Ultra-Vires of Rule 5 of Point of Taxation Rules, 2011
1. Levy Vs. Collection of Service Tax – Concept
1.1 In any taxing statute, the statutory provision imposing levy of tax (i.e. the charging section) is of foremost importance. The parliament has levied service tax by enacting the Finance Act, 1994 by deriving its powers under Entry 97 (residuary powers) of the List – I (Union List) of the Seventh Schedule of the Constitution of India. To provide further necessary legal backup, the Government introduced a new Article 268A in the Constitution in the year 2003 by Constitution (Eighty-eighth Amendment) Act, 2003, which provides that taxes on services shall be charged by Union of India and shall be appropriated by Union of India and the States. Simultaneously, a new Entry 92C which reads "Taxes on Services" was also introduced in the Union List for the levy of service tax. Here, one must understand that the levy of service tax is on provision of service and not on the person providing the service.
1.2 It is well settled law that levy of tax is one thing and collection thereof is quite different thing. Once the levy is attracted, the collection of tax may be at any different point/stage or event. For example, in case of central excise duty, the levy is on the 'manufacture or production of goods' while the collection of duty is postponed till the time of removal of excisable goods. The point of collection is normally determined as per the sake of administrative convenience by the rules made in this behalf.
1.3 The Hon'ble Supreme Court of India in the case of Collector of Central Excise, Hyderabad Vs. Vazir Sultan Tobacco Co. Ltd. [2002-TIOL-215-SC-CX-LB] dated 28-02-1996 has long ago settled the law on this contentious issue and held that:-
"Once the levy is not there at the time when the goods are manufactured or produced in India, it cannot be levied at the stage of removal of the said goods. The idea of collection at the stage of removal is devised for the sake of convenience. It is not as if the levy is at the stage of removal; it is only the collection that is done at the stage of removal. Section 3(1) of the Central Excise Act says: "(1) There shall be levied and collected in such manner as may be prescribed duties of excise on all excisable goods other than salt which are produced or manufactured in India…." [Para 5]…
It is evident that the words "in such manner as may be prescribed" qualify the word "collected" and not the word "levied". While the levy is created by Section 3 itself, the collection of the duty is left to be regulated by the Rules made under the Act. [para 7]…
The removal of goods is not the taxable event. Taxable event is the manufacture or production of goods. [para 11]"
2.Levy of Service Tax under the Finance Act, 1994
2.1 Section 66B is the charging section in the Finance Act, 1994 (hereinafter referred to as Act) which levy service tax on taxable services. It is quoted as below:
"66B. Charge of service tax on and after Finance Act, 2012. There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve percent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed."
2.2 The literal interpretation of the charging section means that the levy of service tax is on the service 'provided or agreed to be provided'. However, the collection of service tax may be shifted to any stage/event, in any manner, as prescribed by the rules made in this behalf. In simple words, applying the ratio of the apex court judgement in the case of Vazir Sultan Tobacco Co. Ltd. (supra), the levy is created by the charging section 66B itself and the collection of tax is left to be regulated by the rules made under the Act.
2.3 The Hon'ble Supreme Court of India in the case of Association of Leasing & Financial Service Companies Vs. Union of India [2010 (20) STR 417 (SC)] observed that the taxable event under the service tax law is the rendition of service.
2.4 The Supreme Court in the case of All India Federation of Tax Practitioners Vs. Union of India, referred to the Constitution Bench of this Court and held that "a tax on a thing or goods can only be with reference to a taxable event but there is a distinction between such a tax and a tax on the taxable event. In the first case, the subject-matter of tax is the goods and the taxable event is within the incidence of the tax on the goods. In the second case, the taxable event is the subject-matter of tax itself… In the present case, tax falls on the activity which is the subject-matter of service tax. In other words, we are substituting the word "service" in place of "goods" by applying the principle of equivalence. Under the Act, the Taxable Event is each exercise undertaken by the service-provider in giving advice on tax planning, auditing, costing etc. It is the said principle of equivalence which equates "service tax" to the Central Excise Duty; one taxes the provision of services and other production of goods".
2.5 In the light of the above discussion, it can be interpreted that the levy of service tax is on the provision of service and the date of issue of invoice or date of payment are absolutely irrelevant. It means that if at the time of rendering of service, the levy was not there but subsequently at the time of issue of invoice or payment or both, the levy was introduced, then also that service should not be subjected to tax and no liability of payment of tax arise.
3.Point of Taxation Rules, 2011 – Rule 5
3.1 The Rule 5 of Point of Taxation Rules, 2011 determines payment of tax in case of new services and is quoted as below:
"5 Payment of tax in case of new services: Where a service is taxed for the first time, then-
(a) no tax shall be payable to the extent the invoice has been issued and the payment received against such invoice before such service became taxable;
(b) no tax shall be payable if the payment has been received before the service becomes taxable and invoice has been issued within fourteen days of the date when the service is taxed for the first time."
3.2 In other words, this rule states that in cases of levy on new services, irrespective of date of completion of service, the service tax shall be payable if the payment is received on or after the date of levy or if the invoice is not issued within 14 days of date of levy.
3.3 For example, the Union Budget 2014-15 presented by the Finance Minister on 10-07-2014 and as passed by the Lok Sabha on 25-07-2014 has proposed to amend negative list i.e. section 66D(g) to extend new levy to advertisements in internet websites, on film screen in theatres, bill boards, conveyances, buildings, cell phones, Automated Teller Machines, tickets, commercial publications, aerial advertising, etc. This change will come into effect from a date to be notified later, after the Finance (No.2) Bill, 2014 receives the assent of the President. Suppose, the government notifies the effective date from say 01-09-2014 and above services become taxable for the first time, then the liability of payment of service tax as per Rule 5 is as illustrated below:
From the above example, it can be seen that:(i) If the newly taxable service is completed and invoice issued before the date of levy, but only because the payment is received after the date of levy, service tax becomes payable.
(ii) If the newly taxable service is completed and payment received before the date of levy, but only because the invoice is issued after 14 days of the date of levy, service tax becomes payable.
3.4 Note: Any service listed in Negative List is not a 'Taxable Service' as it is outside the scope of charging section 66B of the Act. Any service which is not listed in the negative list but is exempted otherwise from payment of service tax like vide mega exemption notification no. 25/2012-ST dated 20-06-2012 is still a 'Taxable Service' but exempted from payment of tax.
4.Why Rule 5 is Ultra-Vires the Finance Act, 1994?
4.1 In my view, the said Rule 5 of Point of Taxation Rules, 2011 seems to be ultra-vires the Finance Act, 1994. Let's examine why?
The power to make rules has been conferred on the Central Government under section 94 of the Act as under:
"94. Power to make rules. –
(1) The Central Government may, by notification in the Official Gazette, make rules for carrying out the provisions of this Chapter.
(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely: -
(a) collection and recovery of service tax under sections 66B and 68;…
(hhh) the date for determination of rate of service tax and the place of provision of taxable service under section 66C;"
In exercise of the powers conferred as above, under section 94(2)(a) and (hhh), the Central Government has issued Notification No. 18/2011 dated 01-03-2011 which is known as Point of Taxation Rules, 2011 (hereinafter referred as POT Rules) and is made effective from 01-04-2011.
Under Rule 2(e) of POT Rules, the 'Point of Taxation' means the point in time when a service shall be DEEMED to have been provided.
4.2 The most important point to observe is that the POT Rules have been issued specifically using the powers for the purposes of collection and recovery of service tax and for determination of rate of service tax. By necessary implications, this delegated legislation cannot be extended to determine the date of levy of service tax and the deemed date of provision of service as per POT Rules should not be applicable for determining the date of levy on new services.
4.3 On the basis of above discussion and analysis, it seems that the Rule 5 of POT Rules, 2011 is ultra vires the Act as it exceeds the powers under which it is framed and empower to levy tax on new services based on date of invoice and date of receipt of value of service while completely ignoring the date of completion of service which is the taxable event. This rule wrongly empowers the revenue authorities to collect and recover tax in a situation when at the time of completion of service, there was no levy of service tax on the ground that either the payment was received on or after the date of levy or that the invoice is issued after 14 days of date of levy.
***
Author : Manoj AgarwalAddress : Ganpati Campus, Lal Building Road, Rourkela – 769012
Contact : +91-9937041788
E:mail : ServiceTaxExpert@yahoo.com
Cost Management & Costing methods…Kenya 2030 Series 3
I don't how much my last two articles have been eye open for the Indian government and for my cost accounting friends about the practices of the Costing Methods and Cost Management across the globe. Well in continuation to my previous series http://taxguru.in/chartered-accountant/costing-methodscost-management-automobileseries-2.html today I will the story of an economy named Kenya. Well my friends might say that why I am not focusing on India. Well my key aim is to make my Cost Accountants and my students to be aware about the true potentiality of the subject/profession across the globe. I am presenting these in short stories as I want gradual progress of the knowledge of the Cost Management profession. I am bringing out these stories to share my knowledge as well as to act as an eye opener to the Indian government as well as to the Indian industries who think that Cost Audit & Costing method is of no use.
These are all hidden gems of the Cost Management profession which needs to be brought into limelight so that the future cost accountants and also the present come to know the strength and pride of this profession.
Before I begin with Kenya I would like a short introduction of the historic economic problems of Kenya. The regional hub for trade and finance in East Africa, Kenya has been hampered by corruption, notably in the judicial system, and by reliance upon several primary goods whose prices have remained low. In 1997, the IMF suspended Kenya's Enhanced Structural Adjustment Program due to the government's failure to maintain reforms and curb corruption.
- A severe drought from 1999 to 2000 compounded Kenya's problems, causing water and energy rationing and reducing agricultural output.
- As a result, GDP contracted by 0.2% in 2000. The IMF, which had resumed loans in 2000 to help Kenya through the drought, again halted lending in 2001 when the government failed to institute several anticorruption measures.
- Despite the return of strong rains in 2001, weak commodity prices, endemic corruption, and low investment limited Kenya's economic growth to 1.2%.
- Growth lagged at 1.1% in 2002 because of erratic rains, low investor confidence, meager donor support, and political infighting up to the elections.
- In the key 27 December 2002 elections, Daniel Arap MOI's 24-year-old reign ended, and a new opposition government took on the formidable economic problems facing the nation. In 2003, progress was made in rooting out corruption, and encouraging donor support, with GDP growth edging up to 1.7%.
After this phase the economy became heavily dependent on Cost Management tools and implemented the dame on SME segment to propel the growth of the economy. The results of the implementation are that currently in Kenya the SME sector contributes an estimated 18% of the GDP as well as creating employment for 80% of the workforce population.
Small and Medium Enterprise was the back bone of any economy whether it's developed or developing economy. Small and Medium scale enterprises (SMEs) play a vital role in economic and social development of developing countries. Now as we all know that the SME segment is highly constrained by various forms of knowledge management capital in terms of intellectual capital, structural capital and human capital. Operating at maximum cost efficiency is vital for both survival and enhanced competitiveness since most SMEs in developing countries operate in a crowded and competitive markets. This economy belongs to the country Kenya which was aspiring to grow along with its SME channel. The economy adopted the finest tools of the Cost Management profession like target costing, Activity based costing (ABC), Just in Time method (JIT) as well as other non conventional methods adopted intuitively as an attempt to enhance enterprise efficiency and innovation for better planning and improved product/service pricing.
The key tools being used to improve the product and service pricing were activity based costing, strategic management accounting, just in time, lifecycle costing and contemporary performance measurement systems such as balance score card. As a result of this new developments some researchers argue that relevant lost may be regained in the near future. This resulting gain seems to be gradually adopted by Kenyan SMEs. According to the vision of Kenya SME 2030 they have taken broader roles for adoption of Costing Methods and Cost Management in the SME business segment.
Below is an analysis showing adoption of various management accounting techniques by SMEs in Kenya by sectors with a vision for SME for 2030 are as follows:
Every company adopted different costing methods since every SME as certain influential factors that will assist management to decide on an appropriate management accounting practice, these factors can either be technological changes and the infrastructure of an organization. Since firms compete on different fronts like, quality, price, reliability on delivery, and customer service there comes the implementation of different costing methods.
Roles of management accountants have become significant given the importance of various strategic decisions, thus an increasing shift in focus from traditional to modern management accounting techniques in order to fulfill this emerging need for management accounting as an aid to strategic decisions-making. Now coming back to the same point that it's quite surprising that the India being such an broad economy followed with a plan of GDP growth of 9% in the coming few years has dropped Cost Audit and Costing methods. I don't know what the government of India wants to do by removing Cost Audit and Costing methods but its for sure that in the long run India will lose its competitiveness in terms of price and cost justification.
Well all my previous and upcoming articles inspiration is being provided followed with necessary inputs by Mr. Amit Apte ,Mr.Vijendra Sharma & Mr.Sanjay Bharghav.
Indraneel Sen Gupta Global Macro Economic Researcher and Business Strategist
Master of Economics, MBA in International Business Management, ICWAI (Final)/CWM Final/Journalist
neel19414@gmail.com
This is good governance.
NEW DELHI, AUG 01, 2014: THE Prime Minister, Mr Narendra Modi, has sought minimum use of affidavits and shift to self-certification, so as to benefit the common man. In a citizen-friendly initiative, all Ministries and Departments of the Union Government, and all State Governments, have been asked to make provision for self-certification of documents in place of affidavits. The requirement of attestation by Gazetted Officer is also sought to be replaced by self-certification by the citizen. Under the self-certification method, the original documents are required to be produced at the final stage. The Prime Minister, during his meeting with all Union Secretaries on June 4th, 2014, had spoken of reforming the public service delivery system, and bridging the governance deficit. This measure is a start in that direction. It is expected to benefit the people immensely, as all affidavits not required by law shall eventually be done away with.
In communications addressed to all Secretaries of the Union Government as well as the Chief Secretaries of States/Administrators of Union Territories, the Department of Administrative Reforms and Public Grievances has noted that "obtaining either an attested copy or affidavit not only costs money to the poor citizen but also involves wastage of time of the citizens as well as of the Government officials." The Department has called for a review of the existing requirement of affidavits and attestation by Gazetted Officers, and replacement by self-certification.
In communications addressed to all Secretaries of the Union Government as well as the Chief Secretaries of States/Administrators of Union Territories, the Department of Administrative Reforms and Public Grievances has noted that "obtaining either an attested copy or affidavit not only costs money to the poor citizen but also involves wastage of time of the citizens as well as of the Government officials." The Department has called for a review of the existing requirement of affidavits and attestation by Gazetted Officers, and replacement by self-certification.
Payment of export commission for services rendered outside India couldn't be deemed asFTS to attract TDS
IT/ILT: Where assessee made payments of sales commission to its agents located abroad for procuring export orders and furnishing of upto date information about fashion and market trends, said services not being in nature of technical services, payments in question were not taxable in India and, thus, assessee was not liable to deduct tax at soruce while making said payments
Grossing up of Dividend for distribution tax – increase in effective Dividend Distribution tax rate of 3.47%
The Finance (No.2) Bill, 2014 proposes to levy dividend distribution tax by grossing up the dividend payable for the purpose of computing liability towards dividend distribution tax. As per the existing provision of Section 115-O dividend distribution tax at the rate of 15% is to be paid on the amount of the dividend paid to shareholders. Further under section 115R, tax at the rate of 15% is to be paid onthe income distributed by the Mutual Fund to its investors.
Presently the effective tax rate after levy of surcharge and education cess is 16.995% (15% tax + 10% surcharge + 3% education cess thereof) and tax at this effective rate of 16.995% is paid on the amount of dividend paid/income distributed. The Finance (No.2) Bill, 2014 proposes to gross up the dividend paid with the income distributed for computing the tax liability on account of dividend distribution tax. With the grossing up, the effective tax rate will be 20.47%, with the result, there will be an additional tax liability of 3.475%.
In the Memorandum explaining the provision of the Finance (No.2) Bill, 2014, it has been stated that prior to introduction of dividend distribution tax, the dividends were taxable in the hands of the shareholder. After introduction of dividend distribution tax, a lower rate of 15% is being applied on the amount paid as dividend after deduction of distribution tax by the company and hence tax is computed with reference to the net amount. Accordingly in order to ensure that tax is levied on a proper base, the dividend actually received need to be grossed up for the purpose of computing the dividend distribution tax. This explanation to the Memorandum is contrary to the reasoning given while introducing the dividend distribution tax way back in the year 1997. It may be relevant to refer to the Budget speech of the then Finance Minister, the relevant paras read as under:-
"100. Another area of vigorous debate over many years relates to the issue of tax on dividends. I wish to end this debate. Hence, I propose to abolish tax on dividends in the hands of the shareholder.
101. Some companies distribute exorbitant dividends. Ideally, they should retain bulk of their profits and plough them into fresh investments. I intend to reward companies who invest in future growth. Hence, I propose to levy a tax on distributed profits at the moderate rate of 10 per cent on the amount so distributed. This tax shall be incidence on the company and shall not be passed on the shareholder.
On going through the above reasoning given way back in 1997, it is quite clear that tax on dividend was abolished and this dividend distribution tax was introduced to encourage companies to retain the income for the future growth. Thus to say that dividend distribution tax is a tax on the dividend income of the shareholder is not correct. Further in case the present Government is of the view that dividend income should be taxed, then there is no reason why company should bear the dividend distribution tax. The dividend may be taxed in the hands of the shareholder at the appropriate tax rate applicable as the case may be with benefit of old Section 80M to avoid cascading effect of this tax in the hands of corporate. It may also be important to note that the dividend distribution tax in the present form is being retained not because any concession is to be provided to the shareholder but by way of revenue compulsion as substantial amount of dividend distribution tax is paid by the public sector companies in respect of the dividend, these PSUs pay to the Government. In case dividend is taxed in the hands of the shareholder, substantive amount of this dividend paid by public sector companies and banks (estimated at Rs. 90229 crore in the receipts budget for 2014-15) to the Government will not be liable for taxation as income of the Government is not chargeable to tax and consequently collection on account of income tax will go down.
The reasoning given in the Memorandum also runs contrary to the provision of Section 14A of the Income Tax Act. As per provisions of Section 14A, no deduction is allowed of expenditure incurred in relation to the income which does not form part of the total income i.e. tax free income. Dividend income in the hands of the shareholder, for the purposes of this Section 14A, is considered to be tax free income and accordingly substantial amount of expenditure is disallowed in the hands of the shareholder being incurred towards earning dividend income under section 14A. If dividend distribution tax is considered to be a tax paid by the company for and on behalf of the shareholders, as is being explained in the Memorandum, there is no justification for considering dividend income as tax free income in the hands of the shareholder so as to attract disallowance under Section 14A.
The proposed grossing up provision shall be applicable from 1st October, 2014. Accordingly it will be advisable that corporates and mutual funds declare and pay dividend of the financial year 2013-14 including interim dividend of financial year 2014-15, if any, before 1st October, 2014 so as to save tax of 3.475%. Similarly it will be advisable to Mutual Funds to distribute its income before 1st October, 2014 to save burden of increased tax liability.
(Rajat Aggarwal (Partner)- RRA Consultants, Mobile - 09466899699)
Reassessment won't sustain if additions weren't made on basis of reasons recorded for escaped income
IT: Re-assessment proceedings are only for purpose of income escaping assessment, as set out in reasons recorded and not otherwise
Payment of commission with RBI's approval for export to Iraq under 'Food and Oil programme' isn't prohibited
IT : Where Assessing Officer disallowed assessee's claim for commission paid to intermediary companies in respect of export made to Iraq under 'Food for Oil Programme' run by United Nations taking a view that it was in nature of prohibited payment in terms of Explanation 1 to section 37(1), in view of fact that said payment was duly approved by RBI, impugned disallowance deserved to be deleted
Striving For Freedom in Independent India
Dr. Sanjiv Agarwal
While India celebrated it 64th independence day early this month, independent India still struggles for freedom in more than many ways. It is indeed time for one and all to introspect in retrospect and prospect as to what we have achieved and what we ought to be, as an individual , as society and as a nation, particularly in backdrop of the famous speech – 'Tryst with Destiny' of our first Prime Minister on 15th August 1947. Social values, national character and mutual respect on one hand and selfish wealth accumulation, mass and massive corruption and gross mis governance are the two extremes of the divide and we ought to travel from one end to other.
Why it is so that people in India are generally still not happy with the progress made and achievements reached in these 64 years. While lot has been done in terms of economic growth, innovation, infrastructure development, agricultural advancements, service sector, exports, technology, intellectual and human capital , yet India suffers from may perils to be truly called independent India where mind and soul are both free and pure to nurture India into a bright future.
In today's era, what does freedom imply- to a child it could be freedom to play, to a teenager it could be freedom to be a free bird in whatever he or she thinks or does, to a businessman it would mean freedom to do business with peace and to help build Indian economy, to a journalist it would mean freedom of expression …… . Today, an average Indian is struggling for independence in independent India. Truly, at the moment, we all desire to have freedom from corruption, corrupt officials & politicians and politics of breeding corruption which is a parasite on our system and society. Corruption, scams, kickbacks, misappropriation of public money, leakage in Government sponsored schemes and like perils …… India needs to be free from all these, sooner the better.
At the same time, while inflation free environment is not a practical wish, yet, the people of India rightly deserve freedom from persistent, high and even increasing inflation, more so food inflation coupled with high interest rate making life of businessmen and people enjoying various loans difficult. Businesses have to live with associated risks but such risks ought to be free from artificial setbacks as it happens with our price policy (sugar, cement… are examples) . In an era where corporate governance become the buzzword today in India Inc, there is a scarcity of independent directors .
Coming to investment, while investments are relatively much easier and hassle free today, they suffer from high volatility , particularly in capital markets. With globalization and inter-linkage of markets, there is a ripple effect with any thing happening in one market to other markets. Recent developments in US and Europe have just crippled the markets here, though India still has strong fundamentals. Though we should not expect to be a shock free market, we will have to learn to live with such volatility and its correlated risks . However, such situations do offer window of opportunities too. You talk of Indian women and they are all finding themselves at a distance to buy gold and silver. They cant freely buy and wear jewellery. Thanks to their prices being out of reach.
Last but not the least in a democratic country like ours, after all, after right to education and right to information , we also deserve right to live peace fully and demand from the government, desirable good governance, not the one which is being displayed there days. If that can be assured, India does not require protests from people like Ramdev or Anna Hazare but if does not happen, many more such revolutions will take place.
Mahatma Gandhi said- "Freedom is like birth. Till we are fully free, we are slaves….. No charter of freedom will be worth looking at which does not ensure the same measure of freedom for the minorities as for the majority….True non. Violence should mean a complete freedom from ill-will and anger and hate and an overflowing love for all….Complete independence does not mean arrogant isolation or a superior disdain for all help…..If it is man's (sic) privilege to be independent, it is equally his duty to be inter-dependent….Freedom of the individual is at the root of all progress . I wan freedom for the full expression of my personality. I must be free to build a staircase to Sirius if I want to……" He wanted that type of independence for India in its real and fullest sense.
No time-limit to claim deductions for lower of brought forward losses or unabsorbed depreciation in MAT
IT: In terms of section 115JB it is only amount withdrawn from provision made for meeting unascertained liabilities and credited to profit and loss account which is liable to be deducted from net profit while computing book profit
IT: Provisions of section 115JB do not prescribe any restriction on number of years that are required to be considered for allowing deduction of brought forward loss or unabsorbed depreciation whichever is lower
Changes in Depreciation under Companies Act, 2013
Key Highlights of Schedule II of the Companies Act, 2013:
Useful Life:
Unlike the Companies Act, 1956, Useful life of the asset on the basis of Shift has been prescribed in place of rates of depreciation in the part C Schedule II of the companies Act 2013 as a base for computing depreciation.
Now the Question arises, what's the meaning of Shift?
The Term Shift has not been specified in the Companies Act, 1956 or Companies Act, 2013, So it should be understood in Common Commercial Parlance. As Per Factories Act, 1948, the term shift means:
"Where Work of the same kind is carried out by two or more sets of workers, working during different periods of the day, each of such set is called group or relay and each of such period is called a shift"
The basic meaning of extra shift is employment of a different set of worker for a period additional to normal working hours. The extra hour worked by the same set of workers is termed as overtime and not referred to as a shift, why because worker is same and he is continuing his work. However, Manifestation of extra shift can also be the situation where a significant number of extra hour are worked beyond the normal working hour in a day say four or more above a shift of eight hour.
Calculation of Shift has to be with reference to a working day and not with reference to the entire year.
How to calculate Extra Shift Depreciation?
The Calculation of the extra depreciation for double shift working and for triple shift working should be made separately in the proportion which the number of days for which the concern worked double shift or triple shift as the case may be, bears to the normal number of working days during the year.
- In the case of Seasonal Factory or concern, the number of days on which the factory or concern actually worked during the year or 180days, whichever is greater.
- In any other cases the number of days on which the factory or concern actually worked during the year or 240days, whichever is greater.
Extra Depreciation for double shift working should be the difference between the depreciation for double shift working and the depreciation for single shift working, adjusted in proportion which the number of days for which the concern worked double shift bears to the normal working days during the year. The extra shift depreciation so calculated has to be added to the depreciation for single shift working to arrive at the total depreciation for double shift working.
Formula for arriving the depreciation
Depreciation for Single Shift working + (Depreciation for Double/triple Shift working- Depreciation For single Shift Working)x(Number of days worked double or triple shift/normal working days during the year)
Component Accounting:
The Companies Act, 2013 has introduced the concept of Component accounting which was not the case of Companies Act 1956. To understand Component Accounting, we can take guidance from IND AS-16 which Provides as under:
Each Part of an item of an asset with a cost significant in relation to the total cost of the item shall be depreciated separately.
Where cost of the part of the asset and useful life of that part is different from the useful life of the remaining asset, useful life of that significant part should be determined separately.
For Example:
X Ltd Purchased a Ship of Rs.30 Crore which Comprises Engine of Rs. 27Crore and Structure and others for Rs.3Crore.The residual value and useful life would be Rs. 7crore and Rs. 1crore respectively. The Useful Life of an asset is 30years.
| Ship | Allocated Cost (Rs.) | Residual Value | Useful Life |
| Engine | 27 Crore | 7 Crore | 10 Year |
| Others | 3 Crore | 1 Crore | 20 Year |
As per Companies Act 1956
Annual Depreciation of the Ship=(22Crore/30)= 0.73Crore
As per Companies Act 2013
| Ship | Depreciable Amount (Rs.) | Useful Life | Depreciation |
| Engine | 27 Crore – 7 Crore= 20 Crore | 10 year | 2 Crore |
| Others | 3 Crore- 1 Crore=2 Crore | 20 Years | 10 Lakh |
| Total | 2.10 Crore |
When at the end of respective useful lives of the component, the components will be replaced, the replacement cost should be capitalized and the existing carrying value, if any, should be decapitalised.
Thus, although the overall amount that will be charged to the statement of profit and loss will be same during the entire life of the ship, the annual charge to the statement of profit and loss will differ significantly.
Impact of Component Accounting on replacement of Component
Let us explain this with an example:
A Company has recently acquired a new factory for a cost of Rs.23Lakh with a residual value of Rs.3 Lakh. This factory has a flat roof, which need to be replacing every ten year at a cost of Rs.5 Lakh. The useful life of new factory would be 20 year.
Now Think, if we applies Companies Act 1956, the new factory will be considered as an one asset and depreciate the whole factory over its useful life of 20 year, charging Rs. 1 Lakh Per Annum
The Cost and accumulated depreciation of the old roof will be Rs.5 Lakh and Rs.2.5 Lakh respectively. There will be a loss of Rs.2.5 Lakh which is to be recognized in the Income Statement.
However if we applies Companies Act 2013, The Factory roof will be treated it as a separate asset and the factory would be treated as another asset.
Now How Depreciation would be calculated?
Now you have to derecognize the cost of roof, so that it could be treated as an another asset i.e. Rs.23 Lakh (original value of an asset)-Rs.5Lakh (replacement cost of factory roof)= Rs.18 Lakh – Rs.3 Lakh(Residual Value)=Rs.15Lakh, The depreciation would be Rs.15 Lakh/20=Rs.75,000 Per annum. Plus depreciation of Factory roof is Rs.5Lkh/10= Rs.50000/- Per Annum. Hence total Depreciation Would be 1.25lakh Per annum.
The carrying amount of the old roof in year 10 will be Nil under the second approach. The cost and accumulated depreciation of Rs. 5lakh are written off, with no profit or loss on disposal arising.
The Second approach more accurately reflects the consumption of economic benefits of the factory with an even charge to the income statement over the 20years of the useful economic life of the factory.
Residual Value:
If residual value is considered as an insignificant, it is normally regarded as NIL. On the Contrary, if the residual value is likely to be significant, it is estimated at the time of acquisition/installation, or at the time of subsequent revaluation of an asset. One of the basis for determining the residual value would be realizable value of similar assets which have reached to end of their useful lives and have operated under conditions similar to those in which the asset will be used.
Ordinarily, the residual value of an asset is often insignificant, but it should generally be not more than 5% of the original cost of the asset.
Can it be possible to take different residual value and useful life as prescribed in companies act 2013
| Basis | Regulated Entities | Such class of Companies As may be prescribed and Whose financial statements comply with the accounting standards | For other companies |
| For | The useful life or residual value of any specific asset, as notified for accounting purposes by a regulatory authority constituted under an act of parliament or by central government should be applied in calculating depreciation irrespective of the requirements of the schedule. | Useful life or residual value shall not be different as indicated in Part-C of schedule-II of Companies Act, 2013, otherwise disclose the justification for the same | Useful life shall not be longer and residual value shall not be higher than the prescribed in Part-C of schedule-II of Companies Act, 2013, |
| Explanation | Mandatory | Management can take differ useful life or residual value, the only thing is that give justification for the same. | Management can take only shorter useful life and lower residual value. |
Transitional Provisions
From the date schedule-II comes into effect, the carrying amount of the asset as on that date:
- Shall be depreciated over the remaining useful life of the asset as per schedule-II
- After retaining the residual value, shall be recognized in the opening balance of retained earning where the remaining useful life of an asset is Nil.
For Example
A Company acquired a building at accost of Rs. 10 Crore. The Company was depreciating the building according to schedule XIV SLM rate i.e. 1.63%. Now In August 2013 Schedule-II was introduced via the companies Act 2013 in which the useful life specified is 30 year.
If the building is acquired on 01/04/2000
Depreciation charges till FY 2012-13, depreciation on SLM Basis for 13 year
Rs 10Crore X1.63%X13 Year=Rs.21190000/-
Carrying Value=10 crore-2.11 Crore=7.88Crore approx.
Now the carrying value as on 01 April 2013 will be depreciated over the remaining useful life of the asset as per schedule II of the companies Act 2013. The remaining useful life is 17 year (30-13)
So annual depreciation to be charged to the profit and loss account from FY 2013-14 would be Rs7.88 crore/17= Rs.46.35 Lakh approx.
If the building is acquired on 01/04/1980
The useful life of an asset as per new schedule has already expired if the building was acquired on 01 April 1980. In such case, the carrying value as on 01 April 2013 would be recognized in the opening balance of retained earnings.
Depreciation charged till FY 2012-13, depreciation on SLM basis for 33 year
Rs 10CroreX1.63%X33 Year=5.37Crore
Carrying Value as on 01 April 2013 was Rs 10 Crore-Rs 5.37Crore= Rs.4.62 Crore Would be recognized in the opening balance of retained earnings. Suppose there is an residual value of Rs. 10lkh, then only 4.52 crore will be adjusted through retained earnings and Rs. 10 Lakh will remain in the carrying amount of the asset.
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Author – CA. Himanshu SharmaACA, B.Com(H)
The Author is a member of ICAI.
He can be reached at cahimanshukhajuria@gmail.com
Structural Audit of Society Buildings – An analysis
OLD BUILDINGS:
1. Most buildings in Mumbai City & Suburbs are over 40 years old. Some of these buildings are "ILLEGAL & UNAUTHORISED", more so since neither the local civic body (BMC) has the buildings Sanctioned Plans and neither the building residents (Society) have the Approved Plans of their buildings.
BUILDING COLLAPSES:
2. Over the period of time, there have been consistent events of falling of such buildings, due to failure or negligence in Maintenance and/or Repairs of these buildings, more so due to lack of Money and/or gross apathy by the residents, towards their own buildings. EVEN basic Plastering & Coloring of building walls and replacing leaking & corroded sewage pipelines, are apathetically ignored, which in turn means reducing the overall life of such buildings. The National Crime Records Bureau, in a data-report states that in the last 10 years, upto year 2012, there has been 448 building collapses, in Maharashtra, killing over 425 people and injuring scores of other people.
GROSS ENCROACHMENTS:
3. Further over a period of time, some residents inbuilt urge to encroach on common spaces /balconies /niche areas /flower-bed areas etc…., lead to unauthorized alterations, which includes shifting of WC, Bathrooms & Kitchens or Amalgamating of Flats. All such unauthorized alterations /changes, in turn culminates into hairline fractures in the Columns, Beams, Pillars, Walls and Floors, leading to leakage of Water and Air, into the RCC structure, thus reducing the overall life of these buildings.
LEAKAGES:
- Many residents have a chronic and orthodox habit of using hammering action using a wooden block, while washing clothes in the bathroom, which ultimately opens up the protective water-proofing layer and the gaps between the bathroom floor tiles, leading to leakage directly in the lower floor structure, thereby causing discontent to the residents on the lower floor.
STRUCTURAL AUDIT – MANDATORY:
5. Taking into consideration all such above & other nuisance factors, the local civic body (BMC), has amended the MMC Act, by inserting section 353-B, which lawfully makes it mandatory for the building owners (Society) to conduct "Structural Audit", for ALL those buildings which are over 30 year of age. The Age of the building is determined by default or by the "Completion Certificate" issued by BMC, at the then time when the building was completed.
STRUCTURAL AUDIT – NOTICE:
- A single building resident (and even a non-member or a public member) may make a basic complaint application u/s 353-B, to the "Designated Officer" of the local ward office of BMC, giving as much details as possible, and "direct" the BMC "Designated Officer", to issue notice u/s 353-B to the building Owner /Society, for conducting the "Structural Audit", of the building.
DESPITE receipt of such written Complaint, IF the "Designated Officer", fails to serve such Notice to the building Owner /Society, THEN the said "Designated Officer", can be successfully prosecuted in a Court of Law, without any reference to any permission from anybody.
STRUCTURAL AUDIT – WITHIN 30 DAYS:
- On receipt of the said BMC notice u/s 353-B, the building Owner /Society, must mandatorily conduct the "Structural Audit", of the building, within 30 days AND mandatorily submit such "Structural Audit Report", to the BMC office, consequent to which IT shall be the mandatory duty of Municipal Engineer to scrutinize the Structural Audit Report and ultimately enforce compliance of all repairs and restorations highlighted in the Structural Audit Report.
Further it shall be mandatory for the Municipal Authorities, to initiate other legal proceedings, against the building Owners/Society, in the absence of Approved /Sanctioned Plans, Occupancy Certificate and other documents. This ultimately serves to safeguard the residents of the said building and other public members around the building, while upholding the Law.
This fact is also evident from the various prosecutions launched against some Society residents residing in unauthorized flats in the Campa Cola compound. The Hon. Supreme Court has ultimately upheld the Law.
STRUCTURAL AUDIT – PENALTY FOR FAILURE:
8. Structural Audit can be conducted, ONLY by a BMC empanelled Structural Engineer. Failure to conduct the said Structural Audit, would result into prosecution by BMC, along with fine AND ALSO would lead to revoking of the buildings "Occupancy Certificate", thus leading to double the water charges u/s 92 of the MMC Act, and increase in Property Tax.
STRUCTURAL AUDIT – PERIODICALLY:
- Periodic "Structural Audit", of the building and compliance thereon, also positively restricts the BMC (or others /owners), from declaring the building as "dilapidated" and ultimately from receiving notices of eviction from the building. Such notices would also mean revocation of buildings "Occupancy Certificate" and increase in Water Charges.
STRUCTURAL AUDIT – CHECKING:
- "Structural Audit", of the building means EVERYTHING connected to the conduct of a Building, which includes strength of the buildings Columns, Beams, Pillars, Iron Bars & Plaster, Sewage discharge systems, Water pipeline systems, Electrical cabin and wiring system, Lifts, Podiums ….
a) Structural Audit parameters will vary for Residential buildings, Commercial buildings and Industrial buildings.
b) Some "quack" type Structural Auditors, perform a superficial check and issue a manipulated Structural Audit Report, to the Society, with the connivance of the apathetic Society office bearers.
STRUCTURAL AUDIT – RESTORE TO NORMALCY:
- A Structurally unfit building shall be prone to sudden collapse without any warning, at the first instance of an earthquake, which in turn means risking the Life and Property of the buildings residents and other people in the vicinity.
a) At present times, there are several technological techniques available, along with highly experienced technical professionals, where old buildings can be easily refurbished /restored, to complete normalcy, thus peacefully extending the life of old buildings by further 20-40 years.
b) This helps in gross monetary savings, while still retaining the emotions and sentiments attached to the building and its co-residents.
ILLEGAL ALTERATIONS – BUILDING COLLAPSES:
12. Around July-2007, a 25 year old building named as "Laxmi Chhaya" (at Borivali West), just simply collapsed in the early morning hours, just because some greedy shop-owner/s had reduced the girth of the buildings Column & Pillars. This resulted in loss of Life and Property of the buildings residents and other people in the vicinity. Today due to courtesy of Human Apathy, everything is back to normal and the losses of human lives are apathetically and conveniently forgotten by all concerned. No lessons learned.
WHAT SHOULD BE CONDUCTED DURING STRUCTURAL AUDIT?
- A "prudent" Structural Engineer would reflect the following in his Structural Audit Report, highlighting the relevant violations under the Municipal Laws, while keeping upfront the Approved Plans of the Building:
a) Any changes and contraventions of the Approved Plans /Availability of Sanctioned Plans. Whether Building has been built in conformity to the Sanctioned Building Plans,
b) Availability of approved & sanctioned building Plans, IOD, CC, OC,
c) Changes made to the buildings Columns, Beams, Pillars,
d) Changes made in place of WC, Bathroom, Kitchen, installation of loft water-tanks,
e) Extension OR Covering of Balcony,
f) Removal of Internal walls between rooms,
g) Internally Amalgamating (joining) of two flats, by removing partition walls /doors,
h) Installing over-protruding Grills, Sheds, Chajjas,
i) Conversions of basements OR Stilt /podium parking for any other usage (e.g. Offices, Shops …. )
j) Existence of unauthorized Lofts & Mezzanine Floors in the building,
k) Any other encroachment of Common areas, Refuge areas and Society premises,
l) Installation of illegal Mobile Towers and Hoardings, and adverse effect of same on the building,
m) Whether the building has appropriate Drainage /Sewage lines connected to the Mains,
n) Existence of Open-Well, Bore-Well and other clandestinely built sub-ground level storage water tanks,
o) Common Electrical Wiring system,
p) Changes in Internal /External Drainage /Sewage lines,
q) Ground and Overhead Water Tanks, Water Meters and supply pipelines,
r) Water logging around periphery of the Building and reverse incline level of ground,
s) Detailed report on the repairs and restorations, that is required in the Building, in terms of the Approved Plans of the building.
Note: Structural Engineer /Auditor have to clearly outline each Alterations with graphic images and photographs and the repairs /rectifications /restorations that needs to be done in the Building.
STRUCTURAL AUDIT TECHNIQUES :
- The Structural Engineer, mandatorily must be a NEUTRAL authority, more so since any manipulations or fabricated or untrue Structural Audit Report, would mean, criminal prosecution against the Structural Engineer. An experienced & competent Structural Engineer would conduct several tests to determine the extent of corrosion, distress and loss of strength in concrete & steel. Some of the tests means:
a) Concrete Core Cutting & Compression testing for columns, beams and slabs for Strength Assessment of concrete.
b) Half Cell Potential test for determining the probability of corrosion in the embedded steel.
c) Carbonation test for carbonation depth measurement for Steel.
d) Ultrasonic Pulse Velocity Test (UPV) for Strength Assessment of concrete.
e) Integrity tests for pile foundations and various testing techniques.
Note: The above are highly technical tests AND must be conducted by an experienced Structural Engineer and NOT by junior assistants /trainees.
FIRE EQUIPMENTS:
- The Structural Auditor has to inspect the Fire Fighting Systems (as applicable) with the relevant approved vendor and prepare recommendatory reports, highlighting the repairs and restorations required, for due compliance of the building Owner /Society.
Failure to install the mandatory Fire Fighting Systems, and to keep maintaining them in working condition is mandatory, failing which the Fire Department is within its jurisdiction to disconnect Electricity and Water connections, besides revoking the FIRE NOC for Occupancy Certificate granted to the building.
EARTHQUAKE RESISTANCE:
- Presently Earthquake resistance buildings are built & designed as per Indian Standard Codes, means "Earthquake Code IS 1893-2002".
a) Under the parameters of "Indian Standard Codes", the island city of Mumbai is located in Earthquake (Seismic) Zone III.
b) Some very old buildings, which are not built for Earthquake resistance, can still be retrofitted appropriately to make it literally earthquake resistant, subject to the building being structurally fit. This preemptive /precautionary measure will help in avoiding sudden collapse of buildings, during Earthquake/s, and giving enough time to clear the building, thus helping in saving Life & Property.
FAILURE TO CONDUCT REPAIRS:
17. IF the building Owners /Society, consistently fails to carry out all the repairs and restorations highlighted in the Structural Audit Report, THEN the BMC is empowered to conduct the repairs and restorations, on its own and recover the cost of such "repairs and restorations" from the building Owner /Society. Failure to carry out relevant repairs by the Society, would also lead to revoking of "Occupancy Certificate", of the building, thus leading to double the water charges u/s 92 of the BMC Act. The BMC is empowered to file prosecution u/s 488 of the MMC Act and levy Penalty, for failure to comply with the repairs, mandated in the Structural Audit Report. Criminal proceedings under Indian Penal Code can also be filed on the Mg. Committee members, for their deliberate failures and endangering the Life and Property of the building residents.
TABLING OF STRUCTURAL AUDIT REPORT:
- After the Structural Audit of the Society building is duly concluded, the Society Mg. Committee has to distribute a Copy of the same to each member at the cost of the Society and then duly call a Special General Body meeting, to deliberate on the Structural Audit Report and the costs for repairs and restoration highlighted by the Structural Engineer. The said Repairs and Restoration has to be mandatorily complied and the General Body of the Society has NO OPTION to avoid the same. The General Body CANNOT pass any resolution to avoid the said Repairs and Restoration, under the Structural Audit Report. The repairs & restorations to the building (as applicable) has to be started WITH or WITHOUT the approval of the General Body. Hence the "Tabling of the Structural Audit Report", before the General Body thou necessary, has no relevance under the BMC Act. IT has to be mandatorily complied with (repairs) even if the General Body does not sanction repairs, due to any reasons, whatsoever.
Note: IF the building owner /society do not complete the repairs /restorations, as per the directions in the Structural Audit Report within 6 month of submission of Audit Report, THEN they are also liable to be punished under section 471 & 352(B) of the MMC Act.
NON-AVAILABILITY OF BUILDING PLANS & OC :
- In the event, IF the building's Sanctioned /Approved Plans and/or Occupancy Certificate (OC) are not available, THEN the building owner (Society) has to conduct the necessary documentations and arrange /make the buildings plans etc….
The buildings Occupancy Certificate can be procured, using various compliance parameters, BUT ONLY after repairing & restoring all illegal alterations /amalgamations.
PREEMPTIVE MEASURES :
- Even in newer buildings, the building owners (Society) should themselves consider to conduct "Structural Audit" of their buildings, every Five years, as precautionary measures against encroachments of common spaces /balconies /niche areas /flower-bed areas and unauthorized alterations in WC, Bathrooms & Kitchens or Amalgamating two Flats.
Such preemptive Structural Audit would help in timely repairing or reversing back any such unauthorized alterations /changes, and avoid hairline fractures in the Columns, Beams, Pillars, Walls and Floors.
The compliance of above, will mean preserving & increasing the overall life of the buildings. This also serves to save Life, Property & Money of the building residents.
CONSPIRACY :
- In Mumbai, a conspiracy is emerging with the connivance of the Society Mg. Committee members and the local builders lobby, to deliberately avoid repairing and restoration of structurally sound old buildings and then consequently having the building declared as "dilapidated or risky" at the hands of the local civic body, for the sole objective of Redevelopment of their buildings, for clandestinely generated monetary benefits.
a) When such conspiracy is appropriately proved, using various parameters and documentations, the Structural Auditor along with the Mg. Committee members can be successfully prosecuted in a Criminal Court, under the Indian Penal Code.
INTROSPECTION:
22. In the larger interest of the public, the State Govt., would do well to consider making mandatory, the preemptive Structural Audit of every old /new building, every Five years, in order to detect illegal encroachments of common spaces /balconies /niche areas /flower-bed areas and unauthorized alterations in WC, Bathrooms & Kitchens or Amalgamating of Flats. This will help in good governance and drastically reduce legal proceedings by the local civic body (BMC), which in turn means lesser leakages and maintaining harmony between Flat Owners.
AUTHOR: Hemant Agarwal, Email: ha21@rediffmail.com
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