it carefully.
Hence, earn honesty as much as
possible during our productive age.
Because:
1. Studying and starting earning itself
takes about first 30 years of our life
2. Then if we assume to work up to
60 years of our age, our productive
period will be 30 years only
3. And if we assume to live up to 90
years of our age, our retired life will
be another 30 years.
Hence, our retired life is almost equal
to our productive years. So, we need
huge retirement fund, to maintain the
same standard of living throughout our
life. It is almost equal to total domestic
expense that we make during our entire
productive period. It means for every
rupee that we spend now as domestic
expense an equal amount is to be kept
aside now in self-retirement pension
fund. Similarly, we need huge funds
for our other future goals as discussed
earlier. So, we have to earn and save as
much as possible during our productive
age, which is only about 30 years.
Hence, in case of job, we have to
work till our normal age of retirement
and we have to say no to VRS and early
retirement. And, in case of business or
102 THE CHARTERED ACCOUNTANT september 2010
profession, we have to work till we are
healthy. We have to look for alternative
source of income like doctors who do
both practice and job simultaneously.
We have to keep on updating our
knowledge and skills in the field of
our job, business or profession to be
relevant.
Taxation
Once we earn the income, naturally
the taxation follows. It is said, tax and
death are inevitable in life. Hence, we
have to pay our taxes honestly and
have a peace of mind. Instead of tax
evasion, we have to use tax planning
to save tax. At present, income tax is
about 10 to 30 per cent depending on
our income slab. If properly planned,
effective rate of income tax can be
brought down.
Tax can be saved by investments
or payments up to R1 lakh under
Section 80C, e.g. life insurance
premium, provident funds, specified
bank deposits, NSCs, senior citizen
savings scheme, ELSS mutual funds,
ULIPs, National Pension Scheme,
housing loan installments and tuition
fees. Tax can be saved on payment up
to R15,000 under Section 80D towards
medical insurance premium and under
Section 24 on housing loan interest
up to R1.5 lakh. We can earn tax-free
incomes by investing in provident
funds, equity mutual funds, etc.
By investing in these, we not only
save tax, but we can also accumulate
funds for our future financial goals.
…we need huge
retirement fund, to
maintain the same
standard of living throughout
our life. It is almost equal to total
domestic expense that we make
during our entire productive
period. It means for every rupee
that we spend now as domestic
expense an equal amount is to be
kept aside now in self-retirement
pension fund.
478
Hence, we have to choose suitable
schemes out of the above, as per our
overall personal financial planning and
asset allocation, and not with the only
intention of saving tax. This helps us to
achieve our financial goals in addition
to tax savings.
Allocation of Income
Only income after tax is available to us
for allocation towards spending and
saving. We have to spend money for
our present expenses. And at the same
time, we have to keep aside money for
our future goals. Assuming the average
rate of inflation at 8 per cent per annum,
we have to provide more money at
about 8 per cent per annum every
year for all our future goals. Hence,
inflation adjusted funds required for
our future goals are huge. So, they can
be provided only in installments over a
long period of time.
Instead of providing money to
one goal at a time, provide money to
all goals simultaneously, in required
proportion or installments. Otherwise,
we may spend more money for the first
goal itself and not left with adequate
money for subsequent goals. So,
have different suitable earmarked
investments or assets for different
goals. And we have to decide and
implement our own “allocation of
income” which means: “allocation
of income after tax, simultaneously
towards various goals such as, present
expenses, future expenses and owning
assets, in different suitable earmarked
investments or assets, in required
proportion or in installments, till we
accumulate the required funds, for all
specific goals”.
Let us assume the allocation of
income of a common man as follows:
[A] 50 per cent of income for Present
expenses: [Out of which]
1. 40 per cent of income for Domestic
expenses
2. 5 per cent of income for Insurance
premiums.
 479
3. 5 per cent of income for Emergency
fund.
[B] 30 per cent of income for Future
expenses: [Out of which]
1. 15 per cent of income for medium-
term goals (which are bellow
10 years far away): Children’s
education, marriage and Purchase
of vehicle.
2. 15 per cent of income for long-term
goals [which are above 10 years
far away]: Self-retirement pension
fund and tours and travels after
retirement.
[C] 20 per cent of income for Owning
assets: [Out of which]
1. 5 per cent of income for gold
for personal use and children’s
marriage
2. 15 per cent of income for owning
real estate such as house, shop,
office for personal use, etc.
We can have further detailed
breakups of each of the above
allocations of income for detailed
planning, e.g. detailed breakup of
domestic expenses budget, child “A”
education fund and child “B” education
fund and so on. So, present expenses
should be limited to about 50 per cent
of income. And the savings for future
expenses and owning assets should
be at least 50 per cent of income.
Spending and Saving
We have to save a major part of our
income for our future goals. Savings
are the backbone and prerequisite of
our personal financial planning. So,
how do we control present domestic
and lifestyle expenses and save for
the future? First, a detailed breakup
or budget of monthly domestic
expenses, e.g. rent, food, clothing,
medicine, electricity, school fees,
Live within your
means. Our elders say:
stretch your legs as
far as the bed is and be satisfied
with what you have. Greed is the
root cause of sorrow.
entertainment, etc., is to be prepared
and then implemented in consultation
with and with cooperation of our family
members.
We have to adopt a standard of
living, which fits in to above domestic
expense budget. Please remember,
upgrading life style is easy, but we may
not easily go down once if we are used
to a higher one. So, upgrade only if we
can maintain it, but not at the cost of
other goals. Cut impulsive spending
which are without planning and budget.
Resist advertisements, purchase with
credit card and installment purchases.
Keep cash required for one month’s
domestic expense and make cash
payments only, to have control. We
have to save whatever little possible in
every opportunity without wasting and
neglecting. Even small regular savings
grows in to big fund with time. Normally
housewives are experts in budgeting
and managing domestic expenses.
Our elders always valued the
managing of money, as they said: If
we don’t save, no matter how much
we earn it is useless. What we save
is more important than what we earn.
Even ants and bees save for rainy days.
A penny saved is a penny earned. It
is said: drops join to make a stream;
grains combine to make a crop. Will
Smith has somewhere said: Too many
people spend money, which they have
not earned, to buy things which they do
not want, but to impress other people
whom they do not like. It is funny yet
a reality. Few celebrities who earn
well during their golden days become
beggars in their latter life, as they do
not control lavishness and show off,
a lifestyle that is not manageable. We
should keep a check on our habits
if they affect our health and finance
negatively.
The intention behind discussing
this topic in such a length is not to
threaten or to make you stingy. The
only concern here is to learn to expand
and then to spend our money evenly
september 2010
BANKING AND FINANCE
throughout our life instead of wasting
money when we have it and starving for
it when we need it. Personal financial
planning is all about to ensure that we
have adequate money when we need it.
We have to balance between demands
of present and needs of future. Please
remember, life is like a marathon and
not a 100 meters race. Hence we have
to conserve in order to cover full length
of the race, i.e. life. So, spend money
slowly, steadily and wisely, and save it
for future too.
Loan
Nowadays, various loans or credits
are easily available for each and every
type of our needs and goals. Hence
we may feel: why to save money and
stop spending? Please remember,
loan is not a gift. It is the present use
of our future uncertain income. High
rates of interest are charged on many
types of loans. Spending first by taking
loan and subsequently earning, saving
and then repaying the loan in future is
costly and uncertain. Hence, it is a bad
policy. Even recent sub-prime lending
crisis and subsequent recession in the
USA was due to such excessive bad
loans and money mismanagement.
Fortunately, India was not hit worse by
it because of our high rate of savings.
So, first earn, save and, then, spend.
As far as possible, postpone expenses
and prepone savings, and avoid loans.
It is always a good policy. There is a
popular (PIPE) strategy: prepone
income and postpone expense.
But there are few good loans also.
Housing loan with an EMI of about
15-20 per cent of our monthly income
is not bad. Housing loan creates an
asset, e.g. house, and it is not an
expense. Rate of interest on housing
loans is cheaper and tax benefits are
also available on it. Productive loans
for business purposes are also good.
But, leveraging or investing in risky
assets such as shares from borrowed
money is risky.
THE CHARTERED ACCOUNTANT 103
 BANKING AND FINANCE
Consumption loans, personal
loans, purchase with credit card
and installment purchases of luxury
items are all costly. There is a saying
about, eating butter with borrowed
money. Taking loan is easy, but its
consequences are horrible if we fail
to repay it. So, a well-known Kannada
poet Sarvajna says: sweet as milk and
nectar it is to get a loan; when creditors
come after you, it’s painful as a broken
ribcage.
Insurance
Life is very uncertain and full of risks.
All our planning can go waste if we
are not adequately insured. So, before
investments, one should have adequate
insurance. Insure on our life, health of
our family, our assets and also our
loans by increasing our life insurance
coverage. Sum assured should be
equal to our future potential income,
or, it should be adequate to cover the
future expenses and commitments of
our dependents. So, it should be at
least 10 times of our annual income
plus our loans, if any. Technically, it
can be calculated by human life value
method.
Pure term insurance is cheap and
good. Treat insurance as expense
to cover the risk and not as an
investment. So, do not mix insurance
and investment. Money-back policies
or ULIPs are mixed and complicated
products. So, it is difficult for a common
man to understand their cost-structure
and evaluate and compare them. Let
us take simple term insurance for
insurance purpose and take fixed
deposits or mutual funds for investment
purpose.
Emergency Funds
Before investment, we should have
some emergency fund. Sometimes, we
may not receive regular income, e.g.
salary or withdrawals from business
or profession. It may be irregular. We
may have a loss of our job or business
104 THE CHARTERED ACCOUNTANT september 2010
temporarily and then we may need an
emergency fund for present expenses
and to keep our investments and
insurance going without a break. It is
required to meet unexpected expenses
that are unbudgeted and to meet the
expenses that are not insured or cannot
be insured. It is also required to meet
medical expenses and vehicle-repairs
expenses that cannot be postponed till
we receive insurance claims.
So, emergency fund is like a small
self-insurance fund in emergency
and it serves as a buffer. If this is not
maintained, we will be forced to use
our earmarked investments/assets
kept for future. So, it helps to keep our
other investments/assets undisturbed
for future.
So, keep aside about a year’s
income in emergency fund. It depends
upon the nature, risk and cash-flow of
our job, business or profession and our
insurance coverage. Keep it in a bank
savings account that gives us a low
return of about 3.5 per cent interest.
But, its safety and liquidity is more
important than the rate of interest.
Investments
It is said that inflation is a silent killer of
our savings. Assuming the average rate
of inflation at 8 per cent per annum, the
purchase power of our money reduces
at about 8 per cent every year. So, what
to do? Why to save? Whether to spend
all money now itself? No. You might
have heard, money earns money and
time is money. By investing money,
we can earn more by way of interest,
dividend and profit. By investing it, we
can reduce or overcome the effect of
inflation. So, do not keep the saved
money idle.
We have to invest our money
simultaneously in suitable earmarked
investments/assets, in required
proportion or in installments till we
accumulate the required funds for the
specific goals. Einstein described the
power of compounding as the eighth
480
Only income after
tax is available to
us for allocation
towards spending and saving.
We have to spend money for
our present expenses. And
at the same time, we have
to keep aside money for our
future goals. Assuming the
average rate of inflation at 8
per cent per annum, we have
to provide more money at
about 8 per cent per annum
every year for all our future
goals.
wonder of the world. Money earns
money and that new money also again
earns money, e.g. compound interest.
So, start investing early and benefit
from compounding. It is said: Waste
neither money nor time, but make best
use of both.
There are various types of
investments or assets, e.g. cash, bank
savings account, gold, real estate,
debt and equity such as shares, mutual
funds and capital in own business or
profession. Now let us understand
each of the above investments or
assets in little detail, which helps us to
decide, where to invest.
Cash: We require cash for our
domestic expenses. It is the most liquid
asset. In hand, it does not earn any
income and, moreover, holding excess
of it in hand is risky. Hence, keep cash
required for our one month’s budgeted
domestic expenses and make cash
payments.
Bank Savings Account: Bank
savings account is required to park
our income temporarily, till payments
are made towards present expenses
and for investing the money for future
goals. We also require bank savings
account for parking our emergency
fund. All these transactions are to be
rooted through a bank savings account
to have control. Bank savings account
gives us very low return, e.g. about 3.5
 481 BANKING AND FINANCE

per cent per annum, but safety and etc. Additional real estate has both share of a company or in the capital
liquidity of our money here is more high risk and high return like equity due of a business. In case of shares, it is
important than the rate of return. to its disadvantages. just participating in the business of a
Gold: It is a traditional and popular Debt: Debt is loan given by us to company to the extent of our share
asset. Gold occupies an important others, e.g. provident funds, bank fixed holding. Return on equity is normally
position in our custom and tradition. deposits, postal small saving schemes high and risk is also high. Average
It is especially loved by women and is and debt mutual funds. Debt is safe, return of BSE Sensex and probability
the second most liquid asset after cash. compared to the equity. But we have of loss is as shown in the table:
Hence, it serves as an emergency fund. to be careful about cheating blade Over 1975 to 2009 Probability of Average
[if held for any] loss return [%]
As it is a movable asset, its safe custody companies and unsecured hand loans
1 Year 11/29 25.36
is very important. Keep it in bank safe among friends and relatives. Return 3 Years 6/27 19.55
deposit locker, if not used. Return on on debt is low. Normally as the term 5 Years 3/25 18.76
gold is low. It just covers the inflation. of investment in debt increases, the 7 Years 3/23 19.19
Hence, it is said that gold is a hedge rate of interest will also increases. Rate 10 Years 1/20 17.16

against inflation. Have it only for our of interest on long-term debt is about 15 Years 0/15 16.81
20 Years 0/10 16.88
personal use and for children’s marriage. 8 per cent that is equal to average
[Note: Here March 31 values of BSE Sensex have been
Hold excess gold, if any, in pure form or inflation. Long-term debt takes about 9 considered. It is an important indicator or index of equity
in gold exchange-traded fund (ETF) and years to double the amount as shown market in India]

not in the form of jewellery.
Real Estate: Land and building
are a traditional and popular asset.
House is a dream of all. It gives a
sense of achievement, prestige and
mental peace. It is an immovable
asset and not liquid. Hence, it has
both advantages and disadvantages.
It is not easy to sell it and spend all.
Question of prestige prevents us from
doing that. It is also a remedy of last
resort. Reverse mortgage facility is
available on houses if required in old
age. Hence, it gives us confidence.
Return on real estate is high and it
beats inflation. Land value appreciates
but building value depreciates after
some time.
Have real estate only for our personal
use, e.g. house, shop and office. That
itself will be a significant part of an
asset allocation of a common man. A
person holding an additional real estate
other than that for personal use should
have the necessary knowledge and
skills to handle the below-mentioned
disadvantages of real estate:
maintenance and repairs expense,
depreciation of building, involvement
of black money, non-liquidity, litigation,
legal aspects, huge investment, non-
diversification, custody, tenancy,
encroachment, market risk, taxation,
in the table below. Please see the
benefit of compounding effect in the
table:
Type of Debt Long Term
F.D.
Interest % 8
Year required to double the amount 9
Year End Compounded
Amount [R]
0 100
1 108
2 117
3 126
4 136
5 147
6 159
7 171
8 185
9 200
[Note: This table is also useful to calculate the inflation
adjusted funds required for future goals, as the rate of
interest and the average rate of inflation are normally
equal]
Normally, interest is taxable except
that on provident funds and tax-free
bonds. Hence, real rate of return on
debt after income tax and inflation is
very low or even negative. Investment
in debt also can be done through debt
mutual funds. Debt mutual funds are
tax-efficient and the risk and return is
slightly more. We have to invest in debt
keeping in view the rate of interest,
term of investment, liquidity, safety,
tax planning, loan and pre-mature
withdrawal facility, etc.
Equity: Equity is investment in the
In a few years, returns are either
more or less than these averages. In
case of few selected individual shares,
returns are either more or less than
these averages. But it is said, past
performance is not an indicator of the
future performance. Economic theory
says average return in equity over long-
term is equal to the average inflation
plus the average GDP of the country.
Now, the average inflation is about 8
per cent per annum and the average
GDP is about 7 per cent per annum.
Hence, average expected return on
equity with low probability of loss is
about 15 per cent per annum over a
term of above 10 years continuously.
This analysis is conservative. Please
refer to the chart. Hence, equity takes
about 5 years to double the amount.
So, how do we control
present domestic and
lifestyle expenses
and save for the future? First,
a detailed breakup or budget
of monthly domestic expenses,
e.g. rent, food, clothing,
medicine, electricity, school fees,
entertainment, etc., is to be
prepared and then implemented
in consultation with and with
cooperation of our family
members.

september 2010 THE CHARTERED ACCOUNTANT 105

 BANKING AND FINANCE
The term of investment in equity
should be ideally more than 10 years
to overcome the effect of slow down or
recession in the economy, if any. In any
case, the term of investment in equity
should not be less than 5 years. Please
note that here equity includes shares,
equity mutual funds, capital in own
business or profession and additional
real estate.
Shares: Trading in shares on daily
basis is not an investment. Trading in
shares is very risky, as it is impossible
to predict their market in a short term.
Investment is for long-term. Investing
directly in shares requires time, regular
study and skills to select good company
and shares to invest. We have to study
company’s business, its accounts, its
sector, govt. policies, economics of
the country and the world. Do not rely
on tips and rumors. Study yourself to
recognize good and bad shares and
their valuations. Buy the share whose
price is less than its valuation. And,
sell the share whose price exceeds its
valuation. Legendary share investor
Warren Buffet says: Be fearful when
others are greedy and be greedy when
others are fearful. Enter and exit market
in small amounts gradually to avoid
mistiming the market. Diversify the
portfolio to spread the risk.
Mutual Funds: Investing directly
in shares requires time, regular study
and skill to select good company
and shares to invest. Mutual fund is
collective investment from a group
of like minded investors through
Pure term insurance
is cheap and good.
Treat insurance as
expense to cover the risk and
not as an investment. So, do not
mix insurance and investment.
Money-back policies or ULIPs are
mixed and complicated products.
So, it is difficult for a common
man to understand their cost-
structure and evaluate and
compare them.
106 THE CHARTERED ACCOUNTANT september 2010
professional management. Mutual
funds invest on behalf of us, for a fee of
about 2 per cent per annum in specified
asset such as debt or equity or gold
and in specified ratio. Advantages
of mutual funds are professional
management, diversification,
transparency, affordability, small
investment, convenience and good
regulation by the SEBI and the AMFI.
Types of mutual funds are liquid funds,
debt funds, balanced fund, index fund,
diversified equity fund, ELSS mutual
fund, thematic fund, sectoral fund,
gold ETFs, large cap fund, mid cap
fund, small cap fund, existing open-
ended funds and initial public offer
[IPO] funds, etc. Each of the above
mentioned type of mutual funds having
different levels of risk and return, and
advantages and disadvantages. So,
we have to select our own portfolio
of mutual funds based on our risk
profile, type of fund suitable, our tax
planning, our existing fund and not
IPO, having good past record, good
return, low risk, low expenses, good
service, good team and process of
fund management, good fund house
– AMC, etc.
To have benefits of equity, we have
to invest in five or six, well-managed,
existing, diversified equity mutual
funds or ELSS mutual funds, in growth
option, from different fund houses as
our core holding. And, only 10 per cent
of our total equity investment may be
invested in more risky, sector funds or
mid cap funds. Invest in mutual funds
gradually over a period of minimum one
year through systematic investment
plan (SIP), if you have regular income,
or, through systematic transfer plan
(STP), if you have lump sum money.
Withdraw from mutual funds gradually
over a period of minimum one year
through systematic withdrawal plan
(SWP). SIP, STP and SWP give the
benefit of average cost of purchase
and sales, and avoid mistiming the
market.
482
Our Business or Profession
The capital we put in our own business
or profession is also similar to equity
investment in a company. In addition
to this capital, we also work ourselves
in our business or profession. So, the
returns from our business or profession
should be at least 15 per cent per
annum on our capital investment, like
in equity, plus salary to our self, based
on our qualification, skills, experience
and time spent. Liability is limited in
case of shares. But it is unlimited in
our own business or profession. In
partnership business or profession,
there is also joint and several liability.
So be careful.
Keep your business accounts
and money separately from your
personal money to know the correct
profit/loss and assets/liabilities of the
business or profession and to avoid
the diversification of funds. Please
remember in case of business or
profession that only net realizable
capital is ours. Please do not keep
on reinvesting and expanding the
same business ignoring the risk in the
business or profession and our other
financial goals. We must have regular
income for present expense and for
investing the money for other future
goals. Hence, we must have regular
withdrawals out of the profits for this
purpose.
Debt-Equity Ratio
Generally, if the return is high, the risk
will also be high. Debt is safe compared
to equity. But return in debt is low and
it is about 8 per cent per annum. And it
is not able to beat the inflation. Equity
is risky compared to debt. But return
in equity is high and it is about 15 per
cent per annum as discussed earlier. It
is almost double than that in the debt
and it is able to beat the inflation. If we
choose to invest only in debt because
of its safety, we have to save and invest
more, i.e. almost double compared to
the equity to accumulate the same
 483
amount. So, it is difficult to achieve
all our goals with limited savings and
investment in debt. Equity gives us an
opportunity to achieve our goals with
lesser saving and investment. Hence,
equity investment is essential.
Equity gives us higher return to
beat the inflation, if invested in planned
manner: We have to balance between
the risk and return, i.e. debt and equity.
We have to decide and implement our
own debt-equity ratio that means how
much or in what proportion we have to
invest in debt and in equity depending
on our needs and risk profile to fulfill
our financial goals. Our risk profile
again depends on our willingness to
take risk and our ability to take risk:
Willingness to Take Risk:
Following guidelines help us to decide
our willingness to take risk: equity
market is volatile by nature. Its prices
fluctuate in short-term due to demand
and supply condition of the equity
market. But in long-run, equity prices
move along with the fundamentals,
e.g. company’s performance, share
valuation, general economic condition
and GDP of the country. Hence, if the
above fundamentals are strong, don’t
panic in case of short-term notional
loss due to market movements. You
should be mentally prepared to see
such losses in your equity portfolio.
Do not lose heart. Wait for the market
to recover. Please do not waste time
and energy, and increase your blood
pressure by checking the share prices
and NAVs of mutual funds daily. Only
Assuming the average
rate of inflation at 8
per cent per annum,
the purchase power of our money
reduces at about 8 per cent every
year. So, what to do? Why to save?
Whether to spend all money now
itself? No. You might have heard,
money earns money and time is
money. By investing money, we
can earn more by way of interest,
dividend and profit.
periodical review and rebalancing of
equity portfolio is sufficient for long-
term investing. Equity investing should
be our part-time activity and we should
be able to continue and concentrate
on our main occupation as usual.
If you strongly believe in and follow
the above fundamentals, and ready to
take such short-term risk, we can say
you have the willingness to take risk.
Hence, invest in risky asset, e.g. equity,
only if you have the willingness to take
risk as per the above guidelines. But
take risk only till you can have sound
sleep and peace of mind.
Ability to Take Risk: Following
guidelines helps us to decide our ability
to take risk:
1. Guideline based on the term of
investment: It is said that time in the
market is important and not timing
the market. The probability of loss
in equity is zero, if continuously
invested for more than 10 years
as discussed earlier. It is still a
conservative statement. Kindly
refer to the chart. Hence, if financial
goal is less than 10 years far away,
its funds should be invested in
debts. And, if the financial goal is
more than 10 years far away, its
funds may be invested in equity.
So, medium-term investments up
to 10 years should be in debts and
long-term investments above 10
years may be in equity.
2. Guideline based on the age: When
we are young and earning, time
will be on our side. Our ability to
recover from the short-term loss, if
any, will be more. Hence our ability
to take risk will be high when we
are young and earning and when
our goals are far away. We can
have more equity and less debt.
But we have to gradually decrease
equity and increase debt as we
grow old or get near our retirement
or to achieve the goals.
Suggested formula of debt-equity
ratio based on the age is: per
september 2010
BANKING AND FINANCE
cent of debt in debt-equity ratio
should be equal to our age and
per cent of equity in debt-equity
ratio should be 100 minus our age,
e.g. suggested debt-equity ratio
(ratio between debt and equity) for
50-year-old person is 50 per cent:
50 per cent, for 30-year-old person
is 30 per cent: 70 per cent, and for
70-year-old person is 70 per cent:
30 per cent.
3. Guideline based on the occupation:
A man of business or profession
will be already having high risk and
high return in his own business
or profession similar to equity.
Hence, a business or professional
man should have more debt
investments than equity. A salaried
person will be already having
low risk and fixed salary job, and
having other retirement benefits,
e.g. provident fund and pension
similar to debt, so she/he may
have more equity investments than
debt. Here, equity includes capital
in own business or profession for
the purpose of debt-equity ratio.
4. Guideline based on the additional
real estate: Additional real estate
is also having high risk and high
return similar to equity due to its
disadvantages discussed earlier.
Hence, person holding additional
real estate should have more debt
investments than equity. Here equity
includes additional real estate for
the purpose of debt-equity ratio.
So, invest in risky assets, e.g.
equity as per your risk profile, only
if you have the willingness to take
risk and only to the extent of your
ability to take risk as per the above
guidelines. Willingness to take risk
is like taste and ability to take risk
is like the power to digest. So, eat
equity only if you have taste and
power to digest the equity.
Asset Allocation
Now, we understand each of the above
THE CHARTERED ACCOUNTANT 107
 BANKING AND FINANCE
investments or assets in little detail with
regard to their nature, risk and return,
and advantages and disadvantages,
and how to invest in them based on
our risk profile. Now, we have to decide
where we have to invest. An investment
or asset which is good for one person
may not be suitable for other person.
Hence, we have to decide and
implement our own asset allocation, i.e.
in which assets or investments we have
to invest and in what proportion or how
much we have to invest depending on
our needs and risk profile to fulfill our
financial goals.
Let us examine each investment or
assets one by one as to see whether it
fits in to our asset allocation:
1. Cash in hand does not earn any
income, but we require it for our
domestic expenses. Hence keep
cash required for our one month’s
budgeted domestic expenses and
make cash payments.
2. Return on bank savings account is
very low. But bank savings account
Economic theory
says average return
in equity over long-
term is equal to the average
inflation plus the average GDP
of the country. Now, the average
inflation is about 8 per cent per
annum and the average GDP
is about 7 per cent per annum.
Hence, average expected return
on equity with low probability
of loss is about 15 per cent per
annum over a term of above 10
years continuously.
108 THE CHARTERED ACCOUNTANT september 2010
is required to park our income
temporarily till payments are made
towards present expenses and
for investing the money for future
goals. We also require bank savings
account for parking our emergency
fund. Hence, keep aside about
one year’s income in bank saving
account as emergency fund.
3. Return on gold is low. Hence, have
it only for our personal use and for
children’s marriage.
4. Return on real estate is high,
but it has both advantages and
disadvantages. So, have it only
for our personal use, e.g. house,
shop, office, etc. That itself will
be a significant part of an asset
allocation of a common man.
5. Gold and real estate held for
personal use are blocked
assets and cannot be treated
as investments in true sense.
Investments are those where we
park money temporarily for returns
and accumulation of required
funds for future. Hence, debt and
equity are here considered as
investments in true sense.
6. We have to invest in debt and
equity as per our debt-equity ratio
assessing our risk profile based on
our willingness to take risk and our
ability to take risk.
It is said: do not put all eggs in
the same basket. It is very difficult
to judge which investment or asset
is going to perform good or bad in
future. So, we have to diversify our
investments or assets as per our asset
484
allocation and spread the risk. Hence,
invest the money simultaneously as
per our asset allocation in different
earmarked investments or assets in
required proportion or installments
till we accumulate the required funds
for the specific goals. Cash and bank
balance spent on domestic expenses
and insurance premiums payment are
our expenses. Only debt, equity, gold
and real estate are our wealth.
Let us assume the asset allocation
of a common man as follows:
[A] 50 per cent of income to be
kept in cash or bank savings a/c for
Present expenses: [Out of which]
1. 40 per cent of income in cash for
domestic expenses
2. 5 per cent of income in bank
savings account for insurance
premiums
3. 5 per cent of income in bank
savings account for emergency
fund
[B] 30 per cent of income or 60 per
cent of wealth as per debt-equity
ratio for future expenses: [Out of
which]
1. 15 per cent of income or 30 per
cent of wealth in debt, e.g. Bank
F.D., for medium-term goals [which
are bellow 10 years far away]:
Children’s education, marriage
and Purchase of vehicle.
2. 15 per cent of income or 30 per
cent of wealth in equity, e.g. Mutual
Funds, for long-term goals [which
are above 10 years far away]: Self-
retirement pension fund and tours
and travels after retirement.
 485
[C] 20 per cent of income or 40 per
cent of wealth in gold and real estate
for owning assets: [Out of which]
1. 5 per cent of income or 10 per
cent of wealth in gold for gold
for personal use and children’s
marriage.
2. 15 per cent of income or 30 per
cent of wealth in real estate for
owning real estate such as house,
shop, office for personal use.
We can have further detailed
breakups of the above asset allocation
for detailed planning. We have to
rebalance our debt-equity ratio
periodically, i.e., once in a year, if it goes
out of proportion. We have to suitably
revise both our debt-equity ratio and
our asset allocation on major changes
in our life or on changes in our goals.
To sum up, money required for
monthly domestic expenses is to be
kept in cash, for emergencies be kept
in bank savings account, for medium-
term goals to be kept in debt, for long-
term goals to be kept in equity, and for
our personal use to be kept as gold
and real estate. Above all, we have to
be adequately insured.
Utilisation of Funds
The purpose of different investments
or assets is as follows: Cash and bank
balances are for present expenses,
debt and equity are for our future
expenses, and gold and real estate
are for our personal use and then for
inheritance. We have to invest in debt
so as to match the maturity date of
debt investments with the dates of
requirement of funds for the specific
goals. This is to be done to ensure
liquidity when in need and to avoid
loss of interest due to premature
encashment of debt investments. And
on maturity we have to liquidate the
earmarked debt investment and use
the money for the specific goal as per
our plan.
And in case of equity, we have
to start withdrawing the money from
the earmarked mutual funds at least
one year earlier from the dates of
requirement of funds for the specific
goals. Withdraw from mutual funds
gradually over a period of minimum
one year through systematic withdrawal
plan (SWP). The SWP gives the benefit
of average cost of sales and avoid
mistiming the market. And keep it in
savings bank account or short-term
bank deposit and then use the money
for the specific goal as per our plan.
After retirement, accumulated
balance in self retirement pension
fund is to withdrawn through SWP and
it is to be kept in risk-free schemes,
e.g. bank or postal monthly-income
scheme or senior citizens scheme,
to receive life-long regular monthly
income for peaceful retired life. Use
our assets such as gold and house for
your personal purpose till you and your
spouse are alive.
Inheritance
All our family members must know
our financial planning, income and
expenses, assets and liabilities,
insurance and safe keeping of financial
documents. Make all investments and
assets in the joint name with spouse.
Make nominations in favor of children in
all investments. Create will for smooth
transfer of investments and assets to
avoid subsequent litigation. Do not
loose control over your investments
september 2010
BANKING AND FINANCE
Do not loose control
over your investments
and assets till you
and your spouse are alive. Hindi
films like Avtaar, starring Rajesh
Khanna, and Baghban, starring
Amitabh Bachchan, have dealt
with this issue and make one
strong recommendation to all
of us: It is wiser to be financially
independent till we and our
spouse are alive.
and assets till you and your spouse
are alive. Hindi films like Avtaar,
starring Rajesh Khanna, and Baghban,
starring Amitabh Bachchan, have dealt
with this issue and make a strong
recommendation to all of us: It is wiser
to be financially independent till we
and our spouse are alive. Mostly, we
consume cash and bank balance for
our expenses and debt and equity for
the specific goals during our life time.
And normally, we leave our assets such
as gold, real estate and our business or
professional setup and unused funds,
if any, to our next generation.
Just accumulating money for the
next generation is not a good policy.
There is no end for such practice and it
will not serve any purpose also. It leads
to unfair practices such as tax evasion. It
may also spoil our coming generations,
as they may not understand the real
value of money. Money is not everything
in life. It is a means to achieve only our
financial goals. We have to devote
time to other goals as well that give
us happiness and peace. According
to Poet Kabirdas, there is no need to
earn money and leave that for a son,
as a good son will earn for himself and
there is no need to leave anything for a
bad one. It is said: Do not make assets
for them, but make them an asset. So,
educate them, help them in their career
and marriage, etc., and make them
financially independent. Let them start
their own personal financial planning
as we did. n
THE CHARTERED ACCOUNTANT 109
 REFERENCE 486

ACCOUNTANT’S BROWSER
‘PROFESSIONAL NEWS & VIEWS PUBLISHED ELSEWHERE’
Index of some useful articles taken from Periodicals/Newspapers received during July-
August 2010 for the reference of Faculty/Students & Members of the Institute.

1. Accounting Secretarial Audit – A Tool to Better Corporate

Different Approaches to Corporate Reporting
Regulation: How Jurisdictions Differ & Why by Christian
Leuz. Accounting & Business Research, Vol.40/3, 2010,
pp. 229-256.
Fair Value Accounting, Financial Economics &
the Transformation of Reliability by Michael Power.
Accounting & Business Research, Vol.40/3, 2010, pp.
197-210.
For Secretarial Compliance Management, MCA’s
Easy Exit Scheme, 2010 & Settlement Scheme, 2010 will
Give a Boost by Delep Goswami. Chartered Secretary,
July 2010, pp. 929-933.
How Can We Measure the Costs & Benefits of Changes
in Financial Reporting Standards? by Katherine Schipper.
Accounting & Business Research, Vol.40/3, 2010, pp.
309-327.
The ICAEW’s Recommendations on Accounting
Principles & Secrecy of Process by Stephen A. Zeff.
Accounting & Business Research, Vol.40/3, 2010, pp.
279-285.
Labour Market Consequences of Accounting Fraud
by Chun-Keung Hoi & Ashok Robin. Corporate Governance,
Vol.10/3, 2010, pp. 321-333.
Governance by S.D. Israni. Chartered Secretary, July
2010, pp. 926-928.
3. ECONOMICS
Have the State Finance Commissions Fulfilled their
Constitutional mandated? by M.A. Oommen. Eco. & Pol.
Weekly, July 24, 2010, pp. 39-44.
SME Credit Crunch by Gavan Ord. Intheblack, July
2010, pp. 54-56.
4. EDUCATION
Are we Heading Towards World-Class Universities? by
C.P.S. Chauhan. University News, July 12-18, 2010, pp.
27-35.
Indian Higher Education: New Horizons & Plausible
Challenges… Whittling a Way Ahead by Beena Shah.
University News, July 12-18, 2010, pp. 64-71.
5. INVESTMENT
A Comparison of Selected Features of Real Estate
Investment Trust Regimes in the United States, the
United Kingdom & Germany by Nicola Fritsch etc.
Bulletin for International Taxation, July 2010, pp. 367-380.

2. AUDITING
The Big Debate: Audit is in the Spotlight. How Might
it Evolve to Meet Future Market Needs & What are the
Challenges? By Juliana Sancto. Accountancy, July 2010,
pp.96-99.
Disciplinary Measures in Response to Restatements
After Sarbanes-Oxley by Jeffrey J. Burks. J. Account.
Public Policy, Vol.29, 2010, pp. 195-225.
Does it Add Up? Early Evidence on the Data Quality
of XBRL Filings to the SEC by Roger Debreceny etc.
J. Account. Public Policy, Vol.29, 2010, pp. 296-306.
Lessons in Banking Audit by Dust Settles & Iain Coke.
Accountancy, July 2010, pp. 100-101.
Litigation Environment & Auditors’ Decisions to Accept
Clients’ Aggressive Reporting by Nen-Chen Richard
Hwang & C.Janie Chang. J. Account. Public Policy, Vol.29,
2010, pp. 281-295.
The Methodology of Secretarial Audit by K.R.
Chandratre. Chartered Secretary, July 2010, pp. 913-
919+925.
6. MANAGEMENT
Are you Ignoring Trends: That Could Shake Up Your
Business? by Elie Ofek & Luc Wathieu. Harvard Business
Review, July-August, 2010, pp. 124-131.
The Crux of Risk & Reward by Gabrielle Upton.
Intheblack, July 2010, pp. 58-59.
Good Governance & Sustainability by IFAC,CGA
Magazine, July-August 2010, pp. 39-43.
GST – Introduction & Role of Cost & Management
Accountant by Dilip M. Bathija. The Management
Accountant, July 2010, pp. 530-532.
How Will You Measure Your Life? by Clayton M.
Christensen. Harvard Business Review, July-August 2010,
pp. 46-51.
7. TAXATION & FINANCE
Finance Act, 2010 by P.N. Shah. BCAJ, July 2010,
pp.21-34.
Turning Business Losses into Tax Refunds by Robert E.
Harrison. Journal of Accountancy, July 2010, pp. 46-48.

Full Texts of the above articles are available with the Central Council Library, ICAI, which can be
referred on all working days. For further inquiries please contact on 011-23370154 or by e-mail at
library@icai.org

110 THE CHARTERED ACCOUNTANT september 2010

 487 BOOK REVIEW

A Useful Book for CAs

Undertaking Auditing Work*
T his almost 1000-page text on topics that are of great importance to the auditing
fraternity is obviously a labour of love.

The first part of the book deals with modified opinions under existing SA 700
(corresponding to AAS 28). The authors have presented over eighty specimens of
auditor’s reports laboriously extracted by them from published annual reports of
companies. This voluminous compilation will undoubtedly be a guide to auditors when
framing auditor’s reports for their clients.

What one perhaps misses is a topic-wise index of the modifications, cross-referenced

to the related auditor’s reports in which such modifications have been made. Such an
index could have made referencing easier.

The other point for users to note is that the existing ICAI standard SA 700
(corresponding to AAS 28), on which this book is based, is due to become outdated from
periods beginning April 1, 2011 and will be replaced by SA 700 (Revised), SA 705 and SA
Title :
Qualifications In The 706. These three standards, all dealing with auditor’s reports, contain significant conceptual and
Auditor’s Report And presentation changes in how auditor’s reports will be drafted in future. Nevertheless, parts of the
Disclosures On
book will still remain relevant – especially the chapter dealing with CARO.
Accounting
Standards
The second part of the book is a referencer on accounting standards. It seeks to briefly
Author :
explain each standard and gives illustrative disclosures taken from real life annual reports of
Dr. Sanjeev Singhal
CA. Krishan Kant Tulshan companies. This compilation will be a useful guide to both accountants and auditors.

Pages :
985 The caution that users will, however, need to exercise is to realise that accounting standards
can sometimes be interpreted differently in different situations by different professionals, and the
Price : authors’ learned interpretation should therefore always be considered as somewhat less than
INR985 (with CD)
sacrosanct.
Publisher :
Bharat Law House Pvt. As compared to auditing standards, accounting standards are an even faster moving target
Ltd., New Delhi
and, even as one writes this, over twenty-five exposure drafts of revised accounting standards
are sitting on the ICAI website awaiting comments and approval of the Accounting Standards
Board in the process of convergence of Indian standards with IFRSs with effect from April 1, 2011.
Nevertheless, the existing standards dealt with in this book, will (with some small modifications
that are being contemplated), continue to remain relevant for Phase 2 and Phase 3 enterprises
that move to the converged accounting standards at later dates, as well as to small and medium
enterprises.

The third part of the book includes an accounting standards disclosures checklist. This is
an important checklist that should be very useful to all practitioners. Most accounting standards
checklists in circulation deal more with recognition and measurement principles of the accounting
standards than with presentation and disclosures stipulations which are equally, if not more,
important. This checklist is refreshingly different and will be welcomed by the fraternity. n

*Reviewed by CA. Khurshed Pastakia, Mumbai

september 2010 THE CHARTERED ACCOUNTANT 111
 NATIONAL UPDATE
India to Become World’s Fastest Growing
Economy by 2013-15: Report
The two hands to produce count for more than that one
mouth to feed, after all. Driven by a sterling demographic
dividend, continuing structural reform and globalisation,
India is poised to accelerate its growth rate to 9-9.5per cent
over 2013-15, even as China will cool down to a more sedate
9per cent by 2012 and to 8per cent by 2015. So finds a new
report by a global financial services firm headquartered in
New York. India has one of the lowest median ages among
the major economies. When an economy prospers, first its
death rate and then, its birth rate falls. As this trend proceeds,
there is a big bulge in the working age population while the
non-working population (the young and the old) shrink as a
share of the population. The lowering of the dependent (non-
working) population to working age population ratio has twin
effects. One, it allows people to save a large proportion of
their income, raising the country’s rate of savings; two, it
boosts the number of people who work and contribute to
growth. Thanks to structural reform, the additional hands
available for work find work. Even with stagnant per capita
output, the sheer increase in the number of workers would
raise GDP growth. With reform pushing up productivity per
worker, GDP would rise even faster. Globalisation gives
additional job opportunities, additional capital to augment
rising domestic savings and additional know-how. With this
happy combination, the report expects India to become
the world’s fastest-growing economy. The government’s
chief economic advisor Kaushik Basu has been forecasting
such a development as well. “Real GDP growth in China
has averaged 10per cent annually over the past 30 years,
compared with 6.2per cent in India. During this period,
China’s GDP grew 16 times to $5 trillion whereas India’s
rose seven times to $1.2 trillion. China’s exports (including
services) surged 65 times over this period to $1,330 billion
while India’s exports increased 22 times to $250 billion”
says the report.
China has overtaken Japan to become the world’s second-
largest economy. China’s demographic transition pushed up
its savings rate above 30per cent in 1985, while India’s savings
rate crossed that level only in 2005. India’s consumption level
will now come down, even as China’s will rise.
(Source: http://economictimes.indiatimes.com/)
CEOs say GST will raise profits: Survey
An overwhelming majority of senior executives from
various sectors favour introduction of the proposed Goods
and Services Tax and think that it will increase profitability
for firms, according to a survey by industry body CII and a
global consultancy firm. The survey also found that industry
Representatives feel that the single unified tax structure
would help in consolidation of business. “Eighty eight
per cent of the survey respondents prefer having a single
national GST enactment, both for Centre and the states,”
112 THE CHARTERED ACCOUNTANT september 2010
488
the ‘Report on Goods and Services Tax Survey: Industry
expectations and perceptions’ said. The study was based on
response from over 200 senior executives of top companies
in diverse fields like auto, FMCG, power and energy, real
estate, IT, pharmaceuticals and financial services. “...most
of the respondents had presence on a pan-India basis and
they expect GST to be a unifying fiscal legislation across the
national market,” the survey added. The government plans
to roll out the GST from April 1, next year. All central and state
taxes like excise, VAT and service tax will be rolled into GST,
once the new regime comes into effect. The revenue from
GST will be shared equally between the centre and states.
The study also found that 44 per cent of the executives felt
that the GST could be an opportunity to consolidate their
business operations as the proposed changes in the indirect
tax structure would transform India into a national market.
(Source: http://www.financialexpress.com/)
Non-compete Fees Taxable, Rules ITAT
Non-compete fees are capital expenditure and therefore
liable to tax, according to a recent ruling by the Income-tax
Appellate Tribunal, Delhi. The special bench of ITAT, Delhi
gave this ruling on July 30, 2010, on an appeal filed by
Tecumseh India, the Indian arm of the US-based Tecumseh.
The transaction in question was the acquisition of Whirlpool
assets at Faridabad and Ballabgarh and the non-compete
fees it paid to Whirlpool. The assets were purchased on
July 2, 1997 but the agreement for non-compete fees of
R2.65 crore was signed on July 10, 1997. Since the non-
compete fee was claimed by Tecumaseh as revenue
expenditure, it accordingly deducted the amount from
computation of taxable income. The I-T department did
not agree with the taxpayer’s contention and held that the
payment of non-compete fee was capital expenditure and
therefore tax has to be paid. The assessing officer, therefore,
added the expenditure back into the income computed for
purpose of levying tax. The company had cited the Delhi
High Court decision in the case of Eicher to support its case.
In the case of Eicher, the Delhi High Court had held that the
non-compete fees are mainly for protecting the profitability
and business interest of the company. Further, since no
profit-making apparatus was created through the payment
of non-compete fees, such expenditures could be classified
as revenue expenditure, and therefore tax was not payable
on this count. The tax payer company had also argued that
the acquisition of Whirlpool assets and the agreement for
the non-compete fee were made on different dates and
therefore the latter could not be construed as part of the
acquisition. The I-T department contented that though MoU
and the agreement for paying non-compete fees, are signed
on separate dates, they are part of the same transaction
that could be classified as capital expenditure. The I-T
department cited section 6 of the Indian Evidence Act which
stipulates that courts should take note of facts which formed
 489
part of the same transaction though they may have occurred
at different places and time. It said the non-compete clause
was part of the same transaction
(Source: http://www.cainindia.org/)
Indirect tax kitty swells 46per cent
In yet another sign of economic recovery, indirect tax
collections in the first four months (April-July) of this financial
year jumped 46 per cent to R96,223 crore, compared with
a mop-up of R65,816 crore in the corresponding period
of 2009-10. The growth is led by a whopping 71 per cent
increase in Customs duty receipts to R41,545 crore, against
R24,323 crore in the same period last year, indicating a
surge in India’s trade. Excise duty collections also showed
a sharp 43 per cent rise to R38,260 crore in April-July
2010-11, against R26,792 crore in the corresponding months
last year. Service tax and receipts, however, showed 12 per
cent growth to R16,418 crore, compared with R14,685 crore
in the year-ago period. Apart from increase in the volume of
exports and imports, which increased by 32 per cent and
34 per cent, respectively in April-June, finance ministry officials
attributed the growth to the increase in petroleum duty.
(Source: http://beta.profit.ndtv.com/news)
‘Over R12k cr of Tax Demands Locked in
Court Disputes’
Over R12,000 crore in tax demands was locked on
account of disputes, pending resolution at various courts,
as on June 30, 2010, Parliament was informed recently.
While cases involving tax demand of about R7,635 crore
are pending in Income Tax Appellate Tribunal (ITAT), around
R3,849 crore is locked up in cases with High Courts, Finance
Minister Pranab Mukherjee told the Lok Sabha in a written
reply. Besides, disputed matters over tax liability of about
R550 crore are lying with the Supreme Court, he said. There
are 4,739 cases pending in the Supreme Court, 21,568
disputes lying with High Courts and 17,522 matters with
ITAT, Mukherjee said. Recently, the Finance Minister had
called the Income Tax Department as the biggest litigant
and asked it to re-examine the way it handles tax disputes.
(Source: http://www.thehindubusinessline.com/)
CAG Empowered to Vet NGOs Involved in
Govt’s Social Sector Schemes
The Comptroller and Auditor General of India (CAG)
has now been empowered to vet all non-government
organisations (NGOs) and other agencies involved in
the government’s social sector schemes. The Planning
Commission has decided that approvals for all social sector
projects undertaken by various NGOs, normally outside the
purview of CAG, will come with the rider that they will be
subject to audit, if required. The inclusion of this clause had
become necessary as inspection of the account books of
private entities that spent government money was not part
NATIONAL UPDATE
of CAG’s mandate. The current law empowers it to audit
only traditional government departments and public sector
companies. In January, the report of the task force on social
audit had pointed out that the audit jurisdiction of CAG was
limited when it came to panchayati raj institutions (PRI),
urban local bodies (ULB) and other agencies or societies.
“Statutorily, audit of local self governance institutions is a state
subject and the primary (external) audit of PRIs and ULBs is
with the State Local Funds Audit Department (LFAD), or with
the designated auditors as specified in the State laws,” the
report had pointed out, thereby emphasising the need for
wider powers to CAG through amendment to existing rules.
The Planning Commission’s intervention is expected to
empower CAG to actually verify, if need be, every rural road
or employment generation for every household in a gram
panchayat by utilising the services of the members of the
Institute of Chartered Accountants of India (ICAI).
(Source: http://www.cainindia.org/)
‘Government Has Imposed Service Tax on
Air Travellers’
Government has imposed a service tax on all domestic
and international air travellers, Civil Aviation Minster Praful
Patel informed the Lok Sabha recently. The rates of service
tax on domestic air travel have been fixed at the rate of
10 per cent of the gross value of the ticket or R100 per
trip, whichever is lower, Patel said. For those international
passengers travelling in economy class and embarking in
India it would be charged at the rate of 10 per cent of the
gross value of the ticket or R500 per trip, whichever is lower.
However, those travelling to or from the airports situated in
Assam, Meghalaya, Manipur, Mizoram, Tripura, Nagaland,
Arunachal Pradesh, Sikkim and Bagdogra in West Bengal
have been exempted.
(Source: http://www.business-standard.com)
Avoid Litigation Where Duty is Negligible:
HC to Customs Dept
To reduce burden on courts and revenue officials, the
Bombay High Court has asked the Central Board of Excise
and Customs (CBEC) to direct senior authorities to not to go
for appeals and litigation where duty impact is not substantial.
The high court has also asked the CBEC to consider the
necessity of issuing circular to this extent. A division bench
of Justice V.C. Daga and Justice S.J. Kathawalla was hearing
an appeal filed by the Central Excise Department to impose
penalty on the duty of R1.21 lakh recoverable from a drug
manufacturing company. The HC observed that a number
of appeals are being filed before the court in which customs
and central excise duty involved is negligible. “Sometimes
the expenses incurred by the Revenue Department are
disproportionate to the stakes involved in the appeal or
petition filed by the department,” the order said.
(Source: http://www.business-standard.com)
september 2010 THE CHARTERED ACCOUNTANT 113
 INTERNATIONAL UPDATE
IFAC SMP Committee Publishes Quality
Control Implementation Guide
The Small and Medium Practices (SMP) Committee
of the International Federation of Accountants (IFAC)
has recently issued the second edition of its Guide to
Quality Control for Small- and Medium-Sized Practices
(QC Guide). The implementation guide is intended
to help SMPs understand and efficiently apply the
redrafted International Standard on Quality Control
(ISQC) 1, Quality Control for Firms that Perform Audits
and Reviews of Financial Statements, and Other
Assurance and Related Services Engagements. The first
edition of the QC Guide was issued in March 2009 and
went on to become IFAC’s second most downloaded
publication after the Handbook of International Auditing,
Assurance, and Ethics Pronouncements last year. The
new edition conforms to the revised and redrafted
Code of Ethics for Professional Accountants and
includes various improvements based on feedback
from users of the first edition. It features an integrated
case study, practical checklists and forms, and two
sample quality control manuals. According to the SMP
Committee, this guide will help SMPs to cost effectively
implement ISQC 1 and ensure that they can provide
high-quality assurance and related services to their
clients. The Guide can be downloaded free of charge
from the IFAC website. Besides, the readers may also
visit www.ifac.org/smp, which hosts a collection of free
IFAC publications and relevant links to resources.
(Source: http://press.ifac.org/news)
Arnold Schilder Reappointed to Chair the
IAASB from 2012 to 2014
The Board of the IFAC has reappointed Prof. Arnold
Schilder to lead the International Auditing and Assurance
Standards Board (IAASB), an independent standard-
setting board supported by the IFAC, for the period
2012–2014. As chairman, Prof. Schilder will play a key
role in guiding the IAASB as it strives to enhance the
quality and uniformity of audit practice throughout the
world by promoting the adoption and implementation of
its Standards on Auditing. His reappointment, beginning
from January 1, 2012, was approved by the Public
Interest Oversight Board (PIOB) — an independent
body that oversees IAASB activities.
(Source: http://press.ifac.org/news)
IAESB Releases Paper on Education
Assessment Practices
The International Accounting Education Standards
114 THE CHARTERED ACCOUNTANT september 2010
490
Board (IAESB), a standard-setting board supported
by the IFAC, has released an International Education
Information Paper to help professional organizations
conduct written examinations to assess the capabilities
and competence of candidates for qualification.
The paper, available online at the IFAC website,
is intended to help member bodies implement
International Education Standard (IES) 6, Assessment
of Professional Capabilities and Competence,
issued in October 2003. It is especially useful
to developing organizations that need to make
decisions on assessment practices for their education
programs.
(Source: http://press.ifac.org/news)
A4S and GRI Announces Formation of the
IIRC
The Prince’s Accounting for Sustainability Project
(A4S) and the Global Reporting Initiative (GRI) has
recently announced the formation of the International
Integrated Reporting Committee (IIRC). The IIRC brings
together a cross section of representatives from the
corporate, accounting, securities, regulatory, NGO,
and standard-setting sectors. Ian Ball, CEO of IFAC,
will serve as co-chairman of the Working Group. Its
objective is to create a globally accepted framework
for accounting for sustainability that brings together
financial, environmental, social and governance
information in a clear, concise, consistent and
comparable format.
(Source: http://press.ifac.org/news)
Two IFAC Nominees Selected as Members of
IFRS SME Implementation Group
The IFAC has welcomed the announcement by the
International Financial Reporting Standards (IFRS)
Foundation of the membership of the newly-created
SME Implementation Group (SME IG). It is pleased
to note the appointment to the SME IG of two of its
nominees—Robin Jarvis and Ricardo Rodil. The group’s
mission is to support the adoption and implementation
of the IFRS for Small and Medium-sized Entities (IFRS
for SMEs) around the world. As such, it will develop
non-mandatory guidance for implementing the IFRS
for SMEs in the form of questions and answers that
will be made publicly available on a timely basis and
make recommendations to the IASB if and when
needed regarding amendments to the IFRS for
SMEs.
(Source: http://press.ifac.org/news)
 491
IASB and US FASB Publish Proposals to
Improve Financial Reporting of Leases
The International Accounting Standards Board
(IASB) and the US Financial Accounting Standards
Board (FASB) today published for public comment
joint proposals to improve the financial reporting of
lease contracts. The proposals are one of the main
projects included in the boards’ Memorandum of
Understanding. The proposals, if adopted, will greatly
improve the financial reporting information available to
investors about the financial effects of lease contracts.
Entities interested in volunteering may contact Aida
Vatrenjak at avatrenjak@ifrs.org or Danielle Helmus at
dehelmus@fasb.org by September 15, 2010.
(Source: http://www.ifrs.org/News/)
IFRS Foundation Appoints Members of SME
Implementation Group
The IFRS Foundation and the oversight of the IASB,
has announced the membership of the newly created
SME Implementation Group. The mission of the Group
is to support the international adoption of the IFRS for
Small and Medium-sized Entities (IFRS for SMEs) and
to monitor its implementation. The Group has two main
responsibilities: to develop non-mandatory guidance
for implementing the IFRS for SMEs in the form of
questions and answers and to make recommendations
to the IASB if and when needed regarding amendments
to the IFRS for SMEs. Representatives of the European
Commission and the European Financial Reporting
Advisory Group (EFRAG) will participate in the work of
the Group as observers.
(Source: http://www.ifrs.org/News/)
IFRS Taxonomy 2010 Updated for Latest
Annual Improvements to IFRSs
The IFRS Foundation has released the first interim
release for the IFRS Taxonomy 2010, which is a
translation of IFRSs as issued at January 1 2010 into
XBRL (eXtensible Business Reporting Language).
This interim release reflects Improvements to IFRSs for
the 2008-2010 project cycle, which was published in
May 2010 as part of the IASB’s annual improvements
process. The decision to issue IFRS Taxonomy interim
releases will support the early adoption of IFRSs,
by providing taxonomy items earlier for reporting
electronically using the latest IFRSs. IFRS Taxonomy
2010 interim releases are consistent with the XBRL
architecture of the IFRS Taxonomy 2010.
(Source: http://www.ifrs.org/News/)
INTERNATIONAL UPDATE
IASB Proposes Improvements to Insurance
Accounting
The IASB has published for public comment an
exposure draft of improvements to the accounting
for insurance contracts. The exposure draft proposes
a single International Financial Reporting Standard
(IFRS) that all insurers, in all jurisdictions, could apply to
all contract types on a consistent basis. In developing
the proposals, the IASB considered more than 160
comment letters received on the discussion paper, as
well as feedback from interested parties through an
extensive outreach programme including interaction
with the IASB’s Insurance Working Group and a
targeted field test with preparers. The exposure draft is
open for comment until November 30, 2010.
(Source: http://www.ifrs.org/News/)
User Questionnaire – Exposure Draft on Mea-
surement Uncertainty Analysis
The IASB has recently published a questionnaire for
financial statement users on its June 2010 exposure
draft Measurement Uncertainty Analysis Disclosure for
Fair Value Measurements. It asks analysts to complete
the questionnaire to provide input on the proposals
in the exposure draft on measurement uncertainty
analysis for Level 3 fair value measurements. This
questionnaire, targeted at analysts, forms part of a
comprehensive programme of outreach activities to
all IFRS constituents. The deadline to complete the
questionnaire is September 7, 2010.
(Source: http://www.ifrs.org/News/)
IFRS Foundation Publishes Illustrative
examples in XBRL for IFRS Taxonomy
In order to provide assistance with the preparation of
financial statements in International Financial Reporting
Standards (IFRS) with the XBRL, the IFRS Foundation
has published illustrative examples in XBRL for the IFRS
Taxonomy 2010. The purpose of these examples is to
illustrate the use of the IFRS Taxonomy in financial state-
ments, in accordance with the XBRL architecture out-
lined in The IFRS Taxonomy Guide. Illustrative examples
available on the IFRS website have been provided for
statement of financial position, comprehensive income,
changes in equity and cash flows, for notes - property,
plant and equipment - reconciliation of carrying amount
at the beginning and end of the period, and for notes -
disclosure of inventories. Each example is provided in
both XBRL and Inline XBRL (iXBRL) format.
(Source: http://www.ifrs.org/News/)
september 2010 THE CHARTERED ACCOUNTANT 115
 ECONOMIC UPDATE 492

116 THE CHARTERED ACCOUNTANT september 2010

 CABF DONORS 494

The Institute of Chartered Accountants of India

duly acknowledges the following members for
making generous contributions to the Chartered
Accountants Benevolent Fund (CABF):
S.No. M.No. NAME OF FIRMS/ AMOUNT (R)
MEMBERS
1 054670 CA. Subodh Kumar Agrawal 100000.00
2 011330 CA. Ajeet Singh Patwa 100000.00
3 015961 CA. Prem Kumar Gupta 100000.00
4 081849 CA. Rajeev Kumar Chopra 101000.00
CA. Subodh Kumar Agrawal CA. Ajeet Singh Patwa CA. Prem Kumar
5 081978 CA. Sujata Chopra 51000.00
6 512881 CA. Jigyasa Chopra 51000.00
7 Banglore Branch Southern 120000.00
India Regional Council of
the Institute of Chartered
Accountants of India
8 Western India Regional 67000.00
Council of Institute of
Chartered Accountants of
India CA. Rajeev Kumar Chopra CA. Jigyasa Chopra CA. K. M. Agarwal
9 010420 CA. K. M. Agarwal 51000.00
10 032199 CA. Bhailalbhai Kanjibhai 15000.00 15 Pune West CPE Study of 11000.00
Patel the Institute of Chartered
11 North Campus Study Circle 11000.00 Accountants of India
of Northern India Regional 16 034625 CA. Rajesh Bhagat 10000.00
Council of the Institute of
Chartered Accountants of 17 035520 CA. Nihar N. Jambusaria 10000.00
India 18 105591 CA. Dhiraj Khandelwal 10000.00
12 071213 CA. P. P. Pareek 11000.00 19 085013 CA. Mahesh Agarwal 7600.00
13 012908 CA. Rattan Lal 11000.00 20 101499 CA. Shruti Jayesh Shah 5000.00
14 006774 CA. K. B. Kapur 11000.00 21 043442 CA. Ashok Chand Jain 5000.00

Classifieds
4810 FCA with nearly 20 years of experience (mostly industrial)
with experience in ERP interested in taking up full time
employment. Also interested in taking assignments/joinng
audit firms as partner in Hyderabad e-mail: naseer30@
yahoo.com
4811 A fiirm of Chartered Accountants based in New Delhi requires
chartered accountants for auditing, business valuations,
project evaluation, financial consultancy and credit audit.
Remuneration is depended upon experience in the reference
fields. Apply with complete details gsmco.gsmco@gmail.
com or contact at 011-41556527.
4812 Delhi based CA firm looking for PAN India expansion and
inviting fresh/experienced CA for partnership and branch
offices. Contact Mr. Jain at 9899615888, dkj_ca@rediffmail.
com.
4813 Assign/sub-contract audit/taxation work all over India to
Chennai based CA firm. Contact: 98406 49930. e-mail:
ksvassociates.s@gmail.com
4814 Required Chartered Accountants on partnership/assignment/
retainership/sub-contract/employment basis, semi-qualified
and articled assistants (for the state of Jammu & Kashmir/
northern states). Send in your applications to: 4814, C/o
Journal Section, The Institute of Chartered Accountants of
India, ICAI Bhawan, A-94/4, Sector-58, Noida-201301
4815 Kolkata based CA firm requires partner. Also interested for
merger & networking. Please send your CV and proposals at
gbgrai@yahoo.com
4816 A C.A. Firm having offices at Mumbai, Surat and Ahmedabad
with well equipped infrastructure is in process of converting
the firm into Limited Liability Partnership [LLP], subject to the
necessary amendments in the CA Act, 1949, and intend to
open other branches in India and overseas. Proposals are
invited from small and medium size CA firms for merger/
networking with proposed LLP. Proposals from any city of
India and Abroad are solicited. Mail your proposal to ncmpl@
ncmpl.com or call us on telephone no. 079 – 2646 4023/2640
3765.

118 THE CHARTERED ACCOUNTANT september 2010

 495
Payment of Annual Membership/Certifacte of Practice Fee
For The Year 2010-11
The annual Membership and Certificate of Practice fees
(if member holds certificate of practice) became due and
payable on 1st April, 2010. Circulars advising members to
pay the membership/certificate of practice fee were sent
to individual members in the month of April, 2010 and
published in May, 2010 issue of the Journal.
Attention of all those members who have still not paid
the annual membership fee/certificate of practice fee by 31st
July, 2010 is invited to pay the fees immediately so as to
reach the concerned Regional Office before 30th September,
2010.
The non-payment of annual membership/certificate of
practice fee will have the following consequences:
i) The member will not be eligible to use designatory
letters ‘CA.’ as a prefix to the name and ‘ACA’/’FCA’
and designation ‘Chartered Accountant’.
ii) A member in practice will cease his right to practise
as a Chartered Accountant.
iii) Such a member will not be eligible to train articled/
audit assistant already receiving training under him.
iv) The member will not be eligible to train any new
Campus Placement Programme for Newly Qualified Chartered Accountants
August-September, 2010
The CMII provides opportunity to the employers to
interact with newly qualified Chartered Accountants
thereby providing a cost effective mode of recruiting newly
qualified Chartered Accountants. An organisation and firms
of Chartered Accountants can participate in one or more
centres.
Campus Interview Dates
Centre Dates
Ernakulam, Kanpur, Ludhiana and September 06 & 07, 2010
Bhubaneswar
Coimbatore, Indore and Nagpur September 07 & 08, 2010
Ahmedabad, Jaipur and Pune September 08, 09 & 10, 2010
Annual Filing of Statutory Returns for the Year 2010
MINISTRY OF CORPORATE AFFAIRS
GOVERNMENT OF INDIA
Dear Corporates,
As you are aware the last date for filing of your
company’s Annual Return & Balance Sheet for the
current year is round the corner. These documents
have to be filed in electronic form online into the MCA21
ICAI NEWS
articled/audit assistant.
v) Such a member will not be eligible to carry out audit/
certificate/attest and other functions in view of (i) &
(ii) above.
Members can also pay membership/COP fees by
using the online facility available on the website. For the
use of payment gateway, members are requested to log in
through “Online Services” link available on home page of
the Institute’s website.
From this year onwards, the scheme of advance amount
remittance has been introduced in place of advance
payment of fee and the same can be referred in the Fee
circular sent to all members.
For, any other clarification, members are advised
to contact the concerned Decentralized Offices of the
Region.
Please pay your membership fee and avoid unwanted
removal of your name.
“HELP US TO SERVE YOU BETTER”
Bangalore, Hyderabad and Kolkata September 15, 16, 17 & 18, 2010
Mumbai, New Delhi and Chennai September 21, 22, 23, 24 & 25,
2010
Organisations intending to recruit Newly Qualified
Chartered Accountants through the scheme are
requested to get in touch with Committee for Members
in Industry, Indraprastha Marg, New Delhi - 110002, Tel.
No. (011) 30110450/491 E-mail: placements@icai.org,
mii@icai.org; Fax- +91(11) 30110583.
For full details, please log on to www.cmii.icai.org
Chairman, CMII
portal. Since the size of each document is huge (2MB
or more), the last minute rush creates a congestion in
the system which is then unable to process pending
requests fast.
You are, therefore, requested to please file your E-forms
due for the coming months of 2010 early, in order to avoid
last minute system problems of heavy traffic on the MCA
website/MCA 21 portal.
september 2010 THE CHARTERED ACCOUNTANT 119
 ICAI NEWS 496

Common Proficiency Test (Paper- Pencil Mode) - December, 2010

TO BE PUBLISHED IN PART III SECTION 4 OF THE GAZETTE OF INDIA
NOTIFICATION
26th July, 2010
No.13-CA (EXAM)/CPT/December/2010: - In pursuance of Regulation 22 of the Chartered Accountants Regulations, 1988,
the Council of the Institute of Chartered Accountants of India is pleased to notify that the Common Proficiency Test
(Paper- Pencil Mode) will be held on Sunday, 19th December, 2010 in two sessions as below, at the following centres
provided that sufficient number of candidates offer themselves to appear from each centre.
[As per provisions of Regulation 25 D (3) of the Chartered Accountants Regulations, 1988 and the syllabus as published
in the pages 291-293 of the Journal ‘The Chartered Accountant’ August 2006 issue and pages 12-13 of Chartered
Accountants Students’ Newsletter August 2006 issue.]
First Session (i.e. Morning Session) 10.30 AM to 12.30 PM (IST)
Section - A Fundamentals of Accounting
Section - B Mercantile Laws
Second Session (i.e. Afternoon Session) 2.00 PM to 4.00 PM (IST)
Section - C General Economics
Section - D Quantitative Aptitude

EXAMINATION CENTRES( IN INDIA):

1 AGRA 46 GOA 91 PANIPAT

2 AHMEDABAD 47 GORAKHPUR 92 PANVEL
3 AHMEDNAGAR 48 GUNTUR 93 PATNA
4 AJMER 49 GURGAON 94 PATIALA
5 AKOLA 50 GUWAHATI 95 PIMPRI-CHINCHWAD
6 ALAPPUZHA 51 GWALIOR 96 PONDICHERRY
7 ALIGARH 52 HISAR 97 PUNE
8 ALLAHABAD 53 HUBLI 98 RAIPUR
9 ALWAR 54 HYDERABAD 99 RAJAMAHENDRAVARAM
10 AMBALA 55 INDORE 100 RAJKOT
11 AMRAVATI 56 JABALPUR 101 RANCHI
12 AMRITSAR 57 JAIPUR 102 RATLAM
13 ANAND 58 JALANDHAR 103 REWARI
14 ASANSOL 59 JALGAON 104 ROHTAK
15 AURANGABAD 60 JAMMU 105 ROURKELA
16 BANGALORE 61 JAMNAGAR 106 SAHARANPUR
17 BAREILLY 62 JAMSHEDPUR 107 SALEM
18 BATHINDA 63 JODHPUR 108 SAMBALPUR
19 BEAWAR 64 KANPUR 109 SANGLI
20 BELGAUM 65 KARNAL 110 SATARA
21 BELLARY 66 KOLLAM 111 SHIMLA
22 BERHAMPORE 67 KOLHAPUR 112 SIKAR
23 BHAGALPUR 68 KOLKATA 113 SILIGURI
24 BHARAUCH 69 KOTA 114 SOLAPUR
25 BHAVNAGAR 70 KOTTAYAM 115 SONEPAT
26 BHILWARA 71 KOZHIKODE 116 SRI GANGANAGAR
27 BHOPAL 72 KUMBAKONAM 117 SURAT

120 THE CHARTERED ACCOUNTANT september 2010

 497 ICAI NEWS

28 BHUBANESWAR 73 LATUR 118 THANE

29 BHUJ 74 LUCKNOW 119 THIRUVANANTHAPURAM
30 BIKANER 75 LUDHIANA 120 THRISSUR
31 BILASPUR 76 MADURAI 121 TINSUKIA
32 CHANDIGARH 77 MANGALORE 122 TIRUCHIRAPALLI
33 CHENNAI 78 MATHURA 123 TIRUPATI
34 COIMBATORE 79 MEERUT 124 TIRUPUR
35 CUTTACK 80 MORADABAD 125 TUTICORIN
36 DEHRADUN 81 MUMBAI 126 UDAIPUR
37 DELHI/NEW DELHI 82 MUZAFFARNAGAR 127 UDUPI
38 DHANBAD 83 MYSORE 128 UJJAIN
39 DUNDLOD 84 NAGPUR 129 VADODARA
40 DURG 85 NANDED 130 VAPI
41 ERNAKULAM 86 NASHIK 131 VARANASI
42 ERODE 87 NELLORE 132 VELLORE
43 FARIDABAD 88 NOIDA 133 VIJAYAWADA
44 GANDHIDHAM 89 PALGHAT 134 VISAKHAPATNAM
45 GHAZIABAD 90 PALI MARWAR 135 YAMUNA NAGAR

Overseas Centres :- Common Proficiency Test application forms duly filled

(1) ABU DHABI
(2) DUBAI
(3) BAHRAIN
(4) DOHA
(5) KATHMANDU
The Council reserves the right to withdraw any centre at
any stage without assigning any reason.
Applications for admission to Common Proficiency
Test is required to be made in the relevant prescribed form
as contained in the Information Brochure, which may be
obtained from the Additional Secretary (Examinations),
The Institute of Chartered Accountants of India, ICAI
Bhawan, Indraprastha Marg, New Delhi – 110002 on
payment of R600/-(R500/- towards examination fee and
R100/- towards cost of application form and information
brochure) per application form. The fee for candidates
opting for Abu Dhabi , Dubai, Doha and Bahrain centres will
be US $160 ( US $ 150 towards examination fee and US $ 10
towards cost of application form and information brochure)
or its equivalent Indian currency. The fee for the candidates
opting for Kathmandu centre are required to remit INR.950/-
(INR 850/- towards examination fee and INR 100/- towards
the cost of application form and information brochure) or its
equivalent foreign currency. Since the cost of Information
brochure containing Common Proficiency Test application
form includes the examination fee , no separate fee is
required to be remitted at the time of submitting the filled
in application form. The Information brochure containing
Common Proficiency Test application form will also be
available in the Regional and Branch Offices of the Institute
and can be obtained there from on cash payment on or
from 6th October, 2010.
in may be sent so as to reach the Additional Secretary
(Examinations) at New Delhi not later than 27th October,
2010. Applications received after 27th October, 2010 shall
not be entertained under any circumstances. Applications
duly filled in will be received by hand delivery at the offices
of Institute at New Delhi and at the Decentralised Offices
of the Institute at Mumbai, Chennai, Kolkata, Kanpur,
Ahmedabad, Bangalore, Hyderabad, Jaipur and Pune upto
27th October, 2010. Candidates residing in these cities are
advised to take advantage of this facility. It may be noted
that there is no provision for acceptance of application
forms after 27th October, 2010 with late fee.
Alternatively the candidate may fill up the examination
application form online at http://icaiexam.icai.org from
6th October, 2010 (10:00 hrs) to 27th October, 2010
(17:30hrs) and remit the fee online by using credit card,
either VISA or Master Card.
Common Proficiency Test (CPT) is open only to those
students who are already registered with the Institute of
Chartered Accountants of India for the said course on or
before 1st October, 2010 and fulfill the requisite eligibility
conditions.
QUESTION PAPER BOOKLET LANGUAGE:
Common Proficiency Test will be an objective type multiple
choice questions based examination. Candidates will be
allowed to opt for Hindi medium Question Paper Booklet for
answering the questions. Detailed information will be found
given in the Information brochure.
(G. SOMASEKHAR)
ADDITIONAL SECRETARY (EXAMS.)

september 2010 THE CHARTERED ACCOUNTANT 121

 ICAI NEWS 498

ICAI Job Portal

( http://jobs4cas.icai.org)
ICAI Job portal for experienced Chartered
Accountants and Accounting Technicians.
Objectives of ICAI Job portal
The ICAI Job Portal is primarily for experienced Chartered
Accountants and Accounting Technicians. The said Job
Portal has been designed and developed to provide a
platform for industry to fill their vacancies and chartered
accountants to get fresh jobs. The benefits are as follows:
• From Members Perspective:
a) To cater to the Career Advancement of the
members in industry.
b) To provide a platform for members in practice
who wish to switch over to service.
c) To provide career advancement services
throughout the year.
• From Industry Perspective:
a) To reinforce the image of the Institute as partner
in Nation Building and to identify itself as a
partner in industrial development through the
provision of quality professionals.
b) To provide placement services throughout
the year and fill their evolving manpower
requirements.
c) To be a driver to the overall improvement of the
various functional area of Industry.
d) To be a driver to develop world class Indian
organisations.
• Features of the Job Portal
Some of the Prominent Features of this portal are as
follows:
For Employers:
• Hot Vacancy-Premium Job Posting Services
• Advanced Search Tools
• Reach through Job Alerts
• Resume Database Access Subscription
• Unlimited writing for Job Advertisement
• Extremely fast display of Job Advertisement
• Facility to monitor the activities done through the
Account.
For Candidates:
• Update Alert for CV
• Job Messenger
• Email Alerts
• Resume Building Services
• Job Search Facility on the basis of Functional
Area, Industry, Experience, Locations, Expected
Salary, Job Type, Freshness, etc
• Covering Letter Option
• Hot Employer/Preferred Employer marking
facility
The Recruiting organizations as well as the Experienced
Chartered Accountants and accounting technicians can
avail the benefits of the ICAI Job Portal. In case you need
any assistance you may feel free to contact Secretary to
CMII at email: placements@icai.org , ssuneja@icai.org,
Tel: 011-30110450/491.
Chairman
Committee for Members in Industry

For kind attention of all members of the

S.Vaidyanath Aiyar Memorial Fund
No.SVAMF/AGM/49/2010 August 11, 2010 Regulations, no member is entitled to any fee or traveling
expenses or other allowances for attending the meeting
This is to inform you that as required under Rule 27 of the whether annual or special.
S.Vaidyanath Aiyar Memorial Fund Rules and Regulations, the You are requested to make it convenient to attend the
49 Annual General Meeting of the Fund will be held at 5.30 p.m.
th
meeting.
on 21st September, 2010 in the office of the Institute of Chartered
Accountants of India, ICAI Bhawan, Indraprastha Marg, New Sd/-
Delhi. In compliance with Rule 28 of the said Rules and (CA S.C.Vasudeva)
Regulations, agenda for the meeting together with the report of Member Secretary
the Managing Committee and statement of Accounts for the year SVAMF
ending 31 March, 2010 will be placed on the table at the time of
st
(Details of Agenda, Report of Managing Committee and
meeting. Financial Statements would be hosted on the Institute’s
Note: I wish to add that under Rule 37 of the said Rules and website www.icai.org )

122 THE CHARTERED ACCOUNTANT september 2010

 499 ICAI NEWS

For kind attention of all members of the

Chartered Accountants Benevolent Fund

No.CABF/AGM/50/2010 August 11, 2010

This is to inform you that as required under Rule 28 of the Chartered
Accountants Benevolent Fund Rules and Regulations, the 50th Annual General
Meeting of the Fund will be held at 5:00 p.m. on 21st September, 2010 in
the office of the Institute of Chartered Accountants of India, ICAI Bhawan,
Indraprastha Marg, New Delhi. In compliance with Rule 29 of the said Rules and
Regulations, agenda for the meeting together with the report of the Managing
Committee and statement of Accounts for the year ending 31st March, 2010 will
be placed on the table at the time of meeting.
Note: I wish to add that under Rule 38 of the said Rules and Regulation, no
member is entitled to any fee or traveling expenses or other allowances for
attending the meeting whether annual or special.
You are requested to make it convenient to attend the meeting.
Sd/ -
(CA. N. D.Gupta)
Member Secretary
CABF
(Details of Agenda, Report of Managing Committee and Financial
Statements would be hosted on the Institute’s website www.icai.org )

NEW PUBLICATIONS
THE COMMITEE ON PUBLIC
FINANCE AND GOVERNMENT
ACCOUNTING
Accounting Reforms in India: A
Bird’s Eye View
The Committee on Public Finance &
Government Accounting of ICAI has prepared
a booklet on “Accounting Reforms in India: A
Bird’s Eye View” with a view to provide explicit
guidance on achievements of accounting
reforms, roadblock in way for accounting
reforms, need to harmonise accounting
standards, conversion from cash to accrual
system and single to double entry book-keeping, implementation of accrual
accounting in Government and other related issues.
This is a non-priced publication of the Institute. In case the members would
like to have a copy of the booklet, they can write to the CPF&GA Secretariat
at cpf_ga@icai.org. The booklet is also freely downloadable from the
URL: http://220.227.161.86/20163announ10956.pdf

september 2010 THE CHARTERED ACCOUNTANT 123

 ICAI NEWS 500

NEW PUBLICATIONS

INTERNAL AUDIT STANDARDS BOARD manufacturing process, sales

Technical Guide on Internal Audit of Sugar Industry and marketing process of
(Pages: 60 + 18 initial pages+ 2 cover pages) sugar and also of distillery
Price: R120/- (including CD) products.
• Deals with important internal
The Indian sugar industry is a key driver of rural deve- control aspects related to
lopment, supporting India’s economic growth Internal audit sugar industry.
can go a long way in helping sugar industry in improving • Includes glossary of terms
their operational efficiency, increasing value for money and peculiar to sugar industry.
finally, their competitiveness, both in the domestic as well as • The Guide comes with a
in international markets. The Internal Audit Standards Board CD of the entire Guide to
has recently issued “Technical Guide on Internal Audit ensure ease of reference and
of Sugar Industry” that primarily deals with the operational reusability.
as well as internal audit aspects relevant to Indian sugar
industry. Ordering Information:
The publication can be obtained from the sales counter at
Significant features of the Technical Guide are: the Regional Offices or at the Head Office of the Institute.
• Brief overview of the sugar industry in India. Copies can also be obtained by post. To order by post, send
• Discusses major legislations governing the sugar a demand draft for the amount of price of the publication
industry. (add the charges indicated below for the desired mode of
• Explains various processes involved in sugar industry, delivery) in favor of the “The Secretary, The Institute of
such as, sugarcane development and procurement, Chartered Accountants of India, New Delhi”, payable at
manufacturing of sugar, and sales and marketing of New Delhi, to the Postal Sales Department, the Institute
sugar. of Chartered Accountants of India, A-94/4, Sector-58,
• Deals with the overall approach of internal audit with Noida - 201301 - (U.P.).
reference to Standards on Internal Audit, and the
procedures to be undertaken by the internal auditor with Postal Charges:
regard to peculiar aspects related to sugar industry. By Courier: Within Delhi : R20/-
• Provides guidance regarding internal audit of key Rest of India: R25/-
processes such as, cane survey, procurement process, By Registered Parcel: Within India : R36/-

ICAI AWARDS FOR EXCELLENCE IN FINANCIAL REPORTING

Invitation to Participate in the Competition for the Year 2009-10
Last date for receipt of entries:
30th September, 2010 Category V Infrastructure and Construction Sector
– (Turnover equal to or more than R500
Objective crore)
To recognise and encourage excellence in the Category VI Infrastructure and Construction Sector–
preparation and presentation of financial information. (Turnover less than R500 crore)

Category VII Service Sector (Other than banking and

Categories of the Awards
insurance) – (Turnover equal to or more
Category I Banking Sector than R500 crore)
Category II Insurance Sector Category Service Sector (Other than banking and
VIII insurance) – (Turnover less than R500
Category III Manufacturing Sector – (Turnover equal to
crore)
or more than R500 crore)
Category IX Not-for-Profit Sector
Category IV Manufacturing Sector – (Turnover less
than R500 crore) Category X Local Bodies

124 THE CHARTERED ACCOUNTANT september 2010

 501 ICAI NEWS

In a case, where an organisation is engaged in more 2. Annual Report relating to the financial
than one business, the dominant source of revenue year ending on any day between April
will determine the category to which the organisation 1, 2009 and March 31, 2010 (both days
belongs. inclusive) is eligible for participation in this
competition.
Awards 3. Decision of the Panel of Judges in all the
Hall of Fame, to be awarded to the entity that has matters relating to the Competition will be
been winning the first prize under the same category final.
continuously in the last five years. 4. Fill in the Entry Form and submit with requisite
documents on or before September 30, 2010
One Gold Shield and one Silver Shield will be awarded to:
in each category for the best entry and the next best The Secretary
entry, respectively. Research Committee
Technical Directorate
Plaques to be awarded to the Entities who are following The Institute of Chartered
better financial reporting practices amongst the Accountants of India
remaining enterprises in each category after conferring ICAI Bhawan, Indraprastha Marg
Hall of Fame, Gold Shield and Silver Shield. New Delhi – 110 002

Procedure for Participation For further information please write to research@

1. There is no fee for participation in the competition. icai.org or visit Institute’s website www.icai.org

Peer Review of the Audit Firms of the Listed Companies – Updation of the
Peer Review Status
The Peer Review Board of the Institute of Chartered
Accountants of India (ICAI) is in process of updating
the status of the firms. Accordingly the Peer Review
Board has desired to know the status regarding
whether your firm has been Peer Reviewed in the past
or whether Peer Review Certificate has already been
issued to your firm for updation of the latest position
regarding the status due to the migration of firms from
the Stage II to Stage I and from Stage III to Stage II
and Stage I and vice-versa. In view of this therefore
it is requested that the latest status of your firm i.e.
in which stage your firm falls as per the Stage wise
coverage mentioned below which may kindly be
send at email id peerreviewboard@icai.org so as to
expedite the Peer Review of the firms doing the audit
of the listed companies which has been mandatory
as per the Circular No. CIR/CFD/DIL/1/2010 dated
April 5, 2010 issued by The Security Exchange Board
of India (SEBI). Further the firms doing the audit of the
listed companies who’s Peer Review Process is not
initiated by the Board may also kindly send a request
for voluntary Peer Review to the Peer Review Board.
The Stage wise coverage as per the Statement on
Peer Review is as under: -
Stage
S
of the Firms covered under each Stage
No.
firms
(i) Central Statutory Auditors of Public
Sector Banks, Private Sector Banks,
1 Stage I
Foreign Banks and Public Financial
Institutions;
(ii) Central Statutory Auditors of Central
and State Public Sector Undertakings
and Central Cooperative Societies
based on criteria such as turnover
or paid up capital etc. as may be
decided by the Board;
(iii) Central Statutory Auditors of Insurance
Companies;
(iv) Conducting audit of Companies ha-
ving paid up capital of over R5 crore
and an annual turnover of more than
R50 crore and such other criteria as
may be decided by the Board;

september 2010 THE CHARTERED ACCOUNTANT 125

 ICAI NEWS
(v) Conducting audits or rendering
attestation functions of asset management
companies and mutual fund entities;
(vi) Conducting audit of enterprises
whose equity or debt securities are listed
in India or enterprises which are in the
process of listing their equity or debt
securities as evidenced by the board of
directors’ resolution in this regard;
(vii) Entities which have raised funds
from banks/public/financial institutions of
over Rs. One crore at any time during the
period covered by the review and satisfy
such other criteria in this regard as the
Board may decide, as well as entities who
have shown readiness to raise funds of
the above amount or more as evidenced
by their filing of prospectus.
2 Stage II (i) Branches of Public Sector Banks;
(ii) Branches of Private Sector and
Foreign Banks;
Invitation to be a part of the Institute’s Vision-2021
The Vision & Perspective Planning Committee
of the Institute is currently engaged in the historic
exercise of drafting the Vision Document for
the Institute and the profession of Chartered
Accountancy leading to the excellence position by the
year 2021.
The Committee had organized Interactive Workshops
at 18 regions across the country, namely, Coimbatore,
Lucknow, Noida, Nasik, Nagpur, Jaipur, Ahemadabad,
Baroda, Bhopal, Bhubaneswar, Ernakulam, Faridabad,
Gurgaon, Guwahati, Hyderabad, Jalandhar, Kolkata
and Mangalore, wherein the elite resourceful people
from the various sectors of the economy, who are
the users of the services of Chartered Accountants,
including Chartered Accountants from industry (CEOs
and CFOs), Chartered Accountants from service (at
key positions) alongwith senior and present Council
Members (central, regional and branch level) were
invited to discuss and deliberate upon certain vital
issues and aspects having an impact or expected
126 THE CHARTERED ACCOUNTANT september 2010
502
(iii) Regional Rural Banks/Co-oper-ative
Banks;
(iv) Non-Banking Financial Com-panies
(NBFCs) which are not covered under
Level I, based on such criteria as the
Board may decide;
(v) Companies having paid-up capital
of R5 crore or less and such other
criteria such as turnover etc. as may
be decided by the Board.
Stage III covers residuary firms which are
3. Stage III
not covered in Stage I and Stage II
If you have any further queries, you may contact
the Secretary, Peer Review Board, The Institute
of Chartered Accountants of India, ICAI Bhawan,
Indraprastha Marg, New Delhi – 110 002, Tel – 011-
30110469/497/452, e-mail. peerreviewboard@icai.
org
to have an impact on the profession in current and
coming times.
Great enthusiasm and active participation was
noticed in these workshops and the vital inputs
gathered through these workshops are expected to
lead to a practical and more realistic Vision Statement
for the profession as well as Institute. In order to make
the vision development process more participative
and to develop a shared vision for the profession,
the members of the Institute are invited to become a
part of this gigantic exercise and helping us achieve
a shared Vision for the profession. The members may
freely provide their inputs/suggestions for drafting the
Vision Document by following the link: http://www.
icai.org/icaivision.html directly, or, otherwise, the link
is also available on the homepage of the Institute by
15th September 2010.
Chairman
Vision and Perspective Planning Committee
 503 GENERAL

Spirituality for a Chartered Accountant

Every profession has its specialty. Our profession has two specialties: one, it handles the most sensitive
issue, i.e. money, and two, it never ends, i.e. there is no cut-off time, as it is an ongoing process. Try to
understand, a barber, for example, is done with as he finishes a hair-cut, but a CA is always in the mid-stream
of his never-ending work. Spirituality is relaxation; it is the relaxing gap that is the source, the end and the
in-between of any activity. If one understands or rather feels this gap, it can be really the starting point, in-
between access point and end point of work. If practiced sincerely, this relaxation works as the background
for the entire work people do and brings creativity, relaxation and enjoyment in whatever they do.

CA. Sanjay Manohar Kshirsagar
(The author is a member of the Institute.
He can be reached at sanjayunlimited@
icai.org.)
The Starting Point
A few years back, my mother used
to go for spiritual discourses. Once I
asked her to ask her Guru a question
who is really running this world – money
or God. I gave this question to her
in writing and then added: If God is
running the show then what is the point
in doing the Sadhana? Let Him handle
everything and we will align ourselves
to whatever is happening. And if money
is running the world, why aren’t we
after money than the God? She never
took the question to her Guru saying
that that would be a sacrilege, i.e. an
irreligious act.
However, that question was so
relevant to me that whatever I was
doing, the question would pop up and
distract me. Others may feel the same.
So, finally it was time to find the answer
within. In fact, this is how spirituality
generally gets started.
The Profession
Our work occupies our life. In fact, life is
not a long story made of so many years.
It is one day multiplied so many times.
At any given time, real life spreads over
just one day. To make it simple, it is the
composition of a day that decides the
quality of our life. Since the prime time
of the day and the very orientation of
the day is work, work occupies our life
and decides how much we will enjoy
it. That is why the way we handle and
enjoy our work will decide whether we
enjoy our life.
To handle any work efficiently, apart
from the skill, there is one very basic

september 2010 THE CHARTERED ACCOUNTANT 127

 GENERAL
Utility of money
cannot be denied
as a concept, but
we are almost focused on
a single factor. That is why
we are not aware of the
mystery of life. The sun
will shine, the earth will
rotate, the stars will fill the
sky, the trees will grow,
the rains will pour and the
hearts will beat without
money. The life around
us is a beautiful reality. It
is run by some unknown
cosmic intelligence that
is a relaxed phenomenon
and the only way to fall in
tune with it is to relax. The
need is to change our focus
from money to relaxation
and this relaxation will
be the starting point, in-
between access and end
point of all works we do.
It will be a background to
all our activities. We will
become more creative, more
effective and more grateful
to the life.
factor: detachment from the subject
handled. Let us understand this:
A surgeon can perform a surgery
successfully undoubtedly because of
her/his skills, but the basic role is that
of her/his detachment from the person
she/he is operating upon. It is said that
surgeons, however efficient and skilled,
cannot operate their loved ones, e.g.
own wives or children. At the very
start of the legendary Bhagawad Gita,
Arjuna’s grief has been described, as
despite being a world-class archer and
warrior, he is not ready to start the fight
and finds himself unable to perform, as
he feels attachment to his enemy, i.e.
they were all his kith and kin. Although
this appears to be far-fetched reality
in our day-to-day life and we may
find it out of context, but the point this
128 THE CHARTERED ACCOUNTANT september 2010
underlines is attachment to subject that
really holds good all the time and in all
dimensions of life.
The point here is what we are
handling is a very sensitive subject,
i.e. money, and if we can be detached
about it. Again, let us understand that
CAs are all smart enough to acquire
any skill they perform for the third time.
We are all now proficient in e-filing of
Income Tax Returns within a span of
three years. So, skill is important but a
secondary issue in this context. We can
be skilled in any area we take interest
in. But it is the detachment that matters.
To be exact, if we are detached and
skilled, we will enjoy the activity, rather
it will not leave any mark on us when
we have finished.
Here, let us understand it from Lord
Buddha who had very intelligently given
the criteria of right work and right food,
i.e. samyak kriya and samyak aahar; he
says that if our state of mind after work
remains the same as it was before we
started, we have done the work rightly.
What he means is, after completion
of the work, we should feel as light
as we were before starting the work.
The same rule, i.e. rule of samyakatv,
applies to eating too that if we feel
the same before and after eating our
food, we have eaten rightly. This single
criterion of Samyakatv is relevant to
both most important aspects of life,
eating and work; because with this
criterion, we can always decide when
to stop and we can then really enjoy
both eating and work. Both have a
physical as well as a psychological
aspect. It is remarkable how Buddha
intelligently defines a singly criterion
following which we will never overeat
or overwork and we will always move
in right direction when accepting and
doing the work.
Detachment
So, the real criterion for enjoyment
is lightness before, during and after the
work. We can acquire any skill in any
504
area we take interest in. What it actually
requires is time and an openness
to learn. As we qualify for the CA
profession, we prove our intelligence
to the world. Next, we should try to
understand the detachment aspect of
work.
Time doesn’t have an absolute
identity. It is a convenience and it helps
us in organizing our life. But, still, it is
a concept. We don’t stop working and
our work becomes light. We can take
the work easy and we become more
efficient. When the subject we are
handling is understood as a concept,
we are ready to accept the outcome
whichever way it comes. We become
interested in the process, rather than
the end and the work becomes easy.
Money is a concept and not a reality
– with this understanding, CAs can
be more efficient. They are serious
because money is a reality for them like
everyone’s case. But they should know
that it is a concept to handle their work
lightly and efficiently. The detachment
will come only when we come to know
that what we are handling is a concept
and not a reality.
Something more about
Detachment
Let us try to understand this central issue
in life a little more. There are two things
in life, we and things and people around
us. In order to run our life smoothly,
In fact, life is not a
long story made of
so many years. It is
one day multiplied so many
times. At any given time,
real life spreads over just
one day. To make it simple,
it is the composition of a
day that decides the quality
of our life. Since the prime
time of the day and the very
orientation of the day is
work, work occupies our life
and decides how much we
will enjoy it.
 505
society has evolved some concepts
and, to make them functional, all of us
have agreed upon them. For example,
as mentioned earlier, time is a concept
which we use to manage events but
when we use the concept quite often
it starts appearing to be a reality. It will
not be easy for anyone to agree that
time is a concept. But let us imagine,
we have traveled vertically towards the
sky. We will find that time is created by
the rotation of earth otherwise the sun
is always shining. The point is that if a
concept has become a reality for us,
we are very much likely to get attached
to it and this creates a tension. For
example, if we are taking time to be real,
we will always be under pressure and
we will create a personality around it
depending upon our past performance
about meeting the time schedules.
Now, this has become an attachment
with time and the attachment works
both ways whether we may consider
ourselves to be punctual. Next time,
we want to meet a schedule we will be
either excited to meet it as a punctual
person, or, tense to avoid the failure if
we think ourselves to be unpunctual. In
either case, we will be tense because
we have taken time to be real.
So, what is to be understood is we
are there and time is there, if we create a
bridge between the two; that illusionary
bridge is attachment. Attachment is
a rainbow like bridge. We just see its
futility and it takes us nowhere and our
very understanding fades it away.
Detachment vs.
Carelessness
Carelessness comes when we are
ungrateful to what we are doing and
when we dislike our work.
Let us try to understand this. When
CAs qualify their course and start
practicing, some of them may find their
work uncreative and hence become
unhappy. If we feel this way, we will be
disinterested in the work and the work
We don’t stop
working and our
work becomes
light. We can take the
work easy and we become
more efficient. When the
subject we are handling is
understood as a concept,
we are ready to accept
the outcome whichever
way it comes. We become
interested in the process,
rather than the end and
the work becomes easy.
Money is a concept and
not a reality – with this
understanding, CAs can be
more efficient.
september 2010
GENERAL
will become heavy. We will then want to
avoid it and carelessness will follow. It is
human psychology that all work in this
world is neutral and it is us who make it
interesting. It is our attitude towards the
work that interacts with the work to give
us joy. It is not that singing or playing
an instrument brings happiness, it is
us who bring happiness in singing or
playing an instrument. It is because a
singer or an instrumentalist is happy,
the song or the concert becomes
joyous. Any activity per se is neutral.
It is the performer who brings colors
to it.
So, it is our attitude that decides
whether we will be interested in the
work. The nature of profession is not
the issue it is our attitude towards the
profession that will decide whether we
will enjoy it or not. So, we rule out the
possibility of becoming careless when
we understand detachment because
that is always the basic confusion. If we
really want to enjoy the work we have to
be detached and still caring because a
work where we are not interested can
bring us money but not happiness.
Let us take it further. If we develop
this attitude of becoming disinterested,
whatever we take up, sooner or later,
we will find it boring not because of
the work but because of the absence
of our interest in that. To be interested
THE CHARTERED ACCOUNTANT 129
 GENERAL
and careless at the same time is not
possible and it is our interest that
makes anything interesting. When
King Akbar expressed how Salim’s
fiancée Anarkali was worthy to be
so great, Salim replied: to know the
beauty of Anarkali one requires the
eyes of Salim. What was meant is that
it is us who bring beauty to what or who
we love.
Money
As CAs, we know what money is and
understand its power. The whole social
orientation is towards the money.
Nothing moves in this world without
money. Imagine if there is no possibility
of making money, would any one
start from home? But money is just a
concept like time. While it has utility,
it is not a reality. The power money
seems to be having is only because of
The whole social
orientation is
towards the
money. Nothing moves in
this world without money.
Imagine if there is no
possibility of making money,
would any one start from
home? But money is just a
concept like time. While it
has utility, it is not a reality.
The power money seems to
be having is only because of
its universal acceptance as
powerful.
130 THE CHARTERED ACCOUNTANT september 2010
its universal acceptance as powerful.
We can not tell our clients that money
is a concept. They consider it to be
a reality that is why they come to us.
But we should understand that we
are handling a concept and this will
remove our attachment to money. It is
guaranteed that our entire approach
to profession will change and all our
tension will disappear. We will be lighter
and very very effective.
Who is really running the
world?
This is a little deeper inquiry. It requires
a more relaxed state of mind to
understand. The more our attachments
are removed we will have better
relaxation to understand.
Let us try to understand why we all
believe that money runs the world. We
believe that we are alive because we
eat and, to buy food, we need money,
so, there is an all-over acceptance
that if we don’t have money we will not
exist. This is the basic fear behind our
belief that it’s money that makes the
mare go. Utility of money is to provide
food, shelter and clothing, and other
comforts come next. Whenever we get
an opportunity to sit silently and relax,
we should just feel for ourselves.
It’s not food but breathing that
keeps everything going. Although all of
us know this, we ignore that breathing
is primary. We go to the extent of taking
it for granted. It is the most mysterious
thing in life and it can stop any time.
506
People may feel that breathing goes
on because we eat. But the reality
is completely reverse: breathing is
completely out of our control. It helps
the body to do everything. This we
come to know probably at our last
breath. The breath goes on because
of so many complex factors that are
beyond our grasp. For example, we
can breathe because the trees are
breathing and both breathe because
the earth is rotating (otherwise it would
burn off). Again, there is life on the
earth, because the sun is shining. We
do not know why the sun is shining.
Even if we know it, we won’t be in a
position to do anything about it. This is
such a complex issue.
Utility of money can not be denied
as a concept, but we are almost
focused on a single factor. That is why
we are not aware of the mystery of life.
The sun will shine, the earth will rotate,
the stars will fill the sky, the trees will
grow, the rains will pour and the hearts
will beat without money. The life around
us is a beautiful reality. It is run by some
unknown cosmic intelligence that is a
relaxed phenomenon and the only way
to fall in tune with it is to relax.
The need is to change our focus
from money to relaxation and this
relaxation will be the starting point, in-
between access and end point of all
works we do. It will be a background
to all our activities. We will become
more creative, more effective and more
grateful to the life. n
 507 EXPOSURE DRAFT

Standard on Assurance Engagements (SAE) 3402

Assurance Reports on Controls At a Service Organisation
Your comments on this Exposure Draft should reach us by September 30, 2010. Comments are most helpful
if they indicate the specific paragraph(s) to which they relate, contain a clear rationale and, where applicable,
provide a suggestion for alternative wording. The comments should be sent to:
Secretary, Auditing and Assurance Standards Board
The Institute of Chartered Accountants of India
ICAI Bhawan, A -94/4, Sector-58, Noida – 201 301,
Uttar Pradesh.
Comments can also be e-mailed at: aasb@icai.org

Standard on Assurance Engagements (SAE) 3402, “Assurance Reports on Controls at a Service Organisation”, should
be read in the context of the “Preface to the Standards on Quality Control, Auditing, Review, Other Assurance and
Related Services”1.

Introduction not deal with assurance engagements: including engagements in accordance

Scope of this SAE
1. This Standard on Assurance Engagements
(SAE) deals with assurance engagements
undertaken by a professional accountant
in public practice2 to provide a report for
use by user entities and their auditors on
the controls at a service organisation that
provides a service to user entities that is
likely to be relevant to user entities’ internal
control as it relates to financial reporting.
It complements SA 4023, in that reports
prepared in accordance with this SAE are
capable of providing appropriate evidence
under SA 402. (Ref: Para. A1)
2. The “Framework for Assurance
Engagements” states that an assurance
engagement may be a “reasonable
assurance” engagement or a “limited
assurance” engagement; that an
assurance engagement may be either
an “assertion-based” engagement or a
“direct reporting” engagement; and, that
the assurance conclusion for an assertion-
based engagement can be worded either in
terms of the responsible party’s assertion
or directly in terms of the subject matter
and the criteria4. This SAE only deals with
assertion-based engagements that convey
reasonable assurance, with the assurance
conclusion worded directly in terms of the
subject matter and the criteria5.
3. This SAE applies only when the service
organisation is responsible for, or otherwise
able to make an assertion about, the
suitable design of controls. This SAE does
(a) To report only on whether controls at
a service organisation operated as
described, or
(b) To report only on controls at a service
organisation other than those related
to a service that is likely to be relevant
to user entities’ internal control as
it relates to financial reporting (for
example, controls that affect user
entities’ production or quality control).
This SAE, however, provides some guidance
for such engagements carried out under
proposed SAE 30006. (Ref: Para. A2)
4. In addition to issuing an assurance report
on controls, a service auditor may also be
engaged to provide reports such as the
following, which are not dealt with in this
SAE:
(a) A report on a user entity’s transactions
or balances maintained by a service
organisation; or
(b) An agreed-upon procedures report on
controls at a service organisation.
Relationship with Other Professional
Pronouncements
5. The performance of assurance
engagements other than audits or
reviews of historical financial information
requires the service auditor to comply
with proposed SAE 3000. Proposed SAE
3000 includes requirements in relation to
such topics as engagement acceptance,
planning, evidence, and documentation
that apply to all assurance engagements,
with this SAE. This SAE expands on how
proposed SAE 3000 is to be applied in
a reasonable assurance engagement to
report on controls at a service organisation.
The Assurance Framework, which defines
and describes the elements and objectives
of an assurance engagement, provides the
context for understanding this SAE and
proposed SAE 3000.
6. Compliance with proposed SAE 3000
requires, among other things, that the
service auditor comply with the Code
of Ethics of the Institute of Chartered
Accountants of India, and implement quality
control procedures that are applicable to
the individual engagement7.
Effective Date
7. This SAE is effective for service auditors’
assurance reports covering periods ending
on or after …………………………………..
Objectives
8. The objectives of the service auditor are:
(a) To obtain reasonable assurance about
whether, in all material respects, based
on suitable criteria:
(i) The service organisation’s description
of its system fairly presents the
system as designed and implemented
throughout the specified period (or
in the case of a Type 1 Report, as at a
specified date);
(ii) The controls related to the control
objectives stated in the service

1
Published in the July, 2007 issue of the Journal.
2
As per the Framework for Assurance Engagements, issued by the Institute of Chartered Accountants of India, the term “professional accountant in
public practice (practitioner)” refers to the member of the Institute of Chartered Accountants of India who is in practice in terms of section 2 of the
Chartered Accountants Act, 1949. The term is also used to refer to a firm of chartered accountants in public practice.
3
SA 402 (Revised), “Audit Considerations Relating to an Entity Using a Service Organization”.
4
Framework for Assurance Engagements, paragraphs 9, 10 and 56.
5
Paragraphs 13 and 52(k) of this SAE.
6
Proposed SAE 3000, “Assurance Engagements Other than Audits or Reviews of Historical Financial Information”.
7
Proposed SAE 3000, paragraphs 4 and 6.

september 2010 THE CHARTERED ACCOUNTANT 131

 EXPOSURE DRAFT
organisation’s description of its
system were suitably designed
throughout the specified period
(or in the case of a Type 1 Report,
as at a specified date);
(iii) Where included in the scope of
the engagement, the controls
operated effectively to provide
reasonable assurance that the
control objectives stated in the
service organisation’s description
of its system were achieved
throughout the specified period.
(b) To report on the matters in (a) above in
accordance with the service auditor’s
findings.
Definitions
9. For purposes of this SAE, the following
terms have the meanings attributed below:
(a) Carve-out method
Method of dealing with the services
provided by a subservice organisation,
whereby the service organisation’s
description of its system includes the
nature of the services provided by
a subservice organisation, but that
subservice organisation’s relevant
control objectives and related
controls are excluded from the
service organisation’s description of
its system and from the scope of the
service auditor’s engagement. The
service organisation’s description of
its system and the scope of the service
auditor’s engagement include controls
at the service organisation to monitor
the effectiveness of controls at the
subservice organisation, which may
include the service organisation’s review
of an assurance report on controls at
the subservice organisation.
(b) Complementary user entity controls
Controls that the service organisation
assumes, in the design of its service,
will be implemented by user entities,
and which, if necessary to achieve
control objectives stated in the service
organisation’s description of its system,
are identified in that description.
(c) Control objective
The aim or purpose of a particular
aspect of controls. Control objectives
relate to risks that controls seek to
mitigate.
(d) Controls at the service organisation
Controls over the achievement of a
control objective that is covered by
the service auditor’s assurance report.
(Ref: Para. A3)
(e) Controls at a subservice organisation
Controls at a subservice organisation
to provide reasonable assurance about
the achievement of a control objective.
(f) Criteria
Benchmarks used to evaluate or
132 THE CHARTERED ACCOUNTANT september 2010
measure a subject matter including,
where relevant, benchmarks for
presentation and disclosure.
(g) Inclusive method
Method of dealing with the services
provided by a subservice organisation,
whereby the service organisation’s
description of its system includes the
nature of the services provided by
a subservice organisation, and that
subservice organisation’s relevant
control objectives and related
controls are included in the service
organisation’s description of its system
and in the scope of the service auditor’s
engagement. (Ref: Para. A4)
(h) Internal audit function
An appraisal activity established or
provided as a service to the service
organisation. Its functions include,
amongst other things, examining,
evaluating and monitoring the adequacy
and effectiveness of internal control.
(i) Internal auditors
Those individuals who perform the
activities of the internal audit function.
Internal auditors may belong to an
internal audit department or equivalent
function.
(j) Report on the description and design
of controls at a service organisation
(referred to in this SAE as a “Type 1
Report”)
A report that comprises:
(i) The service organisation’s
description of its system;
(ii) A written assertion by the service
organisation that, in all material
respects, and based on suitable
criteria:
a. The description fairly presents
the service organisation’s system
as designed and implemented as
at the specified date;
b. The controls related to the
control objectives stated in
the service organisation’s
description of its system were
suitably designed as at the
specified date; and
(iii) A service auditor’s assurance
report that conveys reasonable
assurance about the matters in (ii)
a.-b. above.
(k) Report on the description, design and
operating effectiveness of controls at a
service organisation (referred to in this
SAE as a “Type 2 Report”)
A report that comprises:
(i) The service organisation’s
description of its system;
(ii) A written assertion by the service
organisation that, in all material
respects, and based on suitable
criteria:
a. The description fairly presents
508
the service organisation’s
system as designed and
implemented throughout the
specified period;
b. The controls related to the
control objectives stated in
the service organisation’s
description of its system were
suitably designed throughout
the specified period; and
c. The controls related to the
control objectives stated in
the service organisation’s
description of its system
operated effectively throughout
the specified period; and
(iii) A service auditor’s assurance
report that:
a. Conveys reasonable assurance
about the matters in (ii)a.-c.
above; and
b. Includes a description of the
tests of controls and the results
thereof.
(l) Service auditor
A professional accountant in public
practice who, at the request of the
service organisation, provides an
assurance report on controls at a
service organisation.
(m) Service organisation
A third-party organisation (or segment
of a third-party organisation) that
provides services to user entities that
are likely to be relevant to user entities’
internal control as it relates to financial
reporting.
(n) Service organisation’s system (or the
system)
The policies and procedures designed
and implemented by the service
organisation to provide user entities
with the services covered by the service
auditor’s assurance report. The service
organisation’s description of its system
includes identification of: the services
covered; the period, or in the case of
a Type 1 Report, the date, to which the
description relates; control objectives;
and related controls.
(o) Service organisation’s assertion
The written assertion about the matters
referred to in paragraph 9(k)(ii) (or
paragraph 9(j)(ii) in the case of a Type
1 Report).
(p) Subservice organisation
A service organisation used by another
service organisation to perform some
of the services provided to user entities
that are likely to be relevant to user
entities’ internal control as it relates to
financial reporting.
(q) Test of controls
A procedure designed to evaluate the
operating effectiveness of controls in
achieving the control objectives stated
 509
in the service organisation’s description
of its system.
(r) User auditor
An auditor who audits and reports
on the financial statements of a user
entity8.
(s) User entity
An entity that uses a service
organisation.
Requirements
Proposed SAE 3000
10. The service auditor shall not represent
compliance with this SAE unless the service
auditor has complied with the requirements
of this SAE and proposed SAE 3000.
Ethical Requirements
11. The service auditor shall comply with
relevant ethical requirements, including
those pertaining to independence, relating
to assurance engagements. (Ref: Para. A5)
Management and Those Charged with
Governance
12. Where this SAE requires the service
auditor to inquire of, request representations
from, communicate with, or otherwise
interact with the service organisation,
the service auditor shall determine the
appropriate person(s) within the service
organisation’s management or governance
structure with whom to interact. This shall
include consideration of which person(s)
have the appropriate responsibilities for
and knowledge of the matters concerned.
(Ref: Para. A6)
Acceptance and Continuance
13. Before agreeing to accept, or continue,
an engagement the service auditor shall:
(a) Determine whether:
(i) The service auditor has the
capabilities and competence to
perform the engagement; (Ref:
Para. A7)
(ii) The criteria to be applied by the
service organisation to prepare
the description of its system will
be suitable and available to user
entities and their auditors; and
(iii) The scope of the engagement
and the service organisation’s
description of its system will not be
so limited that they are unlikely to
be useful to user entities and their
auditors.
(b) Obtain the agreement of the service
organisation that it acknowledges and
understands its responsibility:
(i) For the preparation of the
description of its system,
and accompanying service
organisation’s assertion, including
the completeness, accuracy and
method of presentation of that
description and assertion; (Ref:
8
In the case of a subservice organization, the service auditor of a service organization that uses the services of the subservice organization is also a
user auditor.
9
Proposed SAE 3000, paragraph 19.
Para. A8)
(ii) To have a reasonable basis for the
service organisation’s assertion
accompanying the description of
its system; (Ref: Para. A9)
(iii) For stating in the service
organisation’s assertion the criteria
it used to prepare the description
of its system;
(iv) For stating in the description of its
system:
a. The control objectives; and,
b. Where they are specified by law
or regulation, or another party
(for example, a user group or
a professional body), the party
who specified them;
(v) For identifying the risks that
threaten achievement of the
control objectives stated in the
description of its system, and
designing and implementing
controls to provide reasonable
assurance that those risks will not
prevent achievement of the control
objectives stated in the description
of its system, and therefore that
the stated control objectives will
be achieved; and (Ref: Para. A10)
(vi) To provide the service auditor
with:
a. Access to all information, such
as records, documentation and
other matters, including service
level agreements, of which the
service organisation is aware
that is relevant to the description
of the service organisation’s
system and the accompanying
service organisation’s assertion;
b. Additional information that the
service auditor may request
from the service organisation
for the purpose of the assurance
engagement; and
c. Unrestricted access to persons
within the service organisation
from whom the service auditor
determines it necessary to
obtain evidence.
Acceptance of a Change in the Terms of the
Engagement
14. If the service organisation requests a
change in the scope of the engagement
before the completion of the engagement,
the service auditor shall be satisfied that
there is a reasonable justification for the
change. (Ref: Para. A11-A12)
Assessing the Suitability of the Criteria
15. As required by proposed SAE 3000,
the service auditor shall assess whether
the service organisation has used suitable
criteria in preparing the description of its
september 2010
EXPOSURE DRAFT
system, in evaluating whether controls are
suitably designed, and, in the case of a Type
2 Report, in evaluating whether controls are
operating effectively9.
16. In assessing the suitability of the criteria
to evaluate the service organisation’s
description of its system, the service auditor
shall determine if the criteria encompass, at
a minimum:
(a) Whether the description presents how
the service organisation’s system was
designed and implemented, including,
as appropriate:
(i) The types of services provided,
including, as appropriate, classes
of transactions processed;
(ii) The procedures, within both
information technology and
manual systems, by which
services are provided, including,
as appropriate, procedures by
which transactions are initiated,
recorded, processed, corrected
as necessary, and transferred to
the reports and other information
prepared for user entities;
(iii) The related records and supporting
information, including, as
appropriate, accounting records,
supporting information and
specific accounts that are used
to initiate, record, process and
report transactions; this includes
the correction of incorrect
information and how information
is transferred to the reports and
other information prepared for
user entities;
(iv) How the service organisation’s
system deals with significant
events and conditions, other than
transactions;
(v) The process used to prepare
reports and other information for
user entities;
(vi) The specified control objectives
and controls designed to achieve
those objectives;
(vii) Complementary user entity
controls contemplated in the
design of the controls; and
(viii) Other aspects of the service
organisation’s control
environment, risk assessment
process, information system
(including the related business
processes) and communication,
control activities and monitoring
controls that are relevant to the
services provided.
(b) In the case of a Type 2 Report, whether
the description includes relevant details
of changes to the service organisation’s
system during the period covered by
THE CHARTERED ACCOUNTANT 133
 EXPOSURE DRAFT
the description.
(c) Whether the description omits or
distorts information relevant to the
scope of the service organisation’s
system being described, while
acknowledging that the description is
prepared to meet the common needs
of a broad range of user entities and
their auditors and may not, therefore,
include every aspect of the service
organisation’s system that each
individual user entity and its auditor
may consider important in its particular
environment.
17. In assessing the suitability of the criteria
to evaluate the design of controls, the
service auditor shall determine if the criteria
encompass, at a minimum, whether:
(a) The service organisation has identified
the risks that threaten achievement
of the control objectives stated in the
description of its system; and
(b) The controls identified in that descri-
ption would, if operated as described,
provide reasonable assurance that
those risks do not prevent the
stated control objectives from being
achieved.
18. In assessing the suitability of the criteria
to evaluate the operating effectiveness of
controls in providing reasonable assurance
that the stated control objectives identified
in the description will be achieved, the
service auditor shall determine if the
criteria encompass, at a minimum, whether
the controls were consistently applied as
designed throughout the specified period.
This includes whether manual controls
were applied by individuals who have the
appropriate competence and authority.
(Ref: Para. A13-A15)
Materiality
19. When planning and performing the
engagement, the service auditor shall
consider materiality with respect to the
fair presentation of the description, the
suitability of the design of controls and, in
the case of a Type 2 Report, the operating
effectiveness of controls. (Ref: Para. A16-
A18)
Obtaining an Understanding of the Service
Organisation’s System
20. The service auditor shall obtain an
understanding of the service organisation’s
system, including controls that are included
in the scope of the engagement. (Ref: Para.
A19-A20)
Obtaining Evidence Regarding the
Description
21. The service auditor shall obtain and
read the service organisation’s description
of its system, and shall evaluate whether
those aspects of the description included
134 THE CHARTERED ACCOUNTANT september 2010
in the scope of the engagement are fairly
presented, including whether: (Ref: Para.
A21-A22)
(a) Control objectives stated in the service
organisation’s description of its system
are reasonable in the circumstances;
(Ref: Para. A23)
(b) Controls identified in that description
were implemented;
(c) Complementary user entity controls, if
any, are adequately described; and
(d) Services performed by a subservice
organisation, if any, are adequately
described, including whether the
inclusive method or the carve-out
method has been used in relation to
them.
22. The service auditor shall determine,
through other procedures in combination
with inquiries, whether the service
organisation’s system has been
implemented. Those other procedures
shall include observation, and inspection of
records and other documentation, of the
manner in which the service organisation’s
system operates and controls are applied.
(Ref: Para. A24)
Obtaining Evidence Regarding Design of
Controls
23. The service auditor shall determine
which of the controls at the service
organisation are necessary to achieve the
control objectives stated in the service
organisation’s description of its system, and
shall assess whether those controls were
suitably designed. This determination shall
include: (Ref: Para. A25-A27)
(a) Identifying the risks that threaten the
achievement of the control objectives
stated in the service organisation’s
description of its system; and
(b) Evaluating the linkage of controls
identified in the service organisation’s
description of its system with those
risks.
Obtaining Evidence Regarding Operating
Effectiveness of Controls
24. When providing a Type 2 Report,
the service auditor shall test those
controls that the service auditor has
determined are necessary to achieve the
control objectives stated in the service
organisation’s description of its system,
and assess their operating effectiveness
throughout the period. Evidence obtained
in prior engagements about the satisfactory
operation of controls in prior periods does
not provide a basis for a reduction in testing,
even if it is supplemented with evidence
obtained during the current period. (Ref:
Para. A28-A32)
25. When designing and performing tests of
controls, the service auditor shall:
(a) Perform other procedures in
510
combination with inquiry to obtain
evidence about:
(i) How the control was applied;
(ii) The consistency with which the
control was applied; and
(iii) By whom or by what means the
control was applied;
(b) Determine whether controls to be
tested depend upon other controls
(indirect controls) and, if so, whether
it is necessary to obtain evidence
supporting the operating effectiveness
of those indirect controls; and (Ref:
Para. A33-A34)
(c) Determine means of selecting items for
testing that are effective in meeting the
objectives of the procedure. (Ref: Para.
A35-A36)
26. When determining the extent of tests of
controls, the service auditor shall consider
matters including the characteristics of the
population to be tested, which includes the
nature of controls, the frequency of their
application (for example, monthly, daily, a
number of times per day), and the expected
rate of deviation.
Sampling
27. When the service auditor uses sampling,
the service auditor shall: (Ref: Para. A35-
A36)
(a) Consider the purpose of the procedure
and the characteristics of the population
from which the sample will be drawn
when designing the sample;
(b) Determine a sample size sufficient to
reduce sampling risk to an appropriately
low level;
(c) Select items for the sample in such
a way that each sampling unit in the
population has a chance of selection;
(d) If a designed procedure is not
applicable to a selected item, perform
the procedure on a replacement item;
and
(e) If unable to apply the designed
procedures, or suitable alternative
procedures, to a selected item, treat
that item as a deviation.
Nature and Cause of Deviations
28. The service auditor shall investigate
the nature and cause of any deviations
identified and shall determine whether:
(a) Identified deviations are within the
expected rate of deviation and are
acceptable; therefore, the testing
that has been performed provides an
appropriate basis for concluding that
the control is operating effectively
throughout the specified period;
(b) Additional testing of the control or of
other controls is necessary to reach
a conclusion on whether the controls
relative to a particular control objective
are operating effectively throughout
the specified period; or (Ref: Para. A25)
(c) The testing that has been performed
 511
provides an appropriate basis for
concluding that the control did not
operate effectively throughout the
specified period.
29. In the extremely rare circumstances
when the service auditor considers a
deviation discovered in a sample to be an
anomaly and no other controls have been
identified that allow the service auditor to
conclude that the relevant control objective
is operating effectively throughout the
specified period, the service auditor shall
obtain a high degree of certainty that
such deviation is not representative of the
population. The service auditor shall obtain
this degree of certainty by performing
additional procedures to obtain sufficient
appropriate evidence that the deviation
does not affect the remainder of the
population.
The Work of an Internal Audit Function10
Obtaining an Understanding of the Internal
Audit Function
30. If the service organisation has an
internal audit function, the service auditor
shall obtain an understanding of the nature
of the responsibilities of the internal audit
function and of the activities performed in
order to determine whether the internal
audit function is likely to be relevant to the
engagement. (Ref: Para. A37)
Determining Whether and to What Extent
to Use the Work of the Internal Auditors
31. The service auditor shall determine:
(a) Whether the work of the internal
auditors is likely to be adequate for
purposes of the engagement; and
(b) If so, the planned effect of the work
of the internal auditors on the nature,
timing or extent of the service auditor’s
procedures.
32. In determining whether the work of the
internal auditors is likely to be adequate for
purposes of the engagement, the service
auditor shall evaluate:
(a) The objectivity of the internal audit
function;
(b) The technical competence of the
internal auditors;
(c) Whether the work of the internal
auditors is likely to be carried out with
due professional care; and
(d) Whether there is likely to be effective
communication between the internal
auditors and the service auditor.
33. In determining the planned effect of
the work of the internal auditors on the
nature, timing or extent of the service
auditor’s procedures, the service auditor
shall consider: (Ref: Para. A38)
(a) The nature and scope of specific work
performed, or to be performed, by the
10
This SAE does not deal with instances when individual internal auditors provide direct assistance to the service auditor in carrying out audit
procedures.
11
Paragraph 13(b)(v) of this SAE.
internal auditors;
(b) The significance of that work to the
service auditor’s conclusions; and
(c) The degree of subjectivity involved in
the evaluation of the evidence gathered
in support of those conclusions.
Using the Work of the Internal Audit
Function
34. In order for the service auditor to use
specific work of the internal auditors, the
service auditor shall evaluate and perform
procedures on that work to determine its
adequacy for the service auditor’s purposes.
(Ref: Para. A39)
35. To determine the adequacy of specific
work performed by the internal auditors for
the service auditor’s purposes, the service
auditor shall evaluate whether:
(a) The work was performed by internal
auditors having adequate technical
training and proficiency;
(b) The work was properly supervised,
reviewed and documented;
(c) Adequate evidence has been obtained
to enable the internal auditors to draw
reasonable conclusions;
(d) Conclusions reached are appropriate
in the circumstances and any reports
prepared by the internal auditors are
consistent with the results of the work
performed; and
(e) Exceptions relevant to the engagement
or unusual matters disclosed by the
internal auditors are properly resolved.
Effect on the Service Auditor’s Assurance
Report
36. If the work of the internal audit function
has been used, the service auditor shall
make no reference to that work in the
section of the service auditor’s assurance
report that contains the service auditor’s
opinion. (Ref: Para. A40)
37. In the case of a Type 2 Report, if the
work of the internal audit function has
been used in performing tests of controls,
that part of the service auditor’s assurance
report that describes the service auditor’s
tests of controls and the results thereof
shall include a description of the internal
auditor’s work and of the service auditor’s
procedures with respect to that work. (Ref:
Para. A41)
Written Representations
38. The service auditor shall request the
service organisation to provide written
representations: (Ref: Para. A42)
(a) That reaffirm the assertion
accompanying the description of the
system;
(b) That it has provided the service auditor
with all relevant information and access
agreed to;11 and
september 2010
EXPOSURE DRAFT
(c) That it has disclosed to the service
auditor any of the following of which it
is aware:
(i) Non-compliance with laws and
regulations, fraud, or uncorrected
deviations attributable to the
service organisation that may
affect one or more user entities;
(ii) Design deficiencies in controls;
(iii) Instances where controls have not
operated as described; and
(iv) Any events subsequent to the
period covered by the service
organisation’s description of
its system up to the date of the
service auditor’s assurance report
that could have a significant effect
on the service auditor’s assurance
report.
39. The written representations shall be
in the form of a representation letter
addressed to the service auditor. The date
of the written representations shall be as
near as practicable to, but not after, the
date of the service auditor’s assurance
report.
40. If, having discussed the matter with the
service auditor, the service organisation
does not provide one or more of the written
representations requested in accordance
with paragraph 39(a) and (b) of this SAE,
the service auditor shall disclaim an opinion.
(Ref: Para. A43)
Other Information
41. The service auditor shall read the
other information, if any, included in
a document containing the service
organisation’s description of its system
and the service auditor’s assurance report,
to identify material inconsistencies, if
any, with that description. While reading
the other information for the purpose of
identifying material inconsistencies, the
service auditor may become aware of an
apparent misstatement of fact in that other
information.
42. If the service auditor becomes
aware of a material inconsistency or an
apparent misstatement of fact in the other
information, the service auditor shall discuss
the matter with the service organisation. If
the service auditor concludes that there is a
material inconsistency or a misstatement of
fact in the other information that the service
organisation refuses to correct, the service
auditor shall take further appropriate
action. (Ref: Para. A45)
Subsequent Events
43. The service auditor shall inquire whether
the service organisation is aware of any
events subsequent to the period covered
THE CHARTERED ACCOUNTANT 135
 EXPOSURE DRAFT
by the service organisation’s description
of its system up to the date of the service
auditor’s assurance report that could have
a significant effect on the service auditor’s
assurance report. If the service auditor is
aware of such an event, and information
about that event is not disclosed by the
service organisation, the service auditor
shall disclose it in the service auditor’s
assurance report.
44. The service auditor has no obligation
to perform any procedures regarding the
description of the service organisation’s
system, or the suitability of design or
operating effectiveness of controls, after
the date of the service auditor’s assurance
report.
Documentation
45. The service auditor shall prepare
documentation that is sufficient to enable
an experienced service auditor, having no
previous connection with the engagement,
to understand:
(a) The nature, timing, and extent of the
procedures performed to comply
with this SAE and applicable legal and
regulatory requirements;
(b) The results of the procedures
performed, and the evidence obtained;
and
(c) Significant matters arising during the
engagement, and the conclusions
reached thereon and significant
professional judgments made in
reaching those conclusions.
46. In documenting the nature, timing
and extent of procedures performed, the
service auditor shall record:
(a) The identifying characteristics of the
specific items or matters being tested;
(b) Who performed the work and the date
such work was completed; and
(c) Who reviewed the work performed and
the date and extent of such review.
47. If the service auditor uses specific work
of the internal auditors, the service auditor
shall document the conclusions reached
regarding the evaluation of the adequacy
of the work of the internal auditors, and
the procedures performed by the service
auditor on that work.
48. The service auditor shall document
discussions of significant matters with the
service organisation and others including
the nature of the significant matters
discussed and when and with whom the
discussions took place.
49. If the service auditor has identified
information that is inconsistent with the
service auditor’s final conclusion regarding
a significant matter, the service auditor
shall document how the service auditor
addressed the inconsistency.
50. The service auditor shall assemble the
Standard on Quality Control (SQC) 1, paragraphs 74-76, provide further guidance.
12
136 THE CHARTERED ACCOUNTANT september 2010
documentation in an engagement file and
complete the administrative process of
assembling the final engagement file on
a timely basis after the date of the service
auditor’s assurance report12.
51. After the assembly of the final
engagement file has been completed, the
service auditor shall not delete or discard
documentation before the end of its
retention period. (Ref: Para. A46)
52. If the service auditor finds it necessary
to modify existing engagement documen-
tation or add new documentation after the
assembly of the final engagement file has
been completed and that documentation
does not affect the service auditor’s report,
the service auditor shall, regardless of the
nature of the modifications or additions,
document:
(a) The specific reasons for making them;
and
(b) When and by whom they were made
and reviewed.
Preparing the Service Auditor’s Assurance
Report
Content of the Service Auditor’s Assurance
Report
53. The service auditor’s assurance report
shall include the following basic elements:
(Ref: Para. A47)
(a) A title that clearly indicates the report
is an independent service auditor’s
assurance report.
(b) An addressee.
(c) Identification of:
(i) The service organisation’s
description of its system, and the
service organisation’s assertion,
which includes the matters
described in paragraph 9(k)(ii) for
a Type 2 Report, or paragraph 9(j)
(ii) for a Type 1 Report.
(ii) Those parts of the service
organisation’s description of its
system, if any, that are not covered
by the service auditor’s opinion.
(iii) If the description refers to the need
for complementary user entity
controls, a statement that the
service auditor has not evaluated
the suitability of design or operating
effectiveness of complementary
user entity controls, and that the
control objectives stated in the
service organisation’s description
of its system can be achieved
only if complementary user entity
controls are suitably designed
or operating effectively, along
with the controls at the service
organisation.
(iv) If services are performed by a
subservice organisation, the
nature of activities performed
512
by the subservice organisation
as described in the service
organisation’s description of its
system and whether the inclusive
method or the carve-out method
has been used in relation to them.
Where the carve-out method
has been used, a statement
that the service organisation’s
description of its system excludes
the control objectives and related
controls at relevant subservice
organisations, and that the
service auditor’s procedures do
not extend to controls at the
subservice organisation. Where
the inclusive method has been
used, a statement that the service
organisation’s description of its
system includes control objectives
and related controls at the
subservice organisation, and that
the service auditor’s procedures
extended to controls at the
subservice organisation.
(d) Identification of the criteria, and the
party specifying the control objectives.
(e) A statement that the report and, in the
case of a Type 2 Report, the description
of tests of controls are intended only
for user entities and their auditors,
who have a sufficient understanding to
consider it, along with other information
including information about controls
operated by user entities themselves,
when assessing the risks of material
misstatements of user entities’ financial
statements. (Ref: Para. A48)
(f) A statement that the service
organisation is responsible for:
(i) Preparing the description of its
system, and the accompanying
assertion, including the
completeness, accuracy and
method of presentation of that
description and that assertion;
(ii) Providing the services covered
by the service organisation’s
description of its system;
(iii) Stating the control objectives
(where not identified by law or
regulation, or another party,
for example, a user group or a
professional body); and
(iv) Designing and implementing
controls to achieve the control
objectives stated in the service
organisation’s description of its
system.
(g) A statement that the service auditor’s
responsibility is to express an opinion on
the service organisation’s description,
on the design of controls related to
the control objectives stated in that
description and, in the case of a Type 2
 513
Report, on the operating effectiveness
of those controls, based on the service
auditor’s procedures.
(h) A statement that the engagement
was performed in accordance with
SAE 3402, “Assurance Reports on
Controls at a Service Organisation,”
which requires that the service auditor
comply with ethical requirements and
plan and perform procedures to obtain
reasonable assurance about whether,
in all material respects, the service
organisation’s description of its system
is fairly presented and the controls
are suitably designed and, in the case
of a Type 2 Report, are operating
effectively.
(i) A summary of the service auditor’s
procedures to obtain reasonable
assurance and a statement of the
service auditor’s belief that the evidence
obtained is sufficient and appropriate
to provide a basis for the service
auditor’s opinion, and, in the case of
a Type 1 Report, a statement that the
service auditor has not performed any
procedures regarding the operating
effectiveness of controls and therefore
no opinion is expressed thereon.
(j) A statement of the limitations of
controls and, in the case of a Type 2
Report, of the risk of projecting to
future periods any evaluation of the
operating effectiveness of controls.
(k) The service auditor’s opinion, expressed
in the positive form, on whether, in all
material respects, based on suitable
criteria:
(i) In the case of a Type 2 Report:
a. The description fairly presents
the service organisation’s
system that had been designed
and implemented throughout
the specified period;
b. The controls related to the
control objectives stated in
the service organisation’s
description of its system were
suitably designed throughout
the specified period; and
c. The controls tested, which were
those necessary to provide
reasonable assurance that the
control objectives stated in
the description were achieved,
operated effectively throughout
the specified period.
(ii) In the case of a Type 1 Report:
a. The description fairly presents
the service organisation’s
system that had been designed
and implemented as at the
specified date; and
b. The controls related to the
control objectives stated in
the service organisation’s
description of its system were
suitably designed as at the
specified date.
(l) The date of the service auditor’s
assurance report, which shall be no
earlier than the date on which the
service auditor has obtained sufficient
appropriate evidence on which to base
the opinion.
(m) Practitioner’s Signature - The report
should be signed by the practitioner
in his personal name. Where the firm
is appointed, the report should be
signed in the personal name of the
engagement partner and in the name
of the firm. The partner/proprietor
signing the assurance report also needs
to mention the membership number
assigned by the Institute of Chartered
Accountants of India (the Institute).
If Partnership/proprietorship firm is
appointed, the registration number
of the firm, as may be allotted by the
Institute, also needs to be mentioned in
the assurance reports signed by them.
(n) The place of signature – the report
should name specific location, which is
ordinarily the city where the report is
signed..
54. In the case of a Type 2 Report, the
service auditor’s assurance report shall
include a separate section after the opinion,
or an attachment, that describes the tests
of controls that were performed and the
results of those tests. In describing the
tests of controls, the service auditor
shall clearly state which controls were
tested, identify whether the items tested
represent all or a selection of the items in
the population, and indicate the nature
of the tests in sufficient detail to enable
user auditors to determine the effect of
such tests on their risk assessments. If
deviations have been identified, the service
auditor shall include the extent of testing
performed that led to identification of
the deviations (including the sample size
where sampling has been used), and the
number and nature of the deviations noted.
The service auditor shall report deviations
even if, on the basis of tests performed,
the service auditor has concluded that the
related control objective was achieved.
(Ref: Para. A18 and A49)
Modified Opinions
55. If the service auditor concludes that:
(Ref: Para. A50-A52)
(a) The service organisation’s description
does not fairly present, in all material
respects, the system as designed and
implemented;
(b) The controls related to the control
objectives stated in the description
were not suitably designed, in all
material respects;
(c) In the case of a Type 2 Report, the
september 2010
EXPOSURE DRAFT
controls tested, which were those
necessary to provide reasonable
assurance that the control objectives
stated in the service organisation’s
description of its system were
achieved, did not operate effectively, in
all material respects; or
(d) The service auditor is unable to obtain
sufficient appropriate evidence, the
service auditor’s opinion shall be
modified, and the service auditor’s
assurance report shall contain a clear
description of all the reasons for the
modification.
Other Communication Responsibilities
56. If the service auditor becomes aware of
non-compliance with laws and regulations,
fraud, or uncorrected errors attributable
to the service organisation that are not
clearly trivial and may affect one or more
user entities, the service auditor shall
determine whether the matter has been
communicated appropriately to affected
user entities. If the matter has not been so
communicated and the service organisation
is unwilling to do so, the service auditor shall
take appropriate action. (Ref: Para. A53)
***
Application and Other Explanatory
Material
Scope of this SAE (Ref: Para. 1 and 3)
A1. Internal control is a process designed
to provide reasonable assurance regarding
the achievement of objectives related
to the reliability of financial reporting,
effectiveness and efficiency of operations
and compliance with applicable laws and
regulations. Controls related to a service
organisation’s operations and compliance
objectives may be relevant to a user entity’s
internal control as it relates to financial
reporting. Such controls may pertain
to assertions about presentation and
disclosure relating to account balances,
classes of transactions or disclosures, or
may pertain to evidence that the user
auditor evaluates or uses in applying
auditing procedures. For example, a payroll
processing service organisation’s controls
related to the timely remittance of payroll
deductions to government authorities
may be relevant to a user entity as late
remittances could incur interest and
penalties that would result in a liability
for the user entity. Similarly, a service
organisation’s controls over the
acceptability of investment transactions
from a regulatory perspective may be
considered relevant to a user entity’s
presentation and disclosure of transactions
and account balances in its financial
statements. The determination of whether
controls at a service organisation related
to operations and compliance are likely
THE CHARTERED ACCOUNTANT 137
 EXPOSURE DRAFT
to be relevant to user entities’ internal
control as it relates to financial reporting is
a matter of professional judgment, having
regard to the control objectives set by the
service organisation and the suitability of
the criteria.
A2. The service organisation may not be
able to assert that the system is suitably
designed when, for example, the service
organisation is operating a system that
has been designed by a user entity or is
stipulated in a contract between a user
entity and the service organisation. Because
of the inextricable link between the suitable
design of controls and their operating
effectiveness, the absence of an assertion
with respect to the suitability of design
will likely preclude the service auditor
from concluding that the controls provide
reasonable assurance that the control
objectives have been met and thus from
opining on the operating effectiveness of
controls. As an alternative, the practitioner
may choose to accept an agreed-upon
procedures engagement to perform tests
of controls, or an assurance engagement
under proposed SAE 3000 to conclude on
whether, based on tests of controls, the
controls have operated as described.
Definitions (Ref: Para. 9(d) and 9(g))
A3. The definition of “controls at the service
organisation” includes aspects of user
entities’ information systems maintained
by the service organisation, and may also
include aspects of one or more of the
other components of internal control at a
service organisation. For example, it may
include aspects of a service organisation’s
control environment, monitoring, and
control activities when they relate to the
services provided. It does not, however,
include controls at a service organisation
that are not related to the achievement of
the control objectives stated in the service
organisation’s description of its system, for
example, controls related to the preparation
of the service organisation’s own financial
statements.
A4. When the inclusive method is used,
the requirements in this SAE also apply to
the services provided by the subservice
organisation, including obtaining agreement
regarding the matters in paragraph 13(b)(i)-
(v) as applied to the subservice organisation
rather than the service organisation.
Performing procedures at the subservice
organisation entails coordination and
communication between the service
organisation, the subservice organisation,
and the service auditor. The inclusive method
generally is feasible only if the service
organisation and the subservice organisation
are related, or if the contract between the
service organisation and the subservice
organisation provides for its use.
138 THE CHARTERED ACCOUNTANT september 2010
Ethical Requirements (Ref: Para. 11)
A5. The service auditor is subject to relevant
independence requirements, which
ordinarily comprise Code of Ethics of the
Institute in performing an engagement in
accordance with this SAE, the Code of Ethics
of the ICAI does not require the service
auditor to be independent from each user
entity.
Management and Those Charged with
Governance (Ref: Para. 12)
A6. Management and governance structures
vary by jurisdiction and by entity, reflecting
influences such as different cultural and
legal backgrounds, and size and ownership
characteristics. Such diversity means that
it is not possible for this SAE to specify for
all engagements the person(s) with whom
the service auditor is to interact regarding
particular matters. For example, the service
organisation may be a segment of a third-
party organisation and not a separate
legal entity. In such cases, identifying
the appropriate management personnel
or those charged with governance from
whom to request written representations
may require the exercise of professional
judgment.
Acceptance and Continuance
Capabilities and Competence to Perform the
Engagement (Ref: Para. 13(a)(i))
A7. Relevant capabilities and competence
to perform the engagement include matters
such as the following:
• Knowledge of the relevant industry;
• An understanding of information
technology and systems;
• Experience in evaluating risks as they
relate to the suitable design of controls;
and
• Experience in the design and execution
of tests of controls and the evaluation
of the results.
Service Organisation’s Assertion (Ref: Para.
13(b)(i))
A8. Refusal, by a service organisation, to
provide a written assertion, subsequent
to an agreement by the service auditor
to accept, or continue, an engagement,
represents a scope limitation that causes
the service auditor to withdraw from the
engagement. If law or regulation does
not allow the service auditor to withdraw
from the engagement, the service auditor
disclaims an opinion.
Reasonable Basis for Service Organisation’s
Assertion (Ref: Para. 13(b)(ii))
A9. In the case of a Type 2 Report, the
service organisation’s assertion includes
a statement that the controls related to
the control objectives stated in the service
organisation’s description of its system
operated effectively throughout the
specified period. This assertion may be based
514
on the service organisation’s monitoring
activities. Monitoring of controls is a process
to assess the effectiveness of controls over
time. It involves assessing the effectiveness
of controls on a timely basis, identifying
and reporting deficiencies to appropriate
individuals within the service organisation,
and taking necessary corrective actions.
The service organisation accomplishes
monitoring of controls through ongoing
activities, separate evaluations, or a
combination of both. The greater the
degree and effectiveness of ongoing
monitoring activities, the less need for
separate evaluations. Ongoing monitoring
activities are often built into the normal
recurring activities of a service organisation
and include regular management and
supervisory activities. Internal auditors or
personnel performing similar functions
may contribute to the monitoring of a
service organisation’s activities. Monitoring
activities may also include using information
communicated by external parties, such
as customer complaints and regulator
comments, which may indicate problems
or highlight areas in need of improvement.
The fact that the service auditor will
report on the operating effectiveness of
controls is not a substitute for the service
organisation’s own processes to provide a
reasonable basis for its assertion.
Identification of Risks (Ref: Para. 13(b)(iv))
A10. As noted in paragraph 9(c), control
objectives relate to risks that controls seek
to mitigate. For example, the risk that a
transaction is recorded at the wrong amount
or in the wrong period can be expressed as
a control objective that transactions are
recorded at the correct amount and in the
correct period. The service organisation
is responsible for identifying the risks
that threaten achievement of the control
objectives stated in the description of its
system. The service organisation may have
a formal or informal process for identifying
relevant risks. A formal process may include
estimating the significance of identified
risks, assessing the likelihood of their
occurrence, and deciding about actions
to address them. However, since control
objectives relate to risks that controls
seek to mitigate, thoughtful identification
of control objectives when designing and
implementing the service organisation’s
system may itself comprise an informal
process for identifying relevant risks.
Acceptance of a Change in the Terms of the
Engagement (Ref: Para. 14)
A11. A request to change the scope of the
engagement may not have a reasonable
justification when, for example, the request
is made to exclude certain control objectives
from the scope of the engagement because
of the likelihood that the service auditor’s
opinion would be modified; or the service
 515 EXPOSURE DRAFT

organisation will not provide the service
auditor with a written assertion and the
request is made to perform the engagement
under proposed SAE 3000.
A12. A request to change the scope of
the engagement may have a reasonable
justification when, for example, the request
is made to exclude from the engagement a
subservice organisation when the service
organisation cannot arrange for access by
the service auditor, and the method used
for dealing with the services provided by
that subservice organisation is changed
from the inclusive method to the carve-out
method.
Assessing the Suitability of the Criteria (Ref:
Para. 15-18)
A13. Criteria need to be available to the
intended users to allow them to understand
the basis for the service organisation’s
assertion about the fair presentation of its
description of the system, the suitability of
the design of controls and, in the case of a
Type 2 Report, the operating effectiveness
of the controls related to the control
objectives.
A14. Proposed SAE 3000 requires the
service auditor, among other things, to
assess the suitability of criteria, and the
appropriateness of the subject matter13.
The subject matter is the underlying
condition of interest to intended users of
an assurance report. The following table

Subject matter Criteria Comment

Opinion about the The service organization’s
fair presentation of system that is likely
the description of the to be relevant to user
service organization’s entities’ internal control
system (type 1 and as it relates to financial
Type 2 Reports) reporting and is covered
by the service auditor’s
assurance report.
Opinion about The suitability of the
suitability of design, design and operating
and operating effectiveness of those
effectiveness (Type 2 controls that are
Reports) necessary to achieve
the control objectives
stated in the service
organization’s description
of its system.
Opinion about The suitability of the
suitability of design design of those controls
(Type 1 Reports) that are necessary to
achieve the control
objectives stated in the
service organization’s
description of its system.
The description is fairly presented
if it: (a) presents how the service
organization’s system was designed
and implemented including, as
appropriate, the matters identified
in paragraph 16(a)(i)-(viii); (b) in the
case of a Type 2 Report, includes
relevant details of changes to the
service organization’s system
during the period covered by the
description; and (c) does not omit
or distort information relevant to the
scope of the service organization’s
system being described, while
acknowledging that the description is
prepared to meet the common needs
of a broad range of user entities and
may not, therefore, include every
aspect of the service organization’s
system that each individual user
entity may consider important in its
own particular environment.
The controls are suitably designed
and operating effectively if: (a) the
service organization has identified
the risks that threaten achievement
of the control objectives stated in
the description of its system; (b) the
controls identified in that description
would, if operated as described,
provide reasonable assurance
that those risks do not prevent the
stated control objectives from being
achieved; and (c) the controls were
consistently applied as designed
throughout the specified period. This
includes whether manual controls
were applied by individuals who have
the appropriate competence and
authority.
The controls are suitably designed
if: (a) the service organization has
identified the risks that threaten
achievement of the control objectives
stated in the description of its system;
and (b) the controls identified in
that description would, if operated
as described, provide reasonable
assurance that those risks do not
prevent the stated control objectives
from being achieved.
The specific wording of the criteria for this opinion
may need to be tailored to be consistent with criteria
established by, for example, law or regulation, user
groups, or a professional body. Examples of criteria
for this opinion are provided in the illustrative service
organization’s assertion in Appendix 1. Paragraphs
A21-A24 offer further guidance on determining whether
these criteria are met. (In terms of the requirements of
proposed SAE 3000, the subject matter information14
for this opinion is the service organization’s description
of its system and the service organization’s assertion
that the description is fairly presented.)
When the criteria for this The control objectives,
opinion are met, controls which are stated in the
will have provided service organization’s
reasonable assurance description of its system,
that the related control are part of the criteria
objectives were achieved for these opinions.
throughout the specified The stated control
period. (In terms of the objectives will differ
requirements of proposed from engagement to
SAE 3000, the subject engagement. If, as part
matter information for of forming the opinion
this opinion is the service on the description,
organization’s assertion the service auditor
that controls are suitably concludes the stated
designed and that they control objectives are
are operating effectively.) not fairly presented then
those control objectives
would not be suitable
as part of the criteria
Meeting these criteria for forming an opinion
does not, of itself, provide on either the design or
any assurance that the operating effectiveness
related control objectives of controls.
were achieved because
no assurance has been
obtained about the
operation of controls. (In
terms of the requirements
of proposed SAE 3000, the
subject matter information
for this opinion is the
service organization’s
assertion that controls are
suitably designed.)

Proposed SAE 3000, paragraphs 18-19.

13

The “subject matter information” is the outcome of the evaluation or measurement of the subject matter that results from applying the criteria to the
14

subject matter.

september 2010 THE CHARTERED ACCOUNTANT 139

 EXPOSURE DRAFT
identifies the subject matter and minimum
criteria for each of the opinions in Type 2
and Type 1 Reports.
A15. Paragraph 16(a) identifies a number of
elements that are included in the service
organisation’s description of its system as
appropriate. These elements may not be
appropriate if the system being described
is not a system that processes transactions,
for example, if the system relates to
general controls over the hosting of an IT
application but not the controls embedded
in the application itself.
Materiality (Ref: Para. 19 and 54)
A16. In an engagement to report on controls
at a service organisation, the concept of
materiality relates to the system being
reported on, not the financial statements of
user entities. The service auditor plans and
performs procedures to determine whether
the service organisation’s description of its
system is fairly presented in all material
respects, whether controls at the service
organisation are suitably designed in all
material respects and, in the case of a Type
2 Report, whether controls at the service
organisation are operating effectively in all
material respects. The concept of materiality
takes into account that the service auditor’s
assurance report provides information
about the service organisation’s system
to meet the common information needs
of a broad range of user entities and their
auditors who have an understanding of
the manner in which that system has been
used.
A17. Materiality with respect to the fair
presentation of the service organisation’s
description of its system, and with respect
to the design of controls, includes primarily
the consideration of qualitative factors, for
example: whether the description includes
the significant aspects of processing
significant transactions; whether the
description omits or distorts relevant
information; and the ability of controls,
as designed, to provide reasonable
assurance that control objectives would
be achieved. Materiality with respect
to the service auditor’s opinion on the
operating effectiveness of controls includes
the consideration of both quantitative
and qualitative factors, for example,
the tolerable rate and observed rate of
deviation (a quantitative matter), and the
nature and cause of any observed deviation
(a qualitative matter).
A18. The concept of materiality is not applied
when disclosing, in the description of the
tests of controls, the results of those tests
where deviations have been identified. This
is because, in the particular circumstances
of a specific user entity or user auditor, the
deviation may have significance beyond
SA 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment.”
15
140 THE CHARTERED ACCOUNTANT september 2010
whether or not, in the opinion of the
service auditor, it prevents a control from
operating effectively. For example, the
control to which the deviation relates may
be particularly significant in preventing a
certain type of error that may be material
in the particular circumstances of a user
entity’s financial statements.
Obtaining an Understanding of the Service
Organisation’s System (Ref: Para. 20)
A19. Obtaining an understanding of the
service organisation’s system, including
controls, included in the scope of the
engagement, assists the service auditor in:
• Identifying the boundaries of that
system, and how it interfaces with
other systems.
• Assessing whether the service
organisation’s description fairly
presents the system that has been
designed and implemented.
• Determining which controls are
necessary to achieve the control
objectives stated in the service
organisation’s description of its
system.
• Assessing whether controls were
suitably designed.
• Assessing, in the case of a Type 2 Report,
whether controls were operating
effectively.
A20. The service auditor’s procedures to
obtain this understanding may include:
• Inquiring of those within the service
organisation who, in the service
auditor’s judgment, may have relevant
information.
• Observing operations and inspecting
documents, reports, printed and
electronic records of transaction
processing.
• Inspecting a selection of agreements
between the service organisation and
user entities to identify their common
terms.
• Reperforming control procedures.
Obtaining Evidence Regarding the Description
(Ref: Para. 21-22)
A21. Considering the following questions
may assist the service auditor in determining
whether those aspects of the description
included in the scope of the engagement
are fairly presented in all material respects:
• Does the description address the major
aspects of the service provided (within
the scope of the engagement) that
could reasonably be expected to be
relevant to the common needs of a
broad range of user auditors in planning
their audits of user entities’ financial
statements?
• Is the description prepared at a level
of detail that could reasonably be
516
expected to provide a broad range of
user auditors with sufficient information
to obtain an understanding of internal
control in accordance with SA 315?15
The description need not address every
aspect of the service organisation’s
processing or the services provided
to user entities, and need not be
so detailed as to potentially allow a
reader to compromise security or other
controls at the service organisation.
• Is the description prepared in a manner
that does not omit or distort information
that may affect the common needs of a
broad range of user auditors’ decisions,
for example, does the description
contain any significant omissions or
inaccuracies in processing of which the
service auditor is aware?
• Where some of the control objectives
stated in the service organisation’s
description of its system have been
excluded from the scope of the
engagement, does the description
clearly identify the excluded
objectives?
• Have the controls identified in the
description been implemented?
• Are complementary user entity
controls, if any, described adequately?
In most cases, the description of control
objectives is worded such that the
control objectives are capable of being
achieved through effective operation
of controls implemented by the service
organisation alone. In some cases,
however, the control objectives stated
in the service organisation’s description
of its system cannot be achieved by the
service organisation alone because
their achievement requires particular
controls to be implemented by user
entities. This may be the case where,
for example, the control objectives
are specified by a regulatory authority.
When the description does include
complementary user entity controls,
the description separately identifies
those controls along with the specific
control objectives that cannot be
achieved by the service organisation
alone.
• If the inclusive method has been used,
does the description separately identify
controls at the service organisation and
controls at the subservice organisation?
If the carve-out method is used, does
the description identify the functions
that are performed by the subservice
organisation? When the carve-out
method is used, the description need
not describe the detailed processing or
controls at the subservice organisation.
A22. The service auditor’s procedures
to evaluate the fair presentation of the
 517
description may include:
• Considering the nature of user entities
and how the services provided by the
service organisation are likely to affect
them, for example, whether user
entities are from a particular industry
and whether they are regulated by
government agencies.
• Reading standard contracts, or standard
terms of contracts, (if applicable) with
user entities to gain an understanding
of the service organisation’s contractual
obligations.
• Observing procedures performed by
service organisation personnel.
• Reviewing the service organisation’s
policy and procedure manuals and
other systems documentation, for
example, flowcharts and narratives.
A23. Paragraph 22(a) requires the
service auditor to evaluate whether the
control objectives stated in the service
organisation’s description of its system are
reasonable in the circumstances.
Considering the following questions
may assist the service auditor in this
evaluation:
• Have the stated control objectives
been designated by the service
organisation or by outside parties such
as a regulatory authority, a user group,
or a professional body that follows a
transparent due process?
• Where the stated control objectives
have been specified by the service
organisation, do they relate to the types
of assertions commonly embodied in the
broad range of user entities’ financial
statements to which controls at the
service organisation could reasonably
be expected to relate? Although the
service auditor ordinarily will not be
able to determine how controls at a
service organisation specifically relate
to the assertions embodied in individual
user entities’ financial statements, the
service auditor’s understanding of the
nature of the service organisation’s
system, including controls, and services
being provided is used to identify the
types of assertions to which those
controls are likely to relate.
• Where the stated control objectives
have been specified by the service
organisation, are they complete? A
complete set of control objectives can
provide a broad range of user auditors
with a framework to assess the effect
of controls at the service organisation
on the assertions commonly embodied
in user entities’ financial statements.
A24. The service auditor’s procedures
to determine whether the service
organisation’s system has been
implemented may be similar to, and
performed in conjunction with, procedures
to obtain an understanding of that system.
They may also include tracing items through
the service organisation’s system and, in the
case of a Type 2 Report, specific inquiries
about changes in controls that were
implemented during the period. Changes
that are significant to user entities or their
auditors are included in the description of
the service organisation’s system.
Obtaining Evidence Regarding Design of
Controls (Ref: Para. 23 and 28(b))
A25. From the viewpoint of a user entity or
a user auditor, a control is suitably designed
if, individually or in combination with other
controls, it would, when complied with
satisfactorily, provide reasonable assurance
that material misstatements are prevented,
or detected and corrected. A service
organisation or a service auditor, however, is
not aware of the circumstances at individual
user entities that would determine whether
or not a misstatement resulting from a
control deviation is material to those user
entities. Therefore, from the viewpoint of a
service auditor, a control is suitably designed
if, individually or in combination with other
controls, it would, when complied with
satisfactorily, provide reasonable assurance
that control objectives stated in the service
organisation’s description of its system are
achieved.
A26. A service auditor may consider using
flowcharts, questionnaires, or decision
tables to facilitate understanding the design
of the controls.
A27. Controls may consist of a number
of activities directed at the achievement
of a control objective. Consequently,
if the service auditor evaluates certain
activities as being ineffective in achieving a
particular control objective, the existence
of other activities may allow the service
auditor to conclude that controls related
to the control objective are suitably
designed.
Obtaining Evidence Regarding Operating
Effectiveness of Controls
Assessing Operating Effectiveness (Ref:
Para. 24)
A28. From the viewpoint of a user entity
or a user auditor, a control is operating
effectively if, individually or in combination
with other controls, it provides reasonable
assurance that material misstatements,
whether due to fraud or error, are prevented,
or detected and corrected. A service
organisation or a service auditor, however, is
not aware of the circumstances at individual
user entities that would determine whether
a misstatement resulting from a control
deviation had occurred and, if so, whether
it is material. Therefore, from the viewpoint
of a service auditor, a control is operating
effectively if, individually or in combination
september 2010
EXPOSURE DRAFT
with other controls, it provides reasonable
assurance that control objectives stated
in the service organisation’s description
of its system are achieved. Similarly, a
service organisation or a service auditor is
not in a position to determine whether any
observed control deviation would result in a
material misstatement from the viewpoint
of an individual user entity.
A29. Obtaining an understanding of controls
sufficient to opine on the suitability of their
design is not sufficient evidence regarding
their operating effectiveness, unless there
is some automation that provides for the
consistent operation of the controls as
they were designed and implemented. For
example, obtaining information about the
implementation of a manual control at a
point in time does not provide evidence
about operation of the control at other
times. However, because of the inherent
consistency of IT processing, performing
procedures to determine the design of an
automated control, and whether it has
been implemented, may serve as evidence
of that control’s operating effectiveness,
depending on the service auditor’s
assessment and testing of other controls,
such as those over program changes.
A30. To be useful to user auditors, a Type 2
Report ordinarily covers a minimum period
of six months. If the period is less than six
months, the service auditor may consider
it appropriate to describe the reasons for
the shorter period in the service auditor’s
assurance report. Circumstances that
may result in a report covering a period
of less than six months include when (a)
the service auditor is engaged close to the
date by which the report on controls is to
be issued; (b) the service organisation (or a
particular system or application) has been
in operation for less than six months; or (c)
significant changes have been made to the
controls and it is not practicable either to
wait six months before issuing a report or
to issue a report covering the system both
before and after the changes.
A31. Certain control procedures may not
leave evidence of their operation that can
be tested at a later date and, accordingly,
the service auditor may find it necessary
to test the operating effectiveness of
such control procedures at various times
throughout the reporting period.
A32. The service auditor provides an
opinion on the operating effectiveness of
controls throughout each period, therefore,
sufficient appropriate evidence about the
operation of controls during the current
period is required for the service auditor
to express that opinion. Knowledge of
deviations observed in prior engagements
may, however, lead the service auditor to
increase the extent of testing during the
current period.
THE CHARTERED ACCOUNTANT 141
 EXPOSURE DRAFT
Testing of Indirect Controls (Ref: Para.
25(b))
A33. In some circumstances, it may be
necessary to obtain evidence supporting
the effective operation of indirect controls.
For example, when the service auditor
decides to test the effectiveness of a
review of exception reports detailing sales
in excess of authorized credit limits, the
review and related follow up is the control
that is directly of relevance to the service
auditor. Controls over the accuracy of the
information in the reports (for example,
the general IT controls) are described as
“indirect” controls.
A34. Because of the inherent consistency
of IT processing, evidence about the
implementation of an automated appli-
cation control, when considered in
combination with evidence about the
operating effectiveness of the service
organisation’s general controls (in
particular, change controls), may also
provide substantial evidence about its
operating effectiveness.
Means of Selecting Items for Testing (Ref:
Para. 25(c) and 27)
A35. The means of selecting items for
testing available to the service auditor
are:
(a) Selecting all items (100% examination).
This may be appropriate for testing
controls that are applied infrequently,
for example, quarterly, or when
evidence regarding application of
the control makes 100% examination
efficient;
(b) Selecting specific items. This may be
appropriate where 100% examination
would not be efficient and sampling
would not be effective, such as testing
controls that are not applied sufficiently
frequently to render a large population
for sampling, for example, controls
that are applied monthly or weekly;
and
(c) Sampling. This may be appropriate
for testing controls that are applied
frequently in a uniform manner and
which leave documentary evidence of
their application.
A36. While selective examination of specific
items will often be an efficient means of
obtaining evidence, it does not constitute
sampling. The results of procedures applied
to items selected in this way cannot
be projected to the entire population;
accordingly, selective examination of specific
items does not provide evidence concerning
the remainder of the population. Sampling,
on the other hand, is designed to enable
conclusions to be drawn about an entire
population on the basis of testing a sample
drawn from it.
Code of Ethics of the ICAI, paragraph 110.2.
16
142 THE CHARTERED ACCOUNTANT september 2010
The Work of an Internal Audit Function
Obtaining an Understanding of the Internal
Audit Function (Ref: Para. 30)
A37. An internal audit function may
be responsible for providing analyses,
evaluations, assurances, recommendations,
and other information to management and
those charged with governance. An internal
audit function at a service organisation may
perform activities related to the service
organisation’s own system of internal
control, or activities related to the services
and systems, including controls, that the
service organisation is providing to user
entities.
Determining Whether and to What Extent
to Use the Work of the Internal Auditors
(Ref: Para. 33)
A38. In determining the planned effect of
the work of the internal auditors on the
nature, timing or extent of the service
auditor’s procedures, the following factors
may suggest the need for different or less
extensive procedures than would otherwise
be the case:
• The nature and scope of specific work
performed, or to be performed, by the
internal auditors is quite limited.
• The work of the internal auditors relates
to controls that are less significant to
the service auditor’s conclusions.
• The work performed, or to be
performed, by the internal auditors
does not require subjective or complex
judgments.
Using the Work of the Internal Audit
Function (Ref: Para. 34)
A39. The nature, timing and extent of the
service auditor’s procedures on specific
work of the internal auditors will depend
on the service auditor’s assessment of the
significance of that work to the service
auditor’s conclusions (for example, the
significance of the risks that the controls
tested seek to mitigate), the evaluation
of the internal audit function and the
evaluation of the specific work of the
internal auditors. Such procedures may
include:
• Examination of items already examined
by the internal auditors;
• Examination of other similar items; and
• Observation of procedures performed
by the internal auditors.
Effect on the Service Auditor’s Assurance
Report (Ref: Para. 36-37)
A40. Irrespective of the degree of autonomy
and objectivity of the internal audit
function, such function is not independent
of the service organisation as is required of
the service auditor when performing the
engagement. The service auditor has sole
responsibility for the opinion expressed in
the service auditor’s assurance report, and
518
that responsibility is not reduced by the
service auditor’s use of the work of the
internal auditors.
A41. The service auditor’s description of
work performed by the internal audit
function may be presented in a number of
ways, for example:
• By including introductory material to
the description of tests of controls
indicating that certain work of the
internal audit function was used in
performing tests of controls.
• Attribution of individual tests to internal
audit.
Written Representations (Ref: Para. 38 and
40)
A42. The written representations required
by paragraph 39 are separate from, and
in addition to, the service organisation’s
assertion, as defined at paragraph 9(o).
A43. If the service organisation does
not provide the written representations
requested in accordance with paragraph
39(c) of this SAE, it may be appropriate for
the service auditor’s opinion to be modified
in accordance with paragraph 56(d) of this
SAE.
Other Information (Ref: Para. 42)
A44. The Code of Ethics of the ICAI requires
that a service auditor not be associated
with information where the service auditor
believes that the information:
(a) Contains a materially false or misleading
statement;
(b) Contains statements or information
furnished negligently; or
(c) Omits or obscures information required
to be included where such omission or
obscurity would be misleading16.
If other information included in a document
containing the service organisation’s
description of its system and the service
auditor’s assurance report contains future-
oriented information such as recovery or
contingency plans, or plans for modifications
to the system that will address deviations
identified in the service auditor’s assurance
report, or claims of a promotional nature
that cannot be reasonably substantiated,
the service auditor may request that
information be removed or modified.
A45. If the service organisation refuses to
remove or modify the other information,
further actions that may be appropriate
include, for example:
• Requesting the service organisation to
consult with its legal counsel as to the
appropriate course of action.
• Describing the material inconsistency
or material misstatement of fact in the
assurance report.
• Withdrawing from the engagement.
 519
Documentation (Ref: Para. 51)
A46. SQC 1 (or national requirements that
are at least as demanding) requires firms
to establish policies and procedures for
the timely completion of the assembly of
engagement files17. An appropriate time
limit within which to complete the assembly
of the final engagement file is ordinarily not
more than 60 days after the date of the
service auditor’s report18.
Preparing the Service Auditor’s Assurance
Report
Content of the Service Auditor’s Assurance
Report (Ref: Para. 53)
A47. Illustrative examples of service
auditors’ assurance reports and related
service organisations’ assertions are
contained in Appendices 1 and 2.
Intended Users and Purposes of the Service
Auditor’s Assurance Report (Ref: Para.
53(e))
A48. The criteria used for engagements to
report on controls at a service organisation
are relevant only for the purposes of
providing information about the service
organisation’s system, including controls,
to those who have an understanding of
how the system has been used for financial
reporting by user entities. Accordingly this
is stated in the service auditor’s assurance
report. In addition, the service auditor may
consider it appropriate to include wording
that specifically restricts distribution of the
assurance report other than to intended
users, its use by others, or its use for other
purposes.
Description of the Tests of Controls (Ref:
Para. 54)
A49. In describing the nature of the tests
of controls for a Type 2 Report, it assists
readers of the service auditor’s assurance
report if the service auditor includes:
• The results of all tests where deviations
have been identified, even if other
controls have been identified that
allow the service auditor to conclude
that the relevant control objective has
been achieved or the control tested has
subsequently been removed from the
service organisation’s description of its
system.
• Information about causative factors
for identified deviations, to the extent
the service auditor has identified such
factors.
Modified Opinions (Ref: Para. 55)
A50. Illustrative examples of elements of
modified service auditor’s assurance reports
are contained in Appendix 3.
A51. Even if the service auditor has
expressed an adverse opinion or disclaimed
an opinion, it may be appropriate to describe
in the basis for modification paragraph the
SQC 1, paragraph 74.
17
SQC 1, paragraph 75.
18
reasons for any other matters of which the
service auditor is aware that would have
required a modification to the opinion, and
the effects thereof.
A52. When expressing a disclaimer of
opinion because of a scope limitation, it is
not ordinarily appropriate to identify the
procedures that were performed nor include
statements describing the characteristics
of a service auditor’s engagement; to do
so might overshadow the disclaimer of
opinion.
Other Communication Responsibilities (Ref:
Para. 56)
A53. Appropriate actions to respond to the
circumstances identified in paragraph 57
may include:
• Obtaining legal advice about the
consequences of different courses of
action.
• Communicating with those charged
with governance of the service
organisation.
• Communicating with third parties (for
example, a regulator) when required to
do so.
• Modifying the service auditor’s opinion,
or adding an Other Matter paragraph.
• Withdrawing from the engagement.
Appendix 1
(Ref. Para. A47)
Example Service Organisation’s
Assertions
The following examples of service
organisation’s assertions are for guidance
only and are not intended to be exhaustive
or applicable to all situations.
Example 1: Type 2 Service Organisation’s
Assertion
Assertion by the Service Organisation
The accompanying description has been
prepared for customers who have used
[the type or name of] system and
their auditors who have a sufficient
understanding to consider the description,
along with other information including
information about controls operated by
customers themselves, when assessing
the risks of material misstatements of
customers’ financial statements. [Entity’s
name] confirms that:
(a) The accompanying description at pages
[bb-cc] fairly presents [the type or name
of] system for processing customers’
transactions throughout the period
[date] to [date]. The criteria used in
making this assertion were that the
accompanying description:
(i) Presents how the system was
designed and implemented,
including:
• The types of services provided,
september 2010
EXPOSURE DRAFT
including, as appropriate, classes
of transactions processed.
• The procedures, within both
information technology and
manual systems, by which those
transactions were initiated,
recorded, processed, corrected
as necessary, and transferred
to the reports prepared for
customers.
• The related accounting records,
supporting information and
specific accounts that were
used to initiate, record, process
and report transactions; this
includes the correction of
incorrect information and how
information was transferred
to the reports prepared for
customers.
• How the system dealt with
significant events and condi-
tions, other than transactions.
• The process used to prepare
reports for customers.
• Relevant control objectives and
controls designed to achieve
those objectives.
• Controls that we assumed,
in the design of the system,
would be implemented by user
entities, and which, if necessary
to achieve control objectives
stated in the accompanying
description, are identified in
the description along with the
specific control objectives that
cannot be achieved by ourselves
alone.
• Other aspects of our control
environment, risk assessment
process, information system
(including the related business
processes) and communication,
control activities and monitoring
controls that were relevant
to processing and reporting
customers’ transactions.
(ii) Includes relevant details of changes
to the service organisation’s
system during the period [date] to
[date].
(iii) Does not omit or distort
information relevant to the scope
of the system being described,
while acknowledging that the
description is prepared to meet the
common needs of a broad range of
customers and their auditors and
may not, therefore, include every
aspect of the system that each
individual customer may consider
important in its own particular
environment.
THE CHARTERED ACCOUNTANT 143
 EXPOSURE DRAFT
(b) The controls related to the control
objectives stated in the accompanying
description were suitably designed and
operated effectively throughout the
period [date] to [date]. The criteria used
in making this assertion were that:
(i) The risks that threatened
achievement of the control
objectives stated in the description
were identified;
(ii) The identified controls would, if
operated as described, provide
reasonable assurance that those
risks did not prevent the stated
control objectives from being
achieved; and
(iii) The controls were consistently
applied as designed, including
that manual controls were
applied by individuals who have
the appropriate competence and
authority, throughout the period
[date] to [date].
Example 2: Type 1 Service Organisation’s
Assertion
The accompanying description has been
prepared for customers who have used [the
type or name of] system and their auditors
who have a sufficient understanding to
consider the description, along with other
information including information about
controls operated by customers themselves,
when obtaining an understanding of
customers’ information systems relevant to
financial reporting. [Entity’s name] confirms
that:
(a) The accompanying description at pages
[bb-cc] fairly presents [the type or name
of] system for processing customers’
transactions as at [date]. The criteria
used in making this assertion were that
the accompanying description:
(i) Presents how the system was
designed and implemented,
including:
• The types of services provided,
including, as appropriate, classes
of transactions processed.
• The procedures, within both
information technology and
manual systems, by which those
transactions were initiated,
recorded, processed, corrected
as necessary, and transferred
to the reports prepared for
customers.
• The related accounting records,
supporting information and
specific accounts that were
used to initiate, record, process
and report transactions; this
includes the correction of
incorrect information and how
information is transferred to the
reports prepared for customers.
If some elements of the description are not included in the scope of the engagement, this is made clear in the assurance report.
19
144 THE CHARTERED ACCOUNTANT september 2010
• How the system dealt with
significant events and condi-
tions, other than transactions.
• The process used to prepare
reports for customers.
• Relevant control objectives and
controls designed to achieve
those objectives.
• Controls that we assumed,
in the design of the system,
would be implemented by user
entities, and which, if necessary
to achieve control objectives
stated in the accompanying
description, are identified in
the description along with the
specific control objectives that
cannot be achieved by ourselves
alone.
• Other aspects of our control
environment, risk assessment
process, information system
(including the related business
processes) and communication,
control activities and monitoring
controls that were relevant
to processing and reporting
customers’ transactions.
(ii) Does not omit or distort
information relevant to the scope
of the system being described,
while acknowledging that the
description is prepared to meet the
common needs of a broad range of
customers and their auditors and
may not, therefore, include every
aspect of the system that each
individual customer may consider
important in its own particular
environment.
(b) The controls related to the control
objectives stated in the accompanying
description were suitably designed as
at [date]. The criteria used in making
this assertion were that:
(i) The risks that threatened
achievement of the control
objectives stated in the description
were identified; and
(ii) The identified controls would, if
operated as described, provide
reasonable assurance that those
risks did not prevent the stated
control objectives from being
achieved.
Appendix 2
(Ref. Para. A47)
Example Service Auditor’s Assurance
Reports
The following examples of reports are for
guidance only and are not intended to be
exhaustive or applicable to all situations.
Example 1: Type 2 Service Auditor’s Assurance
Report
520
Independent Service Auditor’s Assurance
Report on the Description of Controls, their
Design and Operating Effectiveness
To: XYZ Service Organisation
Scope
We have been engaged to report on XYZ
Service Organisation’s description at pages
[bb-cc] of its [type or name of] system
for processing customers’ transactions
throughout the period [date] to [date]
(the description), and on the design and
operation of controls related to the control
objectives stated in the description19.
XYZ Service Organisation’s Responsibilities
XYZ Service Organisation is responsible for:
preparing the description and accompanying
assertion at page [aa], including the
completeness, accuracy and method
of presentation of the description and
assertion; providing the services covered
by the description; stating the control
objectives; and designing, implementing
and effectively operating controls to
achieve the stated control objectives.
Service Auditor’s Responsibilities
Our responsibility is to express an opinion
on XYZ Service Organisation’s description
and on the design and operation of controls
related to the control objectives stated in that
description, based on our procedures. We
conducted our engagement in accordance
with Standard on Assurance Engagements
3402, “Assurance Reports on Controls
at a Service Organisation,” issued by the
Auditing and Assurance Standards Board.
That standard requires that we comply with
ethical requirements and plan and perform
our procedures to obtain reasonable
assurance about whether, in all material
respects, the description is fairly presented
and the controls are suitably designed and
operating effectively.
An assurance engagement to report on
the description, design and operating
effectiveness of controls at a service
organisation involves performing procedures
to obtain evidence about the disclosures
in the service organisation’s description of
its system, and the design and operating
effectiveness of controls. The procedures
selected depend on the service auditor’s
judgment, including the assessment of
the risks that the description is not fairly
presented, and that controls are not suitably
designed or operating effectively. Our
procedures included testing the operating
effectiveness of those controls that we
consider necessary to provide reasonable
assurance that the control objectives
stated in the description were achieved.
An assurance engagement of this type also
includes evaluating the overall presentation
of the description, the suitability of the
 521
objectives stated therein, and the suitability
of the criteria specified by the service
organisation and described at page [aa].
We believe that the evidence we have
obtained is sufficient and appropriate to
provide a basis for our opinion.
Limitations of Controls at a Service
Organisation
XYZ Service Organisation’s description is
prepared to meet the common needs of a
broad range of customers and their auditors
and may not, therefore, include every
aspect of the system that each individual
customer may consider important in its
own particular environment. Also, because
of their nature, controls at a service
organisation may not prevent or detect all
errors or omissions in processing or reporting
transactions. Also, the projection of any
evaluation of effectiveness to future periods
is subject to the risk that controls at a service
organisation may become inadequate or
fail.
Opinion
Our opinion has been formed on the
basis of the matters outlined in this
report. The criteria we used in forming
our opinion are those described at
page [aa]. In our opinion, in all material
respects:
(a) The description fairly presents the [the
type or name of] system as designed
and implemented throughout the
period from [date] to [date];
(b) The controls related to the control
objectives stated in the description
were suitably designed throughout the
period from [date] to [date]; and
(c) The controls tested, which were those
necessary to provide reasonable
assurance that the control objectives
stated in the description were achieved,
operated effectively throughout the
period from [date] to [date].
Description of Tests of Controls
The specific controls tested and the nature,
timing and results of those tests are listed
on pages [yy-zz].
Intended Users and Purpose
This report and the description of tests of
controls on pages [yy-zz] are intended only
for customers who have used XYZ Service
Organisation’s [type or name of] system,
and their auditors, who have a sufficient
understanding to consider it, along with
other information including information
about controls operated by customers
themselves, when assessing the risks of
material misstatements of customers’
financial statements.
For XYZ and Co.
Chartered Accountants
Firm’s Registration Number
Partner or Proprietor, as the case may be.
20
If some elements of the description are not included in the scope of the engagement, this is made clear in the assurance report.
21
Partner or Proprietor, as the case may be.
22
Signature
(Name of the Member Signing the Audit
Report)
(Designation20)
Membership Number
Place of Signature
Date
Example 2: Type 1 Service Auditor’s Assurance
Report
Independent Service Auditor’s Assurance
Report on the Description of Controls and
their Design
To: XYZ Service Organisation
Scope
We have been engaged to report on XYZ
Service Organisation’s description at pages
[bb-cc] of its [type or name of] system for
processing customers’ transactions as at
[date] (the description), and on the design
of controls related to the control objectives
stated in the description21.
We did not perform any procedures regarding
the operating effectiveness of controls
included in the description and, accordingly,
do not express an opinion thereon.
XYZ Service Organisation’s Responsibilities
XYZ Service Organisation is responsible
for: preparing the description and accom-
panying assertion at page [aa], including
the completeness, accuracy and method
of presentation of the description and the
assertion; providing the services covered
by the description; stating the control
objectives; and designing, implementing
and effectively operating controls to
achieve the stated control objectives.
Service Auditor’s Responsibilities
Our responsibility is to express an opinion
on XYZ Service Organisation’s description
and on the design of controls related
to the control objectives stated in that
description, based on our procedures. We
conducted our engagement in accordance
with Standard on Assurance Engagements
3402, “Assurance Reports on Controls
at a Service Organisation,” issued by the
Auditing and Assurance Standards Board.
That standard requires that we comply with
ethical requirements and plan and perform
our procedures to obtain reasonable
assurance about whether, in all material
respects, the description is fairly presented
and the controls are suitably designed in all
material respects.
An assurance engagement to report on
the description and design of controls at a
service organisation involves performing
procedures to obtain evidence about the
disclosures in the service organisation’s
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EXPOSURE DRAFT
description of its system, and the design of
controls. The procedures selected depend
on the service auditor’s judgment, including
the assessment that the description is
not fairly presented, and that controls
are not suitably designed. An assurance
engagement of this type also includes
evaluating the overall presentation of the
description, the suitability of the control
objectives stated therein, and the suitability
of the criteria specified by the service
organisation and described at page [aa].
As noted above, we did not perform
any procedures regarding the operating
effectiveness of controls included in the
description and, accordingly, do not express
an opinion thereon.
We believe that the evidence we have
obtained is sufficient and appropriate to
provide a basis for our opinion.
Limitations of Controls at a Service
Organisation
XYZ Service Organisation’s description is
prepared to meet the common needs of a
broad range of customers and their auditors
and may not, therefore, include every
aspect of the system that each individual
customer may consider important in its own
particular environment. Also, because of their
nature, controls at a service organisation may
not prevent or detect all errors or omissions
in processing or reporting transactions.
Opinion
Our opinion has been formed on the basis
of the matters outlined in this report. The
criteria we used in forming our opinion are
those described at page [aa]. In our opinion,
in all material respects:
(a) The description fairly presents the [the
type or name of] system as designed
and implemented as at [date]; and
(b) The controls related to the control
objectives stated in the description
were suitably designed as at [date].
Intended Users and Purpose
This report is intended only for customers who
have used XYZ Service Organisation’s [type
or name of] system, and their auditors, who
have a sufficient understanding to consider
it, along with other information including
information about controls operated by
customers themselves, when obtaining an
understanding of customers’ information
systems relevant to financial reporting.
For XYZ and Co.
Chartered Accountants
Firm’s Registration Number
Signature
(Name of the Member Signing the Audit
Report)
(Designation22)
Membership Number
THE CHARTERED ACCOUNTANT 145
 EXPOSURE DRAFT
Place of Signature
Date
Appendix 3
(Ref. Para. A50)
Example Modified Service Auditor’s
Assurance Reports
The following examples of modified reports
are for guidance only and are not intended
to be exhaustive or applicable to all
situations. They are based on the examples
of reports in Appendix 2.
Example 1: Qualified opinion – the service
organisation’s description of the system is
not fairly presented in all material respects
… the Basis for Qualified Opinion paragraph:
Service Auditor’s Responsibilities
… dd/mm/yyyy to dd/mm/yyyy.
We believe that the evidence we have
obtained is sufficient and appropriate to
provide a basis for our qualified opinion.
Basis for Qualified Opinion
The accompanying description states at
page [mn] that XYZ Service Organisation
uses operator identification numbers and
passwords to prevent unauthorized access
to the system. Based on our procedures,
which included inquiries of staff personnel
and observation of activities, we have
determined that operator identification
numbers and passwords are employed in
Applications A and B but not in Applications
C and D.
Qualified Opinion
Our opinion has been formed on the basis
of the matters outlined in this report. The
criteria we used in forming our opinion
were those described in XYZ Service
Organisation’s assertion at page [aa].
In our opinion, except for the matter
described in the Basis for Qualified Opinion
paragraph:
(a) …
Example 2: Qualified opinion – the controls are
not suitably designed to provide reasonable
assurance that the control objectives stated
in the service organisation’s description of
its system will be achieved if the controls
operate effectively
… were those described in XYZ Service
Service Auditor’s Responsibilities
… opinion, except for the matter described in
We believe that the evidence we have
obtained is sufficient and appropriate to
provide a basis for our qualified opinion.
Basis for Qualified Opinion
As discussed at page [mn] of the
accompanying description, from time
to time XYZ Service Organisation makes
changes in application programs to correct
deficiencies or to enhance capabilities.
The procedures followed in determining
146 THE CHARTERED ACCOUNTANT september 2010
whether to make changes, in designing the
changes and in implementing them, do not
include review and approval by authorized
individuals who are independent from those
involved in making the changes. There
are also no specified requirements to test
such changes or provide test results to an
authorized reviewer prior to implementing
the changes.
Qualified Opinion
Our opinion has been formed on the basis
of the matters outlined in this report. The
criteria we used in forming our opinion
were those described in XYZ Service
Organisation’s assertion at page [aa]. In our
opinion, except for the matter described in
(a) …
Example 3: Qualified opinion – the controls
did not operate effectively throughout the
specified period (Type 2 Report only)
… criteria we used in forming our opinion
Service Auditor’s Responsibilities
… Organisation’s assertion at page [aa]. In our
We believe that the evidence we have
obtained is sufficient and appropriate to
provide a basis for our qualified opinion.
Basis for Qualified Opinion
XYZ Service Organisation states in its
description that it has automated controls
in place to reconcile loan payments received
with the output generated. However, as
noted at page [mn] of the description,
this control was not operating effectively
during the period from dd/mm/yyyy to dd/
mm/yyyy due to a programming error.
This resulted in the non-achievement of
the control objective “Controls provide
reasonable assurance that loan payments
received are properly recorded” during the
period from dd/mm/yyyy to dd/mm/yyyy.
XYZ implemented a change to the program
performing the calculation as of [date],
and our tests indicate that it was operating
effectively during the period from dd/mm/
yyyy to dd/mm/yyyy.
Qualified Opinion
Our opinion has been formed on the basis
of the matters outlined in this report. The
criteria we used in forming our opinion
Organisation’s assertion at page [aa]. In our
the Basis for Qualified Opinion paragraph:
… in paragraph 3 (b) to (d) as well as Standards
Example 4: Qualified opinion – the service
auditor is unable to obtain sufficient
appropriate evidence
… in the Preface, paragraph 12a will become
Service Auditor’s Responsibilities
… renumbered accordingly. No amendments
We believe that the evidence we have
522
obtained is sufficient and appropriate to
provide a basis for our qualified opinion.
Basis for Qualified Opinion
XYZ Service Organisation states in its
description that it has automated controls
in place to reconcile loan payments received
with the output generated. However,
electronic records of the performance of
this reconciliation for the period from dd/
mm/yyyy to dd/mm/yyyy were deleted as
a result of a computer processing error,
and we were therefore unable to test the
operation of this control for that period.
Consequently, we were unable to determine
whether the control objective “Controls
provide reasonable assurance that loan
payments received are properly recorded”
operated effectively during the period from
Qualified Opinion
Our opinion has been formed on the basis
of the matters outlined in this report. The
were those described in XYZ Service
opinion, except for the matter described in
the Basis for Qualified Opinion paragraph:
(a) …
Limited Revisions consequential to
issuance of the Standard on Assurance
Engagement (SAE) 3402, “Assurance
Reports on Controls At a Service
Organisation”
The amendments to the Preface to the
Standards on Quality Control, Auditing,
Review, Other Assurance and Related
Services have been shown in track
change mode.
Preface to the Standards on Quality
Control, Auditing, Review, Other
Assurance and Related Services
[No amendments are proposed to
paragraphs 1-11.]
Other Standards
12a. Some Engagement Standards identified
in paragraphs 5-7 contain: objectives,
requirements, application and other
explanatory material, introductory material
and definitions. These terms are to be
interpreted in a directly analogous way to
how they are explained in the context of
SAs and financial statement audits in SA 200
(Revised).
12. Other Engagement Standards identified
on Quality Control referred to in paragraph
4 contain basic principles and essential
procedures...
[When the limited revisions are included
paragraph 12 and the Preface will be
are proposed to paragraphs 13-21.] n
 523 EVENTS

CPE
One Day Programme on Practice and Procedures before the CESTAT
06 at
New Delhi, Mumbai, Chennai, Kolkata, Ahmedabad and Bangalore
Hours
Organised by: Indirect Taxes Committee of ICAI
Hosted by: NIRC, WIRC, SIRC, EIRC, Ahmedabad Branch of
WIRC and Bangalore Branch of SIRC respectively

New Delhi 30.10.2010 (Saturday) Kolkata 18.09.2010 (Saturday)

Mumbai October, 2010 Ahmedabad 23.10.2010 (Saturday)
Chennai 23.10.2010 (Saturday) Bangalore 09.10.2010 (Saturday)

Objective
The objective of the programme is to familiarise members with the procedures to be followed for filing
appeals, preparation and presentation of appeals before CESTAT.

Topics to be Discussed
• Drafting of Appeal and Stay Petition before CESTAT
• Representation before CESTAT including Written Submissions
• Submission of Additional Evidence/Additional Grounds
• CESTAT Rules
• Mock CESTAT

For Registration and Further Details

: 011-3010 0507, 3010 0500, : nirc_seminar@icai.in, nirc@icai.

New Delhi NIRC, ICAI
in

Mumbai WIRC, ICAI : 022-3980 2923, 3980 2922, : wirc@icai.in

Chennai SIRC, ICAI : 044-3021 0321, : sirc@icai.in

Kolkata EIRC, ICAI : 033-3021 1132, : eircevents@icai.in

Ahmedabad
Ahmedabad : 079-3989 3989, 2768 0537, : ahmedabad@icai.org
Branch, ICAI

Bangalore
Bangalore : 080-3056 3513, : blrregistrations@icai.org
Branch, ICAI

The complete announcement with details relating to dates, venues, time, fee etc. will be hosted on the
website of ICAI and of the concerned Regional Councils/Branches hosting the programme.

september 2010 THE CHARTERED ACCOUNTANT 147

 EVENTS 524

World congress of Accounatnts-2010- Invitation for participation

World Congress Of Accountants is held under the • Being in one of the most attractive and beautiful
sponsorship of the International Federation of Accountants nations in the world, Malaysia, home to the world’s
(IFAC). tallest twin towers and the melting pot of Asia where
people of different faiths, beliefs and cultures have
This is a well attended global forum attracting a meeting of come to live harmoniously alongside one another,
influential communities to share in the latest information, thus giving the nation a rich cultural heritage.
innovative ideas and to exchange views on a platform of
international and regional interest. Developed Coun- Developing
tries *(USD) Countries
Coming to WCOA 2010 means: *(USD)
• Meeting the most influential and innovative minds
in business, finance, policy, standard setters and Normal
decision makers from all over the globe. (1 August -7 1,000 900
Nov 2010)
• Sharing and exchanging ideas on the latest
business and global economic trends and receiving On-Site
updates on the latest developments in international (8-11 Novem- 1,200 1,000
accounting and auditing standards. ber 2010)
• Developing new knowledge and strengthening Accompanying
competitiveness in issues related to growth. Person 500 500
• Gaining insights and first-hand information from
renowned business leaders as well as networking *As defined by the United Nations
and socialising within a deluxe conference envir-
onment presented in a state-of-the-art convention For registration and for further details, you are requested
centre. to visit http://www.wcoa2010kualalumpur.com/

ICAI International Study Tour to Australia 7th-14th November 2010

The Australia and India have enjoyed a special bonding in
terms of their move to a regional economic operation and
in terms of services sector in general and accountancy
sector in particular. Both countries share common cultural
and linguistic ties as both are part of the Commonwealth
of Nations. The Institute of Chartered Accountants of India
(ICAI) has recently signed Memorandum of Understanding
(MOU) with CPA Australia and the Institute of Chartered
Accountants of Australia (ICAA). These MoUs will provide
an ample opportunity and recognition to Indian Chartered
Accountants in Australia.
In order to promote member to member and firm to firm
contact so as to under stand the economic and regulatory
environment and better understanding of the economic
opportunities and to tap the vast market existing for
Chartered Accountants in Australia; the International Affairs
Committee of ICAI will be undertaking the tour to selected
cities of Australia during November 2010 for members, on
self financing basis. The Study Tour is a mix of business
meetings / net working towards coupled with exposition to
the local heritage .
The study tour would seek to hold discussions
with counterpart organizations, stakeholders,
members etc. and will have the following basic
objectives:-
• Build sustainable capacity by providing participants
an opportunity to see and interact with various officials
in respective countries
• Facilitate understanding and steps towards networking
of the accounting firms in India and respective
countries
• Seek association for the research and
developmental activities of the Institute in different
fields
• Discuss the issues of qualification and ways to
facilitate cooperation at firm level
• Develop an understanding to help trade and industry

148 THE CHARTERED ACCOUNTANT september 2010

 525 EVENTS

in the respective countries and facilitate inter-country
trade and investment
Since, the delegation size would be limited to 50, registration
for the study tour would be on first-come-first-serve basis.
The detailed itinerary for the study tour is being finalized
and shall be intimated in due course to the confirmed
participants. A tentative itinerary as it stands today and
which is subject to change is also annexed hereto. This
would include the following –
• Economy Class Airfare with applicable taxes Ex-
New Delhi.
• Visa cost
• All accommodation on twin sharing basis in 4 star
hotels or similar
• All meals (Indian) : Breakfast, Lunch and Dinner.
• All transfers by private A/C coach
• Sight seeing activities in cities of Australia
• Cost of all entrance tickets / fees for the above
mentioned sightseeing tours.
• Services of local tour guide.
• All current applicable Hotel & Government Taxes
Further details shall be uploaded in the website of ICAI
For further details, please contact:
Secretariat of the International Affairs Committee,
The Institute of Chartered Accountants of India, ICAI
Bhawan, PB No. 7100, Indraprastha Marg, New Delhi –
110 002, India. +91 11 30110443 fax +91 11 30110591,
: delegation@icai.in

CPE

6
Hours
Seminar on Capital Market at Kolkata
Organized by: Committee for Members in Industry & Committee on
Financial Markets & Investors’ Protection of ICAI
Hosted by: EIRC of ICAI
Date & Time Venue
Date: September 11, 2010 (Saturday)
Hotel Oberoi Grand, Kolkata
Time: 9.30 a.m. to 5.45 p.m.
Theme
Indian Capital Market – its growth potential and challenges
Topics to be Discussed Speakers
Chairman Mr. M. S. Sahoo, Wholetime Director, SEBI*
Capital Market – The Road Ahead CA. S. P. Tulsyan, Mumbai
First Technical Session:
10.30 am to 1.00 pm Impact of European Upheaval on World
Mr. Hemal Kampani, Kolkata
Economy
Implication of Hedge Fund on Indian Capital
Ms. Molly Thamby, Kolkata
Market
Second Technical Ses- Chairman Mr. Pratip Kar
sion: Wealth Creation through common sense CA. Nilesh Shah, Mumbai
1.45 pm to 3.45 pm Annual Reports & Wealth Creation Mr. Mudar Patherya

15
Indian Equity Market Mr. Joseph Massey, Mumbai

Anchor : Mr. Govind Ethiraj, Mumbai

Panel Discussion: Panellists: CA. S. P. Tulsyan, CA. Nilesh Shah, Mr.
3.45 pm to 5.45 pm Capital Market for Inclusive Economic Growth Joseph Massey, CA. A. P. Singh, CA. Arun Jagatramka,
Mr. Ravinder Kumar* & Other eminent dignitaries

Fees: R1,500/-

For Registration and Further Details

Deputy Secretary, EIRC of ICAI, ICAI Bhawan, 7, Anandilal Poddar Sarani (Russell Street), Kolkata – 700 071.
: 033- 30211132/ 33/04 : eircevents@icai.in
Cheque should be drawn in favour of “The Institute of Chartered Accountants of India, EIRC”

*To be Confirmed

september 2010 THE CHARTERED ACCOUNTANT 149

 EVENTS 526

CPE

15
Hours
HRST-I: Hyderabad Residential Service Tax – Intensive

Organised by: Indirect Taxes Committee of ICAI

Hosted by: Hyderabad Branch of Southern India Regional Council of ICAI

Date & Time Venue

October 22, 23 & 24, 2010 [Friday, Centre of Excellence, Gachibowli, Hyderabad
Saturday, Sunday]
The Programme will commence at 1:00 pm on Octo-
ber 22, and conclude at 2:30 pm on October 24.

Theme
In-depth Examination of Some Major Issues in Service Tax: An Analytical and Interactive Approach
The Workshop aims to have a threadbare analysis of few service tax provisions as also deliberations on complex issues
arising in taxable services through interactive modes like case studies and group discussions to be guided by the experts in
the field.
Participants are expected to have basic knowledge of service tax law.
Topics to be Discussed Speakers
Methods to Maximize CENVAT Credit CA. Ashok Batra
Case Study on Reply to Department Audit Note CA. Ashok Batra
Classification of Taxable Services – Practical Issues CA. P. Rajendra Kumar

Legal Aspects relevant to Service Tax Shri K. S. Ravishankar, Advocate

Case Study on Legal Aspects Moderated by: Shri K. S. Ravishankar, Advocate
Led by: CA. Rajesh Kumar T.R.
Case Study on Classification - Pharmaceutical Research Moderated by: CA. A. R. Krishnan
Led by: CA. Rajiv J. Luthia
Renting of Immovable Property Service and Construction CA. A. R. Krishnan
Services – Practical Issues
Case Study on Proportionate Credit Mechanism Shri K. Vaitheeswaran, Advocate
Case Study on Reply to Show Cause Notice in respect of Shri K. Vaitheeswaran, Advocate
CENVAT credit by a Goods Transport Agency Led by: CA. Deepak Jain

Import of Services – Practical Issues CA. S. Thirumalai

Fees
• R6,000 per residential participant (inclusive of stay cost, breakfast, lunch and dinner) on twin sharing basis
• R4,000 per non-residential participant (inclusive of breakfast and lunch)
Cheques/demand drafts should be made in favour of “Hyderabad Branch of SIRC of ICAI” payable at Hyderabad. Please
also mention your name, membership number and contact details at the back of the cheque/demand draft.
Outstation registration limited to 50 Local registration limited to 10

For Registration and Further Details

: 040-2339 3182 : hyderabad@icai.org
The detailed announcement will be hosted on the website www.icai.org shortly.

150 THE CHARTERED ACCOUNTANT september 2010

537 Backpage

september 2010 THE CHARTERED ACCOUNTANT 161

 527 INDEX

Index of Volume 58 [July, 2009 to June, 2010] of

The Chartered Accountant*
21st COUNCIL PHOTO, 1389 Intangible Assets of Selected
IT Companies in India - Dr. P. K.
A WOMAN – CA. Shweta Rathore and Sangita Prajapati,
Dhaka, 43 1766
• Changing over to Accrual
ACKNOWLEDGEMENT System of Accounting by
• Still Vigilant Members from Central Autonomous Bodies &
Vintage Times, 63 Central Universities - Mr. B. S.
Ramaswamy and Dr. A. M. Sherry,
ACCOUNTANT’S BROWSER, 1775
142, 285, 459, 662, 804, 984, • Agriculture and IFRS: Application
1166, 1308, 1490, 1684, 1876, Review of IAS 41-Agriculture (The
2039 Fair Value…) - CA. Sunil Kumar
Beria, 1783
ACCOUNTING • Financial Instruments: Recognition
• See under heading “Article” & Measurement Under the IFRS
Framework - CA. Anurag Singal,
ACCOUNTING STANDARDS 1790
• See under headings “Exposure • Improvements and Developments
Drafts” and “Standards” to IFRSs - CA. (Dr.) A. L. Saini,
1942
ARTICLE • IFRS 3 - Business Combination:
ACCOUNTING An Overview - CA. Bhupendra
• Accounting for Intangible Assets Mantri, 1955
and Depreciation in India – Dr. • IFRS in Real Estate – A Technical
Pradeep Kumar Singh, 424 Area More than Just Accounting
• Recognition of Cost and Revenue & Reporting - CA. Sunil Kumar
of Computer Software – Mr. S. P. Beria, 1963
Dhandayuthapani, 592
• Intellectual Capital Reporting- AUDITING
An Overview, CA. (Dr.) Shital • Fraud Investigation – An Overview,
Jhunjhunwala, 742 CA. Jaydeep Singh Chopra 749
• IFRS for SMEs in Indian Scenario • Intangible Assets - An Advent
Simplification of IFRS Application - to Internal Audit - CA. Arpinder
CA. Bhupendra Mantri, 914 Singh, 924
• IFRS for SMEs - Step Towards - • Valuation Audit under Central
CA. (Dr.) A. L. Saini, 920 Excise Act, 1944 - CA. Ravi
• Role of Internal Auditors in Holani, 1471
Transition to IFRS - CA. Santosh • Internal/Concurrent Audit of
Khandelwal, 1248 Investment Functions of Insurance
• Forensic Accounting: Process and Companies - Committee on
Scope - Dr. R. Parameswaran, Banking, Insurance and Pension,
1251 1974
• Accounting for and Issue related • An Index to the Audit of
to Priliminary/Share Issue Educational Institutions - CA. S. S.
Expenses – CA. Kevin Daftary, Subramanian, 1978
1643
• IPSAS: Harmonising Government BANKING AND FINANCE
Accounting with Commercial • Economic Melt-down and Impact
Accounting - CA. G. Srinivas, on India - Prof. Atul Sharma, 47
1758 • Conservation of Capital Invest-
• Reporting and Disclosure of ments Through Depreciation with
*
No(s) in italic after each entry denotes page no(s)
Special Reference to SSI Units,
CA. J. P. Singh and A. P. Singh, 127
• Role of Chartered Accountants in
Banking Sector – CA. Anuj Goyal,
279
• M&A Deal Documents and Certain
Key Deal Convenants – CA.
Shantanu Neogi, 448
• Earned Value Analysis for Projects
– C. R. Venkataramani, 635
• Electronic Payments and
e-Banking in India: An Overview –
CA. Lavanya Gupta, 783
• Valuation Practices in Emerging
Markets: Issues Involved in
Various Areas - Ms. Richa Dani,
1134
• Leveraging Activity-Based Costing
to Enhance Enterprise Value - CA.
Shubha Subramanian, 1140
• Currency Futures: An Insight - CA.
Suparna Mazumdar, 1145
• Broadening Access to Finance:
New Dimensions of Development
Banking in India - Dr. Manoj Pillai,
966
• Evolving Take-Out Finance
Scheme - A Funding Device
for Infrastructure Projects - CA.
Shailendra Sharma, 1300
• Money Laundering and Financing
of Terrorism – A Study on Methods
to Fight Money Laundering in
India & USA - Dr. Anuradha
Gupta, 1650
• Behavioural Finance: A Road Less
Travelled - Prof. S. S. Khanka,
1658
• Financial Stability and Develop-
ment Council - CA. Srinivas
Yanamandra, 1839
• Private Equity - An Overview - CA.
Nishant K. Patel, 1843
• Global Economic Crisis
and Innovative Cost-Control
Techniques: An Assessment - Dr.
Pradeep Kumar Singh, 2019
BANK AUDIT
• Audit of Investments in a Bank’s
Treasury - CA. Akeel Master and
CA. Ashwin Suvarna, 1427

september 2010 THE CHARTERED ACCOUNTANT 151

 INDEX
• Application of Principles of
Materiality in Bank Audit - CA. H.
Anil Kumar, 1432
• An Overview of Bank Branch Audit
- CA. Abhijit Sanzgiri, 1441
• Conducting Statutory Branch
Audit in CBS Environment: An
Approach - CA. Ishwar Chandra,
1447
• Long Form Audit Report in Case
of Bank Branches - CA. Ajay Kr.
Jain, 1452
CORPORATE AND ALLIED LAWS
• Independent Directors – Liable for
Crimes for Companies – CA. Anup
P. Shah, 115
• Social Security for Unorganised
Sector- New Pension Scheme –
CA. V. K. Gupta & Dr. Anuradha
Gupta, 628
• ‘Employee’ - A Confusing Term
Under Employee Provident Fund
Act, 1952 – Mr. S.M. Jain, 780
• Reverse Mortgage: A Walking
Stick at Old Age - CA. Barkha
Jindal, 1112
• Changing Spectrum of the Social
Security Law in India - CA. Parizad
Sirwalla, 1118
• Limited Liability Act: Plethora of
Penalties - CA Chandra Shekar,
1290
• Available Rights and Benefits
to Micro, Small and Medium
Enterprises - CA. Nelatur
Syamasundaran, 1668
• How will You Will? - S. M. Jain,
1821
• Inspection under Section 209A
of Companies Act 1956: Ways to
Overcome Perils of Inspection - G.
S. Bhabhra, 1824
• Intellectual Property League:
Importance of IP in Indian
Premiere League - Rodney D.
Ryder and Suryakant Kashyap,
1831
• Inter Corporate Loans and
Advances - CA. S. Nirupama, 2010
• Right to Information Act - An
Overview - Abhay Kumar Sethia,
2014
CORPORATE GOVERNANCE
• Corporate Governance - Rahul
Bajaj, 44
• Corporate Governance: Points to
152 THE CHARTERED ACCOUNTANT september 2010
Ponder - Rakesh Mohan, 946
• Corporate Governance in Central
Public Sector Enterprises - Mr.
K. P. Sasidharan and CA. R. K.
Yadav, 1284
DIAMOND JUBILEE SPECIAL
• Role of Chartered Accountants in
Booming Insurance Sector in India
- J. Hari Narayan, 40
• Corporate Governance - Rahul
Bajaj, 44
• Economic Melt-down and Impact
on India - Prof. Atul Sharma, 47
• Public Accountability of Public
Enterprises: C&AG’s Oversight
Role - K. P. Sasidharan, 51
• Climate Change - The Challenges
Before India - Dr. Sanjay
Tomar, 61
ENTERPRISE RESOURCE
PLANNING (ERP)
• Enterprise Resource Planning
SAP: An Overview - CA. Vairavan
Sitambaram, 1673
ENTERPRISE RISK
MANAGEMENT
• The Global Demand for Enterprise
Risk Managers and the Emergence
of the Risk Intelligent Entity – CA.
Deepak Wadhawan, 796
FOREIGN TRADE
• DFIS Holders - Sufferers or
Winners - CA. Pradeep Jain, 974
GENERAL
• Public Accountability of Public
Enterprises: C&AG’s Oversight
Role - K. P. Sasidharan, 51
• Climate Change - The Challenges
Before India - Dr. Sanjay Tomar,
61
• Chief Experience Officer (CExO) –
CA. Sunil Gandhi, 476
• Time Management for
Working People - CA. Sujatha
Padmanabhan, 1180
• Vipassana Meditation - A Master
Tool for Life Balance - CA. Pramod
Jain, 1320
GLOBAL PERSPECTIVE
• A Journey from India to UK-Let the
Wisdom Prevail – CA. Shahwati
Majumdar Wilkiinson, 123
528
HEALTH
• Health Tips - CA. R. S. Agarwal,
162, 316, 475, 697, 847, 1025,
1184, 1318
• Health for Chartered Accountants
– CA. Sanjay Manohar Kshirsagar,
163,
• Women Health - Home Cure and
Yogic Techniques - CA. R. S.
Agrawal, 1184
• Nature’s Panacea to Human
Being - CA. R. S. Agarwal,
1025
• High Blood Cholesterol: Its
Symptoms, Causes and Means of
General Care - CA. R. S. Agarwal,
131
• Vipassana Meditation - A Master
Tool for Life Life Balance - CA.
Pramod Jain, 1320
IFRS
• IFRS for SMEs in Indian Scenario
Simplification of IFRS Application -
CA. Bhupendra Mantri, 914
• IFRS for SMEs - Step Towards -
CA. (Dr.) A. L. Saini, 920
• Role of Internal Auditors in
Transition to IFRS - CA. Santosh
Khandelwal, 1248
• Agriculture and IFRS: Application
Review of IAS 41-Agriculture (The
Fair Value…) - CA. Sunil Kumar
Beria, 1783
• Financial Instruments: Recognition
& Measurement Under the IFRS
Framework - CA. Anurag Singal,
1790
• Improvements and Developments
to IFRSs - CA. (Dr.) A. L. Saini, 1942
• IFRS 3 - Business Combination:
An Overview - CA. Bhupendra
Mantri, 1955
• IFRS in Real Estate – A Technical
Area More than Just Accounting
& Reporting - CA. Sunil Kumar
Beria, 1963
INDUSTRY – SPECIFIC
• Implementation of ERP in Power
Generation Companies - CA. A. B.
L. Srivastava, 960
INFORMATION TECHNOLOGY
• Sensitivity Analysis with MS-
Excel – Data Table and Scenario
Manager – CA. Liyakatali G. Lal,
646
 529
• XBRL - A Great Boon to Financial
Reporting - CA. Jayshree Nara-
yanan, 1295
INSURANCE
• Role of Chartered Accountants in
Booming Insurance Sector in India
- J. Hari Narayan, 40
• Accounting Professionals:
Issues in Professional Indemnity
Insurance - CA. Amresh Vashisht,
1482
• Way to a Peaceful Secured
Life: Right Financial Planning
through Life Insurance - CA.
Ramakrishnan Venkataraman,
2030
INTERNATIONAL TAXATION
• Triangular Cases Involving
Payments of Interest by a Dual
Resident Corporation and Its
Implication under Tax Treaties -
CA. Rashmi Lodha, 1128
• Section 206AA of Income-tax Act,
1961 – Whether a Nightmare for
Non-Residents? - Committee on
International Taxation of the ICAI,
1796
• Cross-Border Movement of
Personnel – Service PE Issues
- Committee on International
Taxation of the ICAI, 1983
KNOW YOUR FUTURE
• This Month for You - Puja Mathur,
176, 356, 537, 700, 850, 1028,
1187, 1326
LIMITED LIABILITY
PARTNERSHIP
• Limited Liability Partnership-
Concept, Law and Taxation Issues
– CA. Ketan Dave & CA. Sudin
Sabnis, 251
• Limited Liability Partnership Act,
2008: A User’s Perspective – CA.
Anil Kumar Agarwal & CA. Anurag
Singal, 260
• Conversion to Limited Liability
Partnership – CA. Anand Pagaria,
266
• Audit of Limited Liability
Partnerships – CA. Milan Hazra,
271
• Winging Up and Dissolution of
LLP – CA. (Dr.) A.L. Saini, 275
• Limited Liability Act: Plethora of
Penalties - CA Chandra Shekar,
1290
• Proposals for Change in
Conversion to LLP and MAT - CA.
Chandrashekhar V. Chitale, 1618
• Limited Liability Act: Plethora of
Penalties - CA Chandra Shekar,
1290
• Proposals for Change in
Conversion to LLP and MAT - CA.
Chandrashekhar V. Chitale, 1618
MANAGEMENT
• Analysis of Business Distress
Prediction - CA. Hitesh B.
Agarwal, 132
• Feasibility Study—A Widening
Approach – CA. Anjusha Gupta,
454
• Appraisal of Business
Performance: A Financial
Perspective – CA. (Dr.) Nikhil
Zaveri & Dr. Subhash M. Joshi,
639
• Shared Service – A Journey to
Excellence – CA. Sandhya Sriram,
1149
MARKETING
• Role of Branding in Business
Value Proposition - Dr. B. K.
Mohanty, 1847
NATION BUILDING
• Profession and Politics: A Review
- CA. Kailash Kumar Gadhvi, 957
PROFESSIONAL OPPORTUNITY
• Role of Chartered Accountants in
Banking Sector – CA. Anuj Goyal,
279
• Finacial Modelling: An Opportunity
for CAs – CA. Anurag Singal, 773
PROFESSIONAL AVENUE
• How to Become CPA-USA - CA.
Sudhir Kumar Shukla, 953
TAXATION
• Section 69B vs. Section 50C of
the Income Tax Act – An analytical
Study – CA. S. C. Jain, 103
• Refund of Service Tax for
Exporters of Goods – Provisions
at a glance – CA. Deepak Kalani,
107
• New Provisions for Taxation of
Gifts – CA. G. Ramaswamy, 236
september 2010
INDEX
• Service Tax Perspective – CA. A.
K. Batra, 239
• Indirect Taxation – An Analysis –
CA. Madhukar N. Hiregange, 247
• Taxation Aspects of Film Producer
– CA. Hemraj S. Joshi, 431
• TDS/TCS Compliances/ITRs
Filing–An Overview – CA. Mahesh
Agarwal, 438
• Taxability of Principal Amount of
Loan Waived Under One Time
Settlement Scheme (O.T.S) – CA.
R. Sreenivasan, 443
• Interest Allowable on Capital
Borrowed –An Interesting Thought
– CA. Sailendra Sharma, 600
• Valuation of Taxable Service Under
Works Contract Composition
Scheme –Effect of Amendments –
CA. S. Ranga Swamy, 607
• Preparing for Goods & Service Tax
– CA. R.S. Bhatt, 613
• Rate of Taxes, Tax Deducted at
Source & New Pension Scheme in
Direct Taxes Code Bill, 2009 – CA.
Vimal Punmiya, 623
• Housing Projects and Recent
Special Bench Decision – CA.
Vardhaman L. Jain, 759
• Special Provisions for Taxation of
Co-operative/Other Banks – CA.
Darshan Jain, 764
• Amendment to Definition of ‘Book
Profits’ in Sections 115JA & 115JB
by Finance (No. 2) Act, 2009 -
Impact on Banks - CA. Dharini
Shah, 1122
• Treatment of Interest on Borrowings
in Financial Accounting and
Income Tax - CA. (Prof.) Ramu
Krishnamurthi, 936
• Issues in Relation to Section 2(22)
(e) of the Income-tax Act, 1961 -
CA. Krish Bhikhalal Desai, 942
• Double Taxation in Indirect Tax
Law - Analysing the Challenge
Through the SIM Card Case Study
- Vatsal Gaur, 930
• Capital vs. Revenue Expenditure
- A Journey to Unending
Controversy - CA. Manoj Gupta,
1257
• Electoral Trust - CA. Aadesh
Kumar Agarwal, 1264
• No Discretion is Available Under
Section 80 of Finance Act, 1994 to
Impose Lesser Penality - CA. M.
Govindarajan, 1268
THE CHARTERED ACCOUNTANT 153
 INDEX
• Business Auxiliary vs. Support
Services - Similarities and
Differences - CA. Deepak Kalani,
1273
• Taxation Aspects of Trading in
Currency Derivatives - CA. S. B.
Gupta, 1277
• Service Tax Proposals under the
Finance Bill, 2010 - CA. Ravi
Holani, 1628
• Analysis of Latest Changes
Effected in CENVAT Rules in
Finance Bill, 2010 - CA. Ashok
Batra, 1635
• Expanded Scope of Construction
Services - CA. Tushar K. Doctor,
1640
• Taxability Under Central Sales
Tax Act on Interstate Transfer of
Goods for Job Work - CA. Sanjay
K. Agarwal, 1646
• Depreciation for Infrastructure
Companies - Shantanu J. Pendse,
1802
• Can Government Retain MAT
Credit after Expiry of Period
Laid Down in Section 115JAA
of Income-tax Act, 1961? - CA.
Raghubir Singh, 1808
• Taxation of Services Received
from Outside of India: Import
of Services - CA. (Dr.) Sanjiv
Agarwal, 1811
• Section 192, TDS: Salaries
Payable Outside India - CA.
Tushar Gandhi, 1990
• Beat the VAT; Say ‘Fryum’ is
Papad - Nelatur Syamasundaran,
1996
• Royalty and Fees for Technical
Services: Treatment in DTAAs and
the Indian Income-tax Act, 1961 -
CA. Adarsh Ramanujan, 1999
UNION BUDGET
Budget 2009-2010:
• Salient Features of the Finance
(No. 2) Bill, 2009 - Direct Taxes -
CA. Ved Jain, 223
• New Provisions for Taxation of
Gifts – CA. G Ramaswamy, 236
• Service Tax Perspective – CA. A.K.
Batra, 239
• Indirect Taxation – An Analysis –
CA. Madhukar N. Hiregange, 247
Budget 2010-11:
• Salient Features of Finance Bill,
154 THE CHARTERED ACCOUNTANT september 2010
2010 - CA. Ved Jain, 1602
• User-Friendly Proposals in the
Union Budget - CA. T. Banusekar,
1614
• Proposals for Change in
Conversion to LLP and MAT - CA.
Chandrashekhar V. Chitale, 1618
• Issues on Amendments in
Deductions by Finance Bill, 2010 -
CA. Barun Kumar Ghosh, 1622
• Service Tax Proposals under the
Finance Bill, 2010 - CA. Ravi
Holani, 1628
• Analysis of Latest Changes
Effected in CENVAT Rules in
Finance Bill, 2010 - CA. Ashok
Batra, 1635
• Expanded Scope of Construction
Services - CA. Tushar K. Doctor,
1640
VASTU SHASTRA
• Placement of Main Gate, Kitchen
and Sitting Room - Kashyap Nitin
Pathak, 174
• Position and Placement of
Bedroom - Kashyap Nitin Pathak,
354
• It’s Time to Think About the
Almighty! - Kashyap Nitin Pathak,
535
• Placement of Study Room -
Kashyap Nitin Pathak, 698
• Significance of Water in Vastu
Shastra - Kashyap Nitin Pathak,
848
• A Chartered Accountant’s Office -
Kashyap Nitin Pathak, 1026
• A Manufacturing Unit - Kashyap
Nitin Pathak, 1185
• Planets and the Industry or
Business they Represent -
Kashyap Nitin Pathak, 1324
WOMEN & CAREER
• Gender Inclusivity and
Opportunities at Workplace – CA.
Gargi Ray, 652
WOMEN AND PROFESSION
• Women Steering Group - ICAI’s
Futuristic Initiative for Women
Empowerment - CA. Priya
Bhansali, 1074
• Women Empowerment - Envision
a Future - Dr. Anuradha Gupta,
1078
• Empowerment of Women: India’s
530
Imperatives - CA. (Dr.) Geeta Das,
1087
• Embracing Womanhood - CA.
Jessika Arora, 1094
• Ways to Balance Work and Family
Life - CA. Ishita Bose, 1098
• Changing Roles of Women - An
Overview into the Perception of
Women Over Time in India - CA.
Rushoti Roy, 1102
• God Lives There Where Women
are to be Worshipped - Gender
Viewpoint - Dr. Vidhi Agarwal,
1106
WTO
• Regional Trade Agreements: Road
Ahead for Agricultural Sector –
CA. Rajay Kumar Aggarwal, 790
XBRL
• XBRL-Unleashing the Accounting
Codes – CA. T.V. Mohandas Pai &
CA. Gargi Ray, 400
• XBRL to Revolutionise Financial
Reporting and Analysis Globally –
CA. Oliver Servais, 406
• eXtensible Business Reporting
Language- An Overview –
Navneet Saxena, 409
• XBRL- A Dynamic Tool For
Financial Reporting – CA. Anurag
Singal, 417
• XBRL - A Great Boon to Financial
Reporting - CA. Jayshree
Narayanan, 1295
AUDITING
• See under heading “Article”
AUDITING STANDARDS
• See under headings “Exposure
Drafts” and “Standards”
BACK PAGE
• Crossword, Smile Please, 177,
357, 538, 701, 866, 873, 1092,
1193, 1372, 1554, 1717, 1898,
2061
BANK AUDIT
• See under heading “Article”
BANKING AND FINANCE
• See under heading “Article”
BEHAVIOURAL FINANCE
• See under heading “Article”
 531
BOOK REVIEW
• ‘International Accounting’ – A
Useful Book for Students as well
as Professionals, 1491
• A Complete Guide on Issues of
Income Tax & Wealth Tax,
1492
• Role of Branding in Business
Value Proposition, 1855
BUSINESS AUXILIARY
SERVICE
• See under heading “Article”
CABF DONORS, 1734, 2053
CAREER WATCH, 574, 1691,
1870
CHIEF EXPERIENCE OFFICER
(CEXO)
• See under heading “Article”
CIRCULARS AND
NOTIFICATIONS
• See under heading “Legal
Update”
• Suggested List of Relevant RBI
Circulars, 1468
Classifieds, 139, 301, 378, 696,
849, 1024, 1177, 1316, 1500, 1687,
2053
• See also under heading “ICAI
News”
CLIMATE CHANGE
• See under heading “Article”
COMPUTE SOFTWARE
• See under heading “Article”
CONSTRUCTION SERVICES
• See under heading “Article”
CO-OPERATIVE/OTHER
BANKS
• See under heading “Article”
CORPORATE & ALLIED LAWS
• See under heading “Article”
CORPORATE GOVERNANCE
• See under heading “Article”
CPA-USA
• See under heading “Article”
CROSSWORD
- See under heading “Back Page”
CURRENCY FUTURES
• See under heading “Article”
DIAMOND JUBILEE
CELEBRATIONS
• ICAI Diamond Jubilee
Celebrations: A Glimpse, 77
• See under headings “Article” and
“ICAI News”
DIAMOND JUBILEE SPECIAL
• See under heading “Article”
DISCIPLINARY CASE
• See under heading “Legal Update”
EAC OPINION
• Provision for LTC benefits
provided to employees, 136
• Value of Material in Transit,
221
• Accounting for expenditure
incurred on evacuation of
accumulated ash in the ash dyke,
398
• Classification of compulsorily
convertible debentures in the
balance sheet as equity-whether
appropriate, 590
• Revenue recognition from sale of
WEGs, and providing Installation,
Commissioning and other related
services, 739
• Determination of Current
Liabilities, 911
• Whether a company registered
under section 25 of the
Companies Act, 1956 should
prepare income and expenditure
account or profit and loss
account, 1072
• Accounting for foreign exchange
variation prior to commencement
of commercial operation, 1248
• Treatment of preliminary expenses
incurred on incorporation of a
company, 1424
• Discloser in cash flow statement
of borrowings and loan disburse-
ments and related repayments in
case of a financial institution,
1599
• Virtual certainty in respect of
deferred tax assets, 1755
• Capitalisation of expenditures
september 2010
INDEX
in respect of projects under
construction, 1937
ECONOMIC UPDATE, 135, 284,
458, 661, 803, 983, 1165, 1306, 1489,
1679, 1878, 2038
EDITORIAL
• A Journey of Excellence, 3
• Limited Liability Partnership, 183
• Challenges Before Indian
Economy, 363
• India Boosts Global Economic
Recovery, 543
• IFRS for Small and Medium-Sized
Entities, 707
• Goods and Services Tax, 871
• Empowering Women – The Road
Ahead, 1035
• Indian Trusts (Amendment) Bill,
2009, 1199
• Meeting the Challenge of Bank
Audit, 1379
• Union Budget 2010-11, 1559
• Government Accounting, 1723
• IFRS Convergence and India,
1903
E-LEARNING ON IFRS, 314
ELECTIONS
• Election to 21st Council and 20th
Regional Councils, 83
• Election - 2009
1. Election to Twenty First
Council and Twentieth
Regional Councils, 306
2. Election Code of Conduct,
673
3. Election 2009 Notifications,
678
ELECTORAL TRUST
• See under heading “Article”
ENTERPRISE RESOURCE
PLANNING (ERP)
• See under heading “Article”
ENTERPRISE RISK
MANAGEMENT
• See under heading “Article”
E-SAHAAYATAA
• See under heading “ICAI News”
Events, 156, 309, 312, 378, 663,
810, 993, 1856, 2055
THE CHARTERED ACCOUNTANT 155
 INDEX
EXPOSURE DRAFTS
ACCOUNTING STANDARD
• Accounting Standard 1 (Revised
20XX) (Corresponding to IAS
1) Presentation of Financial
Statements, 317
• Accounting Standard for Local
Bodies (ASLB)5, 683
• Accounting Standard for Local
Bodies (ASLB) 6, 693
• Accounting Standards 25
(Revised 20XX)1 (Corresponding
to IAS 34), 999
• Accounting Standard (AS) 4
(Revised 20XX) (Corresponding to
IAS 10), Events After the Reporting
Period, 1188
AUDITING STANDARD
• Invitation to comments on the
Exposure Draft of Standard on
Internal Audit(SIA), Consideration
of Laws and Regulations in an
Internal Audit., 168
• Standard on Auditing (SA) 320
(Revised): Materiaility in Planning
and Performing an Audit, 335
• Standard on Auditing (SA) 402
(Revised): Audit Consideration
relating to an Entity Using a
Service Organisation, 339
• Standard on Auditing (SA) 450:
Evaluation of Misstatement
Identified During the Audit,
347
• Standard on Auditing (SA) 610
(Revised) : Using the work of
Internal Auditors, 351
• Standard on Auditing (SA) 200
(Revised), 481
• Standard On Auditing (SA)710
(Revised), 493
• Standard On Auditing (SA) 800,
498
• Standard On Auditing (SA) 805
(Revised): Special Considerations
- Audits of Financial Statements
Prepared in accordance with
Special Purpose Frameworks, 498
• Standard On Auditing (SA) 810:
Engagements to Report on
Summary Financial Statements,
508
• Standard on Auditing (SA) 220
(Revised): Quality Control for an
Audit of Financial Statements,
820
156 THE CHARTERED ACCOUNTANT september 2010
• Standard on Auditing (SA) 501
(Revised): Audit Evidence-Specific
Considerations for Selected Items,
826
• Standard on Auditing (SA) 520
(Revised): Analytical Procedures,
830
• Standard on Auditing (SA) 505
(Revised): External Confirmations,
834
• Standard on Auditing (SA) 620
(Revised): Using the Work of an
Auditors Expert, 840
STANDARD ON ASSURANCE
ENGAGEMENTS
• Standard on Assurance
Engagements (SAE) 3000
Assurance Engagements other
than Audits or Reviews of
Historical Financial Information,
1546
STANDARD ON REVIEW
ENGAGEMENTS
• Standard on Review
Engagements (SRE) 2410 Interim
Financial Reporting Review of
Interim Financial Information
Performed by the Independent
Auditor of the Entity, 1010
FILM PRODUCER
• See under heading “Article”
FINANCIAL INSTRUMENTS
• See under heading “Article”
FINACIAL MODELLING
• See under heading “Article”
FLASHBACK
• ICAI Diamond Jubilee
Celebrations: A Glimpse, 77
FOREIGN TRADE
• See under heading “Article”
FORENSIC ACCOUNTING
• See under heading “Article”
FRAUD INVESTIGATION
• See under heading “Article”
FROM THE PRESIDENT, 6, 186,
366, 546, 710, 874, 1038, 1202, 1384,
1562, 1726, 1906
532
FROM THE VICE PRESIDENT, 12
GENERAL
• See under heading “Article”
GLOBAL ECONOMIC CRISIS
• See under heading “Article”
GLOBAL PERSPECTIVE
• See under heading “Article”
GOODS AND SERVICE TAX
• See under heading “Article”
HEALTH
• See under heading “Article”
ICAI ACHIEVEMENTS
• Information Technology, 1212
• Infrastructure, 1231
• Going Global, 1234
• Partner in Nation Building, 1237
• Professional Opportunities, 1239
• Student Services, 1242
• Research Activities, 1245
ICAI COMMITTEES 2010–11,
1493
ICAI’s CORPORATE
CONCLAVE, 1167
ICAI Corporate Forum,
805, 996
ICAI HEADQUARTERS, 67
ICAI Initiatives
• ICAI Green Initiative, 461
• ICAI’s Initiatives & Activities- A
Report, 556
ICAI Job Portal, 295, 598, 2052
ICAI NEWS
• Diamond Jubilee Celebrations, 82
• ICAI Congratulates Shri Salman
Khurshid, 85
• Invitation for Research Proposals,
145
• New Publication from Research
Committee, 146
• E-learning-CBT Training Modules,
146
• Empanelment of faculty members
for training CA Students for the
Examination, 147
 533
• Members Practicing in Individual
name, 147
• An Appeal Re: Ensuring effective
practical training, 148
• Online Facilities on Institute
Website-An Overview, 149
• Member’s Identity Card, 149
• Secondment of Articles [Regulation
54, Para 2.11 of Training guide],
150
• Membership and Certifiacte of
Practice Fee for the year 2009-
2010, 151
• ERP Courses on SAP FA & MA
Modules & Microsoft Dynamics
NAV, 151
• Announcement regarding working
hours of the Articled Assistants,
152
• New Pubilcation from Committee
on Trade Laws and WTO, 153
• Important Council Decisions-
Transfer of Articles, 154
• Announcement (for Mandatory
Compliance)- Indian CA firms
having affiliation with International
entities/network, 155
• Issuance of Exposure Draft of
Accounting Standard 16(revised),
155
• Non-Banking Financial Companies
Auditor’s Report (Reserve Bank)
Directions, 2008, 288
• Formation of CPE Study Circles
for Members in Industry, 291
• Questionnaire on Capacity
Building Measures for CA Firms &
Members, 292
• ICAI Job Portal, 295, 598,
• Transfer/Termination of Articleship,
[Regulation 56 (1)], 296
• Announcement from Committee
on Public Finance, 296
• Invitation for Research Proposals,
298
• New Publications, 299
• Vapi Branch Notification , 300
• BU-ICAI Joint Education
Programme, 301
• Classifieds, 301
• Certificate Course on ERM at
Mumbai, 302
• Campus Placement Programme
for Newly Qualified Chartered
Accountants, 303
• Request to Contribute Articles on
XBRL, 304
• ERP Courses on SAP FA & MA
Modules & Microsoft Dynamics
NAV, 305
• Empanelment of Members to Act
as Co-ordinators/Observers in the
CA Examination Centres, 305
• Election – 2009 , See under
heading “Election-2009”
• Important Announcement
–Next Chartered Accountant
Examinations, 308
• Payment of Annual Membership/
Certificate of Practice Fee for the
Year 2009-10, 308
• ICAI Awards for Excellence in
Financial Reporting , 464
• Amendment to SQC 1 -Retention
Period for Engagement Docum-
entation (Working Papers), 466
• Launch of ISA Course e-Learning,
466
• Recent ICAI e-Initiatives, 467
• Formation of Industry Specific
Groups of Members in Industry,
468
• Invitation for Research Proposals,
469
• Campus Placement Programme
for Newly Qualified Chartered
Accountants - August-September,
2009, 470
• Empanelment of Resource
Persons to act as Faculty, 471
• New Publications, 472
• For Kind Attention of all Members
of the Chartered Accountants
Benevolent Fund, 473
• For Kind Attention of all Members
of the S. Vaidyanath Aiyar
Memorial Fund, 473
• Invitation for Expression of
Interest, 474
• Empanelment of Resource
Persons in CASLB, 514
• Empanelment of Resource
Persons in CGA, 526
• Using CAATS/GAS & Using MS-
Excel 2007 as an Audit tool, 536
• Merger of Firms - Seniority/Firm
Name Issues, 571
• New Publications, 664
• Invitation to Join Panel of
Examiners, 668
• Scholarships from The S.
Vaidyanath Aiyar Memorial Fund,
668
• ERP Courses, 669
• Permission for Pursuing a Course
along Articleship, 670
september 2010
INDEX
• ICAI Awards for Excellence in
Financial Reporting, 671
• ICAI’s Corporate Conclave, 1167
• Invitation for Research Proposals,
672
• New Publications, 811
• Single Window Help Desk for
Chartered Accountants in Service/
Industry Relating to Membership
of ICAI, 812
• Form for Intimating the ICAI about
Engagements Accepted, 813
• Invitation for Expression of Interest
for Authoring Publications, 814
• Appeal to Contribute for Flood
Relief , 815
• CPE Study Circle for Members in
Industry of ICAI, 816
• Help Line Desk for November
2009 CA Examinations, 817
• ‘Women Empowerment’ –
Request to Contribute Articles,
817
• High Court of Delhi Directs to
Accord Exemption to ICAI-ARF
under Section 10(23)(c)(iv) of the
Income-tax Act,1961, 818
• Non Receipt of Policy Certificate
of “CABF Group Term Insurance
Scheme”, 818
• CFO Guild (Corporate
Accountants Guild) and Members
in Industry Guild, 986
• Single Window Help Desk for
Chartered Accountants in Service
/Industry, 986
• Invitation for Research Proposals,
987
• Empanelment of Chartered
Accountant Firms for the Year
2010-2011, 988
• Invitation for Faculty & Case
Studies for Post Qualification
Course on Information Systems
Audit, 989
• Popularising Brand CA in Gulf
Co-operation Council (GCC)
Countries, 989
• Registrations for Next Batch of
Certificate Course on Valuation, 990
• Exposure Draft of XBRL Banking
Taxonomy, 990
• Invitation For Research Proposals,
1170
• Placement Portal of ICAI, 1171
• New Publication, 1171
• Join Now for ISA Assessment Test
- June 2010, 1172
THE CHARTERED ACCOUNTANT 157
 INDEX
• Compilation of Firms Data as on
1st January, 2010, 1172
• Non-Receipt of Journal, 1172
• Empanelment of Chartered
Accountant Firms for the Year
2010-11, 1174
• Important Announcement on
Empanelment for theyear 2010-
11, 1174
• Request to Contribute in the
Journal, 1174
• Campus Placement Programme
for Newly Qualified Chartered
Accountants - February- March,
2010, 1176
• Invitation for Research Proposals,
1309
• Branch Notification, 1310
• Empanelment of Chartered
Accountant Firms for the Year
2010-11, 1310
• Breach of Regulation 65 & 78 -
Non submission of Form 112,
1312
• Announcement for the Attention of
the Members, 1312
• Publications by Committee on
Information Technology, 1313
• Election Notifications, 1314
• ICAI e- Learning, 1317
• New Releases, 1498
• New Publications, 1499
• Common Proficiency Test, June,
2010, 1501
• Chartered Accountants Exam-
inations, May, 2010, 1502
• Half Yearly Certificate from Statu-
tory Auditors of NBFCs, 1503
• Campus Placement Programme
for Newly Qualified Chartered
Accountants – March, 2010,
1504
• Branch Notifications, 1505
• Request to Contribute in the
Journal, 1535
• Last Date of Registration for
Post Qualification Course in
International Trade Laws &
WTO for November 2010 Part I
Examinations, 1685
• ERP Courses, 1685
• Announcement on Guidance Note
on Audit of Banks, 1686
• Queries Relating to Audit of Banks
and Bank Branches Relating to FY
2007-08, 1686
• Bank Audits for the FY ended
31.03.2010, 1686
158 THE CHARTERED ACCOUNTANT september 2010
• Important Announcement, 1687
• Classifieds, 1687
• Additional Disclosures by Banks
in Notes to Accounts, 1688
• Request of Proposals for
Development of Study Material,
1690
• Non-Receipt of Journal, 1690
• Multipurpose Empanelment Form
for the Year 2010-11, 1736
• Revised Syllabus and Background
Materials for the Post Qualification
Course on Information Systems
Audit (ISA), 1861
• Summer Placement Programme
– June, 2010 for experienced and
fresh Chartered Accountants, 1862
• Invitation to Join CFO Guild/
Members in Industry Guild, 1862
• Committee on Public Finance and
Government Accounting Invitation
to Contribute Articles, 1863
• Formation of CPE Study Circle for
Members in Industry of ICAI,
1863
• Invitation to Send Quotes for
Printing Work of the ICAI Journal,
The Chartered Accountant,
1864
• For The Attention Of Members
Membership and Certificate of
Practice Fee for the year 2010-
2011, 1865
• e-Learning - CBT Modules
by Committee on Information
Technology, ICAI, 1866
• Invitation for Empanelment of
Service Maintenance Agencies for
Placement Portal, 1867
• Corrigendum, 1867
• ICAI Job Portal (http://jobs4cas.
icai.org), 1868
• “e-Sahaayataa” - A New
Grievance Resolution Mechanism,
1918
• Advisory for Multipurpose
Empanelment Form (MEF) for the
year 2010-11, 2040
• Sample MEF 2010-11 for
Partnership Firm, 2041
• Invitation to Work as Resource
Persons & to Contribute Articles,
2045
• Expert Advisory Committee of
ICAI, 2045
• Implementation of Section 51A
of Unlawful Activities (Prevention)
Act, 1967, 2046
534
• Invitation to Join Panel of
Examiners/Paper-setters, 2046
• Invitation for Articles on XBRL, 2047
• New Publications from the Internal
Audit Standards Board
o Technical Guide on Internal
Audit of Construction Industry,
2048
o Technical Guide on Internal
Audit of Educational
Institutions, 2048
• New Publication from the
Research Committee
o Technical Guide on
Accounting for SEZs
Development Activities, 2049
• Special Placement Programme –
June, 2010, 2050
• Invitation for Empanelment of
Service Maintenance Agencies for
Placement Portal, 2050
• Invitation to join CFO Guild/
Members in Industry Guild, 2051
• Formation of CPE Study Circle for
Members in Industry of ICAI,
2051
• ICAI Job Portal (http://jobs4cas.
icai.org), 2052
• Classifieds 2053
• CABF Donors, 2053
• ‘Transfer Pricing’ eLearning
Course, 2053
• Articles Invited for Students’
Journal, Special Issue, 2054
• Corrigendum , 2054
IFRS
• See under heading “Article”
INDEX
Index of Volume 57(July, 2008 to June,
2009 of The Chartered Accountant,
851
INDUSTRY SPECIFIC
• See under heading “Article”
INFORMATION TECHNOLOGY
• See under heading “Article”
INFRASTRUCTURE
• ICAI Infrastructure Round up
- ICAI Head Office, 67
- Western Region, 68
- Southern Region, 70
- Eastern Region, 73
- Central Region, 74
- Northern Region, 76
 535
Infrastructure
Companies
• See under heading “Article”
INSURANCE
• See under heading “Article”
INTANGIBLE ASSETS
• See under heading “Article”
INTELLECTUAL CAPITAL
REPORTING
• See under heading “Article”
Internal Auditor
• See under heading “Article”
INTERNATIONAL TAXATION
• See under heading “Article”
INTERNATIONAL UPDATE, 141,
282, 461, 659, 802, 982, 1163, 1305,
1488, 1682, 1874, 2036
IPSAS
• See under heading “Article”
KNOW YOUR COMMITTEE
• Committee on Information
Technology, 143
• Expert Advisory Committee, 992
KNOW YOUR ETHICS, 192, 382,
572, 718, 890, 1052, 1216, 1246,
1406, 1572
KNOW YOUR FUTURE, 176, 356,
537, 700, 850, 1028, 1187, 1326
LIMITED LIABILITY
PARTNERSHIP
• See under heading “Article”
LEGAL UPDATE
• Circulars & Notification, 100, 216,
394, 584, 732, 904, 1066, 1228,
1420, 1468, 1592, 1750, 1934
• Disciplinary Case, 99, 220, 397,
589, 737, 910, 1065, 1230, 1424
• Legal Decisions, 384, 575, 720,
894, 1054, 1218, 1408, 1580,
1740, 1920
LEGENDS IN THE
ACCOUNTING TRADITION OF
INDIA: SERIES
• Shri K. S. Aiyar, 1854
• Shri Sorabji S. Engineer, 2033
MANAGEMENT
• See under heading “Article”
MAT Credit
• See under heading “Article”
MESSAGE, 14,
MONEY LAUNDERING
• See under heading “Article”
MS-Excel
• See under heading “Article
NATIONAL BUILDING
• See under heading “Article”
NATIONAL UPDATE, 140, 460,
657, 801, 981, 1161, 1307, 1487,
1680, 1872, 2034
NOSTALGIA, 38, 83
NOTIFICATIONS
• See under heading “Legal
Update”
OBITUARY
• Past President CA. Rahul Roy
Passes Away, 878
One Time Settlement
Scheme (O.T.S)
• See under heading “Article”
OUR NEW PRESIDENT, 1382
OUR NEW VICE-PRESIDENT,
1383
PATH BREAKING INITIATIVES,
372
PHOTOGRAPHS, 86, 194, 374,
554, 716, 882, 1046, 1207, 1389,
1390, 1570, 1736, 1914
PRACTICE UPDATE
• Enhancing Audit Quality,
138
• Non-Compliance with Reporting
Obligations, 979, 1158, 1871
Private Equity
• See under heading “Article”
september 2010
INDEX
PROFESSIONAL
OPPORTUNITY
• See under heading “Article”
PROFESSIONAL AVENUE
• See under heading “Article”
PROFILE
• New Secretary, MCA, 552
• Our New President, 1382
• Our New Vice-President, 1383
RBI Circulars, 1468
READERS WRITE, 190, 550,
714, 880, 1044, 1384, 1568, 1734,
1912
Real Estate
• See under heading “Article”
Regional Trade
Agreements
• See under heading “Article”
REPORTS
• ICAI Presidents Visit to Spain and
Poland Accompanying President
of India, 88
• Report on ICAI’s Africa Day
Celebrations, 90
• ICAI Delegation Visits Bahrain, 92
• Report on ICAI presidents visit to
London, 94
• Report on ICAI Delegation Visit to
Dubai, 96
• International Conference – “Winds
of Challenges – Global Strategies
for Accounting Profession”,
198
• ICAI Signs MoU with ICAA and
Joint Declarations with CGA-
Canada and BIBF, 208
• Report on ‘CA Day’ Celebrations
Coinciding with Diamond Jubilee
of the ICAI , 210
• ICAI Centre of Excellence at
Hyderabad Launched , 212
• Path Breaking Initiatives, 372
• Foundation Stone of ICAI’s CA.
Rameshwar Thakur Centre of
Excellence laid in Bangalore, a
report, 380
• ICAI Study Tour of Australia,
884
• ICAI Abu Dhabi Chapter Silver
Jubilee Function, 886, 888
THE CHARTERED ACCOUNTANT 159
 INDEX
• GCC Conference – A report,
1245
• Report on ICAI’s 60 Annual
Function, 1394
REVERSE MORTGAGE
• See under heading “Article”
REVIEW ENGAGEMENTS
• See under headings “Exposure
Drafts” and “Standards”
Right to Information Act
(RTI)
• See under heading “Article”
SERVICE TAX
• See under heading “Article”
SMILE PLEASE
• See under heading “Back Page”
SPECIAL ADDRESS
• Minister of Corporate Affairs Shri
Salman Khurshid, 1574
STANDARDS
ACCOUNTING STANDARDS
• Accounting Standard for Local
Bodies (ASLB) 5, 1358
• Accounting Standard for Local
Bodies (ASLB) 6, 1368
AUDITING STANDARDS
• Standards on Auditing (SA) 320
(Revised), 335
• Standards on Auditing (SA) 402
(Revised), 339
• Standards on Auditing (SA) 450,
347
• Standard on Auditing (SA)
610(Revised), 351
• Standards on Auditing (SA) 210
(Revised): Agreeing the terms of
Audit Engagements, 515
• Standard on Auditing (SA) 265:
Communicating Deficiencies in
Internal Control to Those Charges
with Governance and
Management, 527
• Standard on Auditing (SA) 700
(Revised), 1327
• Standard on Auditing (SA) 705,
1339
• Standard on Auditing (SA) 706
(Revised), 1349
160 THE CHARTERED ACCOUNTANT september 2010
• Standard on Internal Audit (SIA)
17, 1353
• Standard on Auditing (SA) 200
(Revised) Overall Objectives
of the Independent Auditor
and the Conduct of an Audit in
Accordance with Standards on
Auditing, 1508
• Standard on Auditing (SA) 220
(Revised) Quality Control for an
Audit of Financial Statements,
1521
• Standard on Auditing (SA)
501 (Revised) Audit Evidence
– Specific Considerations for
Selected Items, 1527
• Standard on Auditing (SA) 505
(Revised) External Confirmation,
1531
• Standard on Auditing (SA) 520
(Revised), Analytical Procedure,
1536
• Standard on Auditing (SA) 620
(Revised), Using the work of an
Auditor’s Expert, 1540
• Standard on Auditing (SA)
710 (Revised): Comparative
Information - Corresponding
Figures and Comparative
Financial Statements,
1693
• Standard on Auditing (SA) 800:
Special Considerations - Audits of
Financial Statements Prepared in
Accordance with Special Purpose
Frameworks, 1699
• Standard on Auditing (SA) 805:
Special Considerations - Audits of
Single Financial Statements and
Specific Elements, Accounts or
Items of a Financial Statement,
1703
• Standard on Auditing (SA) 810:
Engagements to Report on
Summary Financial Statements,
1709
REVIEW ENGAGEMENTS
• Standard on Review Engage-
ments (SRE) 2400 (Revised)*:
Engagements to Review Financial
Statements, 1879
• Standard on Review
Engagements (SRE) 2410: Review
of Interim Financial Information
Performed by the Independent
536
Auditor of the Entity, 1885
TAX AUDIT
• See under heading “Article”
TAX DEDUCTED AT SOURCE
(TDS)
• See under heading “Article”
TAXATION
• See under heading “Article”
TRADING IN CURRENCY
DERIVATIVES
• See under heading “Article”
TRUSTS
• See under heading “Article”
UNION BUDGET
• See under heading “Article”
VALUE ADDED TAX
• See under heading “Article”
VASTU SHASTRA
• See under heading “Article”
Vipassana Meditation
• See under heading “Article”
WEBCAST
• ICAI Webcast Channel , 286
WOMEN AND CAREER
• See under heading “Article”
WOMEN AND PROFESSION
• See under heading “Article”
Women Health
• See under heading “Article”
WOMEN STEERING GROUP
• See under heading “Article”
WORKS CONTRACT
• See under heading “Article”
WORKSHOPS, 214
WTO
• See under heading “Article”
XBRL
• See under heading “Article”n