Penalty u/s. 270A and 271(1)(c)

Shubham Agarwal
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Penalty u/s. 270A and 271(1)(c)

Before the introduction of S. 270A, Section 271(1)(c) of the Income Tax Act was in place being penalty on concealment of income and or furnishing inaccurate particulars of income. However this section always caused litigation between revenue and taxpayers due to the decision of quantum of penalty at the discretion of assessing officer. Now the said section is replaced by Section 270A inserted vide Finance Act 2016 with effect from AY 2017-18 for imposition of penalty for underreporting of income or for misreporting of income. Let’s discuss certain important aspects of both the sections.

Amount of penalty:

 Section 271(1)(c) provides for the imposition of a penalty for furnishing inaccurate particulars of income or for concealing the particulars. The amount of penalty ranges from 100% to 300% of the tax sought to be evaded at the discretion of assessing officers.

Section 270A(7) provides that penalty shall be imposable @ 50% of the tax payable in case of underreporting of income and 200% in case of misreporting of income. Therefore the new provision brings certainty to the quantum of penalty by prescribing a fixed percentage of penalty. Further section 270A(9) provides the cases of misreporting of income. They are as follow.

  • misrepresentation or suppression of facts; failure to record investments in the books of account;
  • claim of expenditure not substantiated by any evidence;
  • recording of any false entry in the books of account;
  • failure to record any receipt in books of account having a bearing on total income; and
  • failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply

Therefore, if the under-reporting of income arises out of cases mention above penalty imposable shall be 200% of the tax payable on under-reported income.

What is Underreporting of Income?

Section 270A(2) provides the cases where a person is said to be underreported his income. A person is said to be underreported his income when,

Normal Provisions

Section 270A(2)(a): Return of income is filed.

Amount of income assessed is greater than the income assessed determined after processing of return of income u/s. 143(1).

Section 270A(2)(b): No return of income is filed or ROI is filed for the first time in response to notice u/s. 148.

The amount of income assessed is more than the maximum amount not chargeable to tax.

For example: Mr. X has not filed the return of income within the time allowed u/s. 139(1). Thereafter notice u/s. 148 was issued to Mr. X for making the reassessment u/s. 147. Mr.X has filed the return of income declaring the total income at Rs. 10 lakh. Assessment in case of Mr. X was finalized after accepting the return filed in response to notice u/s. 148 determining total income at Rs. 10 lakh. Even though no addition has been made by assessing officer in the assessment u/s. 147, then also Mr.X is said to be underreported his income because income determined to exceed the maximum amount not chargeable to tax and Mr. X has filed the return of income for the first time.

Note: A recent amendment has been made by the Finance Act(no.2) of 2019 in section 270A with retrospective effect from AY 2017-18. Accordingly the cases where the person the not filed their return of income even though their income was liable to be taxed but subsequently on receipt of notice u/s. 148 they made full disclosure of income are also treated as a case of underreporting of income.

Therefore in the example referred above Mr. X will not be liable to the penalty for underreporting of income as per the earlier position of law that is a prior amendment.

Section 270A(2)(c) Previous reassessment or reassessment has been made.

Amount of income assessed is more that amount of income determined in the immediately preceding assessment or reassessment.

MAT Provisions.

Section 270A(2)(d): Return of Income is filed

The amount of deemed total income assessed or reassessed as per the provisions of section 115JB or section 115JC, is greater than the deemed total income determined in the return processed u/s. 143(1)

Section 270A(2)(e): No return of income is filed or ROI is filed for the first time in response to notice u/s. 148.

The amount of deemed total income assessed as per the provisions of section 115JB or section 115jc is greater than the maximum amount not chargeable to tax.

Section 270A(2)(f) Previous reassessment or reassessment has been made.

The amount of deemed total income reassessed as per the provisions of section 115JB or section 115JC, is greater than the deemed total income assessed or reassessed immediately before such reassessment.

In case of Loss:

Section 270A(2)(g) Income assessed or reassessed has the effect of reducing the loss or converting such loss into income

Amount of underreported income.

Section 270A(3) prescribes the calculation of the amount of underreported income.

Case1: Return of income is filed and there is no previous assessment
Income assessed XX
Less: Income determined on processing of return u/s. 143(1) (XX)
Amount of Underreported income XX
   
Case 2: Return of income is not filed or filed for the first time in response to notice u/s. 148
Income assessed XX
Less: Maximum Amount not chargeable to tax [Not applicable in case of Company, Firm, and local authority because their income is taxable at flat rates. (xx)
Amount of underreported income XX
   
Case 3: Previous Assessment has been made
Income assessed XX
Income assessed in previous assessment (XX)
Underreporting of income XX

Determination of amount of underreported income where MAT/AMT is applicable.

Amount of underreported income will be calculated  by using the following formula:

(A — B) + (C — D)

where,

A = the total income assessed as per general provisions (Other than Section 115JC/115JB)

B = the total income that would have been chargeable had the total income assessed as per the general provisions been reduced by the amount of under-reported income;

C = the total income assessed as per the provisions contained in section 115JB or section 11

D = the total income that would have been chargeable had the total income assessed as per the provisions contained in section 115JB or section 115JC been reduced by the amount of under-reported income:

It is to be noted that where the amount of under-reported income on any issue is considered both under the provisions contained in section 115JB or section 115JC and under general provisions, such amount shall not be reduced from total income assessed while determining the amount under item D.

Circumstance where penalty could not be levied.

Example 1: Let’s assume that assessment in the case of XYZ Pvt. Ltd. was finalized after making the addition of ₹1,00,000/- on account of low gross profit. Assessing officer has estimated gross profit @ 5% as against 4% as declared by the assessee. However the books maintained by the assessee are correct and to the satisfaction of assessing officers and are in conformity with provisions of the Act. Now the issue arises whether the penalty is leviable.

Earlier Regime: Section 271(1)(c).

Section 271(1)(c) does not provide any exceptional cases where the penalty could not be levied. However various Judicial and Appellate authorities in various rulings decided the cases where penalty u/s. 271(1)(c) could not be levied. They are:

  1. CIT vs. Reliance Petroproducts (P) Ltd [322 ITR 0158] (SC): It was held by Honorable Supreme Court that where assessee makes any claim of expense in the return of income, however, the said claim was disallowed by assessing officer, the in such case penalty u/s. 271(1)(c) will not be attracted if no information furnished in the return of income is incorrect or inaccurate.
  • CIT vs Aero Traders Pvt. Ltd. [322 ITR 0316] (Delhi HC): It was held by Honorable Delhi High Court that estimated the rate of profit applied to the turnover of the assessee which in does not amount to concealment or furnishing inaccurate particulars.

Therefore no penalty u/s. 271(1)(c) can be levied in the example mentioned above after relying on the decision of Delhi High Court in the case of CIT vs Aero Traders Pvt. Ltd (Cited Supra)

New Regime: Section 270A

Section 270A(6) provides the cases which do not amount to underreporting of income. They are as follow:

(a) the amount of income in respect of which the assessee offers an explanation and the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered;

 (b) the amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, but the method employed is such that the income cannot properly be deduced therefrom;

 (c) the amount of under-reported income determined on the basis of an estimate, if the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue, has included such amount in the computation of his income and has disclosed all the facts material to the addition or disallowance;

 (d) the amount of under-reported income represented by any addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer, where the assessee had maintained information and documents as prescribed u/s. 92D, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction; and

 (e) the amount of undisclosed income referred to in section271AAB.

Therefore no penalty could be levied in the example mentioned above as per section 270A(6)(b).

Example2:  Mr. Y, resident of Surat while filing his return of income has claimed the expense of certain items after relying on the decision of Jurisdictional High Court (Gujarat High Court). Case of Mr. Y was selected for scrutiny. In the Meantime decision of Gujarat High Court was reversed by Supreme Court on an appeal before the Supreme Court. Assessing officer while framing the assessment disallowed the said expense claimed by the assessee on the basis of the ruling of Gujarat High Court. Now the question arises that whether the penalty could be levied.

Alternative 1: Section 271(1)(c) Since the claim of expenditure is a debatable one and there is a failure on part of MR Y to furnish any inaccurate particulars of income, therefore penalty u/s. 271(1)© could not be levied. Reliance is placed upon CIT vs Electrolux Kelvenatro (Del. HC) [44 taxmann.com369]

Alternative 2: Section 270A: Mr. Y has offered a valid explanation in respect of the claim and the explanation offered by his also bona fide. And therefore no penalty u/s. 270A can be imposed as per section 270A(6)(a).

Immunity From Imposition of Penalty (Section 270AA)

Section 270AA provides for the immunity against imposition of penalty u/s. 270A or initiation of prosecution proceedings u/s. 276C and 276CC on an application made by the assessee in this regard after payment of interest and tax as specified in the notice of demand, provided that no appeal is filed against the order of assessment or reassessment.

To Whom Application is to be made?

To assessing officer within one month from the end of the month in which the order u/s. 143(3) or 147 is received by the assessee.

Note: Where underreporting of income arises due to cases of misreporting, immunity u/s. 270AA will not be granted.

Conclusion

Section 270A aims to bring certainty in the law of penalties by removing the discretion of assessing officers in deciding the quantum of penalty. Further section 270AA provides the immunity from imposition of penalty. Thus it clearly seems that the Government of India is focusing on reducing the tax litigation and the introduction of these two sections was one of those steps which our government had taken. However, since these sections are effective from AY 2017-18, whose scrutiny assessment has just completed in the last year and many of those cases are pending in appeal before CIT(A), the result of the implementation of theses sections will appear only after the passage of some time.

Finance Act 2020: NRI can stay in India only for 119 days, if his taxable income is more than Rs.15 lakhs.

CA Shristi Barmecha
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Finance Act 2020: NRI can stay in India only for 119 days, if his taxable income is more than Rs.15 lakhs.

During the Budget 2020, Finance Minister proposed changes in the criteria for determining residential status for Non Residents Indians for tax purpose. On March 23, 2020, the proposal was accepted in Lok Sabha with certain amendments, granting relaxation in the criteria originally proposed. Finance Bill 2020 was then passed in Rajya Sabha and later ratified by President on March 27, 2020 which is brought in force as Finance Act, 2020.

Let us have a concise and brief walk through of the proposed amendment and the assented amendment to have clear idea of actual changes in the Act.

Proposed amendment as per Finance Bill, 2020:

“4. In section 6 of the Income-tax Act, with effect from the 1st day of April, 2021,

(a) in clause (1), in Explanation 1, in clause (b), for the words “one hundred and eighty two days”, the words “one hundred and twenty days” shall be substituted;

(b) after clause (1), the following clause shall be inserted, namely:
“(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, shall be deemed to be resident in India in any previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.”;

(c) for clause (6), the following clause shall be substituted, namely:  
“(6) A person is said to be “not ordinarily resident” in India in any previous year, if such person is—
(a) an individual who has been a non-resident in India in seven out of the ten previous years preceding that year; or
(b) a Hindu undivided family whose manager has been a non-resident in India in seven out of the ten previous years preceding that year.’.”

Approved amendment as per Finance Act, 2020:

“4. In section 6 of the Income-tax Act, with effect from the 1st day of April, 2021,

(a)  in clause (1), in Explanation 1, in clause (b), for the words “substituted” occurring at the end, the words “substituted and in case of the citizen or person of Indian origin having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year,” for the words “sixty days” occurring therein, the words “one hundred and twenty days” had been substituted;

(b)  after clause (1), the following clause shall be inserted, namely:

“(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature;

(c)  in clause (6), in sub-clause (b), for the words ‘‘days or less’’ occurring at the end, the following shall be substituted, namely:—

‘‘days or less; or
(c) a citizen of India, or a person of Indian origin, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year, as referred to in clause (b) of Explanation 1 to clause (1), who has been in India for a period or periods amounting in all to one hundred and twenty days or more but less than one hundred and eighty-two days; or
(d) a citizen of India who is deemed to be resident in India under clause (1A).
Explanation.—For the purposes of this section, the expression “income from foreign sources” means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).”

After amendment , the overall provisions of Section 6 stands as under:

6. For the purposes of this Act,—

 (1) An individual is said to be resident in India in any previous year, if he—  
(a) is in India in that year for a period or periods amounting in all to one hundred and eighty- two days or more ; or
 (b) [***]
 (c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.

(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature;

Explanation. 1—In the case of an individual,—

 (a) being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted ;

 (b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and twenty days” had been substituted and in case of the citizen or person of Indian origin having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year.

Explanation 2.—For the purposes of this clause, in the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, in respect of such voyage, be determined in the manner and subject to such conditions as may be prescribed.

………

(6) A person is said to be “not ordinarily resident” in India in any previous year if such person is—

(a) an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or

(b) a Hindu undivided family whose manager has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or

(c) a citizen of India, or a person of Indian origin, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year, as referred to in clause (b) of Explanation 1 to clause (1), who has been in India for a period or periods amounting in all to one hundred and twenty days or more but less than one hundred and eighty-two days; or

(d) a citizen of India who is deemed to be resident in India under clause (1A).

Explanation.—For the purposes of this section, the expression “income from foreign sources” means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).

Highlights of amendments are explained below:

  1. New criteria introduced to determine residential status:

As per the Act, an individual is considered as a ‘Resident’ in India during a tax year, if he meets any of the following criteria:

(a) has been in India for an overall period of 182 days or more in the relevant tax year; or
(b) has been in India for 60 days or more in the relevant tax year and for 365 days or more during four tax years preceding the current tax year.

An individual who does not meet both the above criteria qualifies as a ‘Non-Resident’. The tax laws recognize that Indian citizens or Person of Indian Origin (PIO) ( now PIO and OCI are merged ) who stay outside India often visit India to take care of their assets, families or for other purposes. Therefore, relaxation is provided to Indian citizens/ PIOs, allowing them to visit India for longer duration, without qualifying as a ‘Resident’ of India. Under the existing tax laws, Indian citizens/ PIO visiting India shall qualify as a ‘Resident’ only if they are in India for at least 182 days in the tax year.

However, the government believes that some individuals misuse the relaxed provisions to avoid qualifying as a ‘Resident’ in India, by managing their period of stay in India as less than the specified limit of 182 days and thereby escaping the payment of tax on their Global income in India, even while they may be carrying out significant economic activities within India. Therefore, in order to curb potential tax loss, the Finance Bill 2020 proposes to reduce the threshold to 120 days in the tax year coupled with 365 days in previous four tax years in order for an Indian citizen/PIO visiting India.

As per the amendment in the Bill, applicable from April 1st, 2020, which was passed by Parliament subsequently, it is enacted that any individual (covers Indian citizen and Indian origin) will be considered as resident for tax purposes if he stays in India for 120 days or more in that financial year and 365 days or more in the immediately preceding 4 years to that financial year only if he has total taxable income, excluding foreign income, exceeding Rs.15 lakhs in that financial year. The first condition of stay for 182 days or more remains intact. Thus, if the taxable income of NRI in India is up to Rs.15 lakhs during the financial year, then he can stay in India for less than 182 days to maintain his status as Non-resident.

Thus, from now on, besides monitoring the number of days present in India, the visiting Indian is also required to keep a tab of his Indian taxable income. This is because once the total taxable income exceeds Rs.15 lakhs, then provision related to stay exceeding 120 days will become applicable.

The next question arises that if the NRI is considered as resident as per Section 6(1), will his global income become taxable? The Answer is prima facilely No.

This is because a resident is further categorized between ‘ordinary resident’ or ‘not-ordinary resident’. It is important to note here that an ‘ordinary resident’ is taxable in India on his global income as against a ‘not-ordinary resident’ whose income from sources outside India is taxable in India only if it is derived from a business controlled in or a profession set up in India.

As per the current tax laws, an individual would qualify as a ‘not-ordinarily resident’ if he has been a ‘Non-Resident’ in India in at-least nine out of the ten previous tax years or has been in India for an overall period of 729 days or less during the seven previous tax years. An individual exceeding these limits would qualify as an ‘ordinary resident’ and therefore be required to pay taxes in India on his global income.

The new criteria for residential status will restrict the NRI’s visit to India for longer period as per Section 6(1) however relaxation is given as per Section 6(6) that if they fall in this category they will be treated as Resident but not ordinary resident (RNOR). This comes out as sigh of relief for NRIs because their foreign sourced income (income accrued outside India) will not be taxable in India solely because they have stayed for 120 days or more in that financial year.

2. Introducing the concept of deemed resident

A new clause is added to the Section, wherein if any individual, being a citizen of India, having total income exceeding Rs.15 lakhs during financial year, will be deemed to be resident of India, if he is not liable to tax in any other country by reason of his domicile or residence or any criteria of similar nature.

Till FY 2019-20, there was no such provision in the Act. The introduction of new provision of making certain Indian citizens a ‘deemed resident’ was done only to curb and bring those citizens under the tax net who had been traveling from country to country merely to maintain their non-resident status and ended up being a ‘resident’ of no country.

However as per clause (d) of Sub Section 6, deemed resident will be covered under Resident but Not Ordinary Resident and taxed accordingly. Although such ‘deemed resident’ may not have immediate tax implication on their global income due to being considered as Not Ordinary resident while they continue to visit India for less than 182 days but may stand to lose on the benefit of Not Ordinary Resident subsequently if their stay in India is for 182 days or more as another condition for not ordinary resident of being non-resident resident for 9 years out of 10 years immediately preceding that year may not be fulfilled.

3. Criteria for Resident but not Ordinary Resident (RNOR) liberalized

Up till now, there were two conditions for a person to be qualified as Resident but not ordinary resident under sub-section 6;

  1. An individual must have been NRI for 9 out of 10 years in immediately preceding financial year or;
  2. He has stayed in India for upto 729 days or less during 7 years immediately preceding financial year.

The proposal in the Budget was to have only one condition for a person to be treated as RNOR, that the individual must have been NRI for 7 out of 10 years in immediately preceding that financial year.

However, as per the amendment in the Act, the two existing conditions mentioned have been retained and the scope of applicability has been widened further to include the above two criteria of deemed resident and 120 day applicability for NRIs as explained.

Few examples below would help to bring more clarity in the modalities of amendment brought in the definition of residential status.

Case-1

Aman works in USA and visits India after 5 years and stays for a period of 150 days and his total taxable income in India exceeds Rs.15 lakhs during that financial year. In this situation, Aman does not automatically become resident because of his stay in India for more than 120 days, as he does not qualify for the cumulative condition of 365 days in the immediately preceding 4 years from the financial year. Thus, he will be Non-resident during that year and hence there is no need to ascertain the status as not ordinary resident.

Case-2

Let’s say Aman stays in India for 130 days during the year and had been in India for 365 days in 4 years immediately preceding that year. His total taxable income in India is Rs.16 lakhs. Now as he qualifies both the conditions as per the amendment, he will be treated as Resident as per Section 6(1) but not ordinary resident as per Section 6(6) and hence his global income will not be taxable.

Case-3

Karan, an Indian citizen, works in Dubai (tax free country) and also earns income from India exceeding Rs.15 lakhs. Not considering the DTAA agreement with UAE, Karan will qualify as deemed resident under clause (1A) of Section 6 of Income Tax Act, and will be treated as Resident but not ordinary resident for the purpose of taxation.

Case-4

Suppose Karan, being NRI was non-resident for 10 years and had been visiting India for only 100 days in a year but has completely shifted back to India during the year on 05.10.2020. Now for the FY 2020-21, as he has stayed in India for more than 120 days but less than 182 days, he shall qualify as resident but not ordinary resident as per clause (c) of Section 6(6) newly inserted.  In the second year i.e. FY 21-22, he stays in India for 365 days and hence he will qualify as resident as per Section 6(1) but will not be an ordinary resident as he had the status of non-resident in 9 out of 10 preceding years and hence for FY 2021-22 also, his global income will not be taxable. It will only be in FY 2022-23 that he would be considered as resident and ordinary resident wherein his global income shall be taxable.

Conclusion: NRIs need to carefully consider the total Indian income and plan their travel itinerary based on the amendment for their period of stay. The positive aspect is that in most cases, where the period of stay in India is 120 days or more (and also 365 days or more in preceeding 4 years) or in case of Indian citizens who are not tax residents of any other country and are deemed to be tax residents of India, the status would be RNOR and hence foreign income shall not be taxable in India.

Editor’s Note : Considering the situation of Lockdown during COVID19 , there shall be a lot of NRIs who could not go back abroad because of lockdown or even NRI who voluntarily came to India considering it more safe and homely during these stressed times. These NRIs should consult their respective Chartered Accountant or expert to plan their taxes and residential status. Alternatively, if you are an NRI and if the amended tax provisions concerns you, you may place a request on https://www.itatorders.in/case-research and get on a Free Consultation Call from our team of legal experts to discuss the issue.

Related-Party and its Reporting Requirements

Anjali Garg
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Related-Party and its Reporting Requirements

Meaning of related party

So what does the term ‘Related Party’ mean.? How important this is to companies and individuals. What are the conditions to be recorded or understood before any transaction takes place? When and How it is to state in the books of account? When will the transaction be called as related party transaction? What if all the requirements required are not followed?

Well.., As per IndAs 24;

A related party is an individual or entity connected to the reporting entity;

  • An individual or a close member of the family of that individual is connected to a reporting agency where that person has authority, shared authority or substantial influence over the organization or is a member of its key management staff.
  • An entity is linked to a reporting entity’s parent, subsidiary, fellow subsidiary, partner, or joint venture, or is owned jointly owned, or substantially affected or operated by a related party.

Now, it’s time to know about Related-party transactions which is a transfer of resources, services, or obligations between a reporting entity and a related party, irrespective of whether a price is paid. Accordingly, IAS 24 specifies that it discloses the existence of the related party relationship as well as information on certain transactions and deferred balances, including obligations, required for users to recognize the possible impact of the relationship on the financial statements. Thus, IAS 24 requires an entity to disclose key management personnel compensation in total and by category as specified in the Standard.

So, let’s have a look at the disclosures that need to be made:

  • Relationships between the parent and the subsidiaries should be disclosed irrespective of whether any transactions have been made or not. Unless the parent of the company or the ultimate controlling party does not produce consolidated financial statements, instead the next senior parent shall be designated for public use of the consolidated financial statements.
  • An entity will report the compensation total to the main management personnel for each of the categories such as short-term employee benefits, post-employment benefits, termination benefits, share-based payment and other long-term benefits.
  • If main management resources are provided by another company, instead it must report only the sums paid for the delivery of such resources.
  • If, throughout the financial year, the company has dealings with the related party, it shall report the existence of such dealings, as well as all the information such as the number, unpaid balances and obligations, the provision of questionable debts, and the costs recognized in respect of poor and uncertain debts.

The disclosures for similar items can be made in aggregate except when separate disclosure is necessary to understand the effects of related party transactions on the financial statements.

As per Companies Act, 2013 under section 2(76) which defines a related party, with reference to a company to mean;

  • Director or a key managerial person or their relatives or
  • A firm, private co. in which the partner, director/manager or his relative is a partner or
  • A private co. or a public co. in which a director holds along with his relatives, more than 2% of its paid-up share capital.

Now,

 Related Party Transaction as per sec 188

Exemption from sec 188 where such a transaction takes place during the ordinary course of business and at arm’s length price. Where Arm’s length price means if a company is entering into any transaction with its related party then that price which the company would have taken or given if such transaction would have taken place with any unrelated party i.e. the actual market price of that good, property or service. Therefore any transaction made at arm’s length price called arm’s length transaction and such transaction did not require approval of the board for its completion.

Disclosure Requirements;

Disclosures to be made in the notice of Board Meeting;

  • name of the related party and nature of the relationship;
  • nature, duration of the contract and specifies of the contract or arrangement;
  • material terms of the contract or arrangement including the value, if any;
  • any advance charged or earned for the contract or arrangement, if any; and
  • the manner in which prices and other terms of trade are calculated, both included as part of the contract and not considered as part of the contract;
  • whether all factors applicable to the contract have been taken into account, if not, the specifies of factors not included with the justification for not taking into account certain factors;
  • any other information relevant or important for the Board to take a decision on the proposed transaction.

Disclosure by interested directors;

Every representative of an organization involved or engaged in a contract or arrangement or a planned contract or arrangement entered into or to be entered into in some manner, explicitly or indirectly;

  • with a body corporate in which such director or such director in association with any other director, holds more than 2% shareholding of that body corporate, or
  • with a body corporate in which such director is a promoter, manager, Chief Executive Officer of that body corporate; or
  • with a firm or other entity in which, such director is a partner, owner or member, as the case may be

Shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed.

Disclosures to be made in Register of contracts or arrangements in which directors are interested;

Every company shall maintain one or more registers in Form MBP 4, and shall enter therein the particulars of contracts or arrangements with a related party with respect to transactions to which section 188 applies.

Consequences of non-compliance:

  1. If any related party transactions or contracts are signed without the consent of the board and/or members and if, as the case may be, the board and/or members do not ratify the agreement within 3 months at a meeting, the contract or agreement will be voided at the Board’s discretion and if the agreement is with any related party any director or approved by any other director then the concerned directors are liable to indemnify the loss incurred by the company.
  2. In addition, the company can also move against a director or employee who, in contravention of the provisions of this section, has entered into such a contract or arrangement to recover any damage suffered by the company as a result of such contract or arrangement.
  3. Any director or other employee of a company who has entered into or approved a contract or agreement in violation of the provisions of this section shall:-
  4. In the case of listed co. be punishable by imprisonment for a period of up to 1 year or by a fine not less than Rs. 25,000/- but extending to Rs. 5,00,000/- or both;
  5. In case of any other co. a fine of no less than Rs. 25,000/- but which may extend to 5,00,000/- shall be punishable.
  6. Another is ineligible to be a director for five years if, within the last five years preceding it, he is convicted of an offense associated with related party transactions.

As per, Sec 40A(2)(b) The persons referred to in clause (a) u/s 40A(2) are the following;

  • In case the individual is an assessee relative of the individual.
  • In case the assessee is HUF/ Firm/ Company/ Association of Person any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member
  • any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual;
  • a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member or any other company carrying on business or profession in which the first mentioned company has substantial interest;
  • a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member;
  • any person who carries on a business or profession,
  • where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or
  • where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person.

Explanation — for the purposes of this subsection, a person shall be deemed to have a substantial interest in a business or profession, if,—

In a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty percent of the voting power; and

In any other case, such person is, at any time during the previous year, beneficially entitled to not less than twenty percent of the profits of such business or profession.

The word relative is defined u/s 2(41) of the Income Tax Act in relation to an individual, as the husband, wife, brother or sister or any lineal ascendant or descendant of that individual.

It is disclosed in the company’s annual report which details related party disclosures providing a better understanding of the company’s operations.

An auditor is required to give in a tax audit report payment details for the persons specified in the part 40A(2)(b) of the Form 3CD(Audit Tax Report) referred to in Clause 23. The information to be disclosed in clause 23 can be found easily from the Related Party Disclosures under AS 18 in the Notes to Accounts of Audited Financial Statements as tax audit is normally conducted after the statutory audit. However, the related parties as per AS 18 and the persons covered u/s 40A (2)(b) are not completely the same.

Conclusion

There is no consistency between the criteria of the Companies Act, 2013, Sebi norms, and Accounting principles for related parties. The Companies Act, 2013 requires disclosure at the time of contract or agreement while the accounting norm requires disclosure at the time of transaction. Clause 49 adds to the definition provided under the Act a new class of related parties that includes close family members, fellow company organizations, joint ventures of the same third party that their combinations which are not in the accounting norm or the Companies Act. Revised Clause 49 includes the consent of shareholders for all transactions of material related parties, with no provision for transactions in the ordinary course of business or arms-length. The related party transactions are thus widespread and form part of all business group activities.

Extensions announced under Direct Tax, Audit Compliance and RERA due to Covid 19

Khushi Surana
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Extensions announced under Direct Tax, Audit Compliance and RERA due to Covid 19

The Finance Minister Ms. Nirmala Sitharaman, in the press release held on 13.05.2020 announced various relaxations in respect to deadlines and due dates under Income tax return filing, Tax Audit, Vivad se Vishwas scheme and RERA,2016.

Have a look at the revised due dates below:

  1. Income Tax Returns Deadline For 2019-20 Extended to End-November

The dates for the financial year 2019-20, for filing the income tax returns have been            pushed back from July 31, 2020 and October 31, 2020 to November 30, 2020.

  1. Tax Audit Deadline for 2019-20 Extended to End-October

The date for the tax audit has also been pushed back by a month from September 30, 2020 to October 31, 2020.

  1. Payment due date for “Vivad se Vishwas” Scheme Extended

The period of “Vivad se Vishwas” Scheme for making payment without additional amount will be extended to December 31, 2020. Applicants will not have to pay any extra interest or penalty on the extension, said the minister. 

  1. Extension of Registration and Completion Date of Real Estate Projects under RERA

There has been an adverse impact due to COVID and projects stand the risk of defaulting on RERA timelines. Ministry of Housing and Urban Affairs will advise States/UTs and their Regulatory Authorities to the following effect:

  • Treat COVID-19 as an event of ‘Force Majeure ‘under RERA which means the epidemic COVID-19 will be considered as unforeseeable circumstances that prevent someone from fulfilling a contract.
  • Extend the registration and completion: The registration and completion date Suo-moto by 6 months for all registered projects expiring on or after 25th March, 2020 without individual applications. Regulatory Authorities may extend this for another period of up to 3 months, if needed.
  • Issue fresh ‘Project Registration Certificates’ automatically with revised timelines
  • Extend timelines for various statuary compliance under RERA concurrently.

IMPACT: These measures will de-stress real estate developers and ensure completion of projects so that home buyers are able to get delivery of their booked houses with new timelines.

Why it is important to know your business’s “Working Capital Cycle”?

CA Richa Agarwal
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Why it is important to know your business’s “Working Capital Cycle”?
A working capital cycle (WCC) may sound like financial jargon, but it’s an important concept for business owners to understand. What entrepreneur wouldn’t want to know how fast their company can turn a profit? The Working Capital Cycle is a measure of how quickly a business can turn its current assets into cash. Understanding how it works can help small business owners like you manage their company’s cash flow, improve efficiency, and make money faster. To understand net working capital, you should know what your current assets and current liabilities are. Current assets can be converted to cash in a short-period. In financial parlance, “current” or “short-term” typically refers to one year. A business’s current assets might include inventory, accounts receivables, prepaid expenses, or short-term investments. They don’t include long-term assets, such as real estate or equipment. Your firm’s Current liabilities are its debts and obligations within the same period. These might be bills to vendors, payroll, or serving loans. Working capital is your current assets net of current liabilities. In other words, working capital is the assets you have after paying your bills, at least in the short-term. Essentially, the working capital cycle begins when assets are obtained to start the operating cycle and ends when the sale of a product or service is converted to cash. Ultimately, the working capital ratio that you have will determine if you can afford short-term expenses, so it’s imperative that you monitor your business’s finances. One way to do this is to keep a balance sheet, which is a statement of your business’s assets, capital, and liabilities. Referring to your balance sheet frequently will enable you to review how much positive working capital you have, so that you can adjust payment cycles or other factors

What Affects the Cycle?

The stages of a working capital cycle will vary depending on your business’s industry and how you operate, but the key elements will be the same. For accounting purposes, the working capital cycle is measured by how long inventory takes to move, and the time it takes to receive cash payment from the sale, subtracted by how long your business has to pay its bills. For instance, the working capital cycle for a retail company might involve purchasing raw materials on credit to begin the cycle, selling the product over several weeks, and collecting cash from credit card sales a month later. Let’s say it takes the business 90 days to turn inventory into cash, and the bill for inventory is due in 60 days. Therefore, the business’s working capital cycle is 30 days, which is how long the company will be short on cash. Ideally, owners will want a negative working capital cycle, in which they receive payment for goods before their own bills are due. This can be accomplished by revising various stages of the cycle, such as moving inventory faster, or asking customers to pay sooner. You could also lengthen your accounts payable or credit terms, for example, by asking vendors to give you more time to pay your bill.

Financing Growth and Working Capital

Businesses with normal/positive cycles often require financing to cover the period of time before they receive payment from customers and clients.  This is especially true for rapidly growing companies. A common warning axiom regarding growth and working capital is to be careful not to “grow the company out of money.” To deal with this potential problem, companies often arrange to have financing provided by a bank or other financial institution.  Banks will often lend money against inventory and will also finance accounts receivable. For example, if a bank believes the company is capable of liquidating its inventory at 70%, it may be willing to provide a loan equal to 50% of the value of the inventory. (The 20% difference between 70% and 50% gives the bank a buffer, or financing cushion, in case the inventory has to be liquidated). Additionally, if a company sells products to businesses that have high creditworthiness, the bank may finance those receivables (called “factoring”) by providing early payment of a percentage of the total revenue. By combining one or both of the above financing solutions, a company can successfully bridge the gap of time required for it to conclude its working capital cycle. Small business owners who fall short might turn to financing options, such as a revolving credit line, cash advance, or business loan to bridge these gaps in cash flow. Ultimately, you should try to shorten the working capital cycle. The faster your business converts assets to cash, the sooner that cash is available for use to run and grow your operations.

Index funds – Here’s why they’re a smart investment.

Anjali Garg
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Index funds – Here’s why they’re a smart investment.

Index funds, created by John Clifton Bogle almost 45 years ago as a way for everyday investors to compete with the pros. Index funds are a form of passive investing which is an investing technique that involves purchasing and keeping long-term assets, rather than performing regular trades to try to beat the market because they allow investors to buy a lot of stocks at once and hold them for the long term. We know the importance of investing in stocks to grow our wealth. But choosing the companies and industries that will deliver the best earnings growth is a real challenge. Competitive trends, management’s ability to execute on their plans and unpredictable events, make it very difficult to forecast results with success and consistency. Building a well-rounded portfolio of individual stocks is complex. Also it is difficult to actively buy and sell individuals securities and match the market’s performance. So to build a portfolio that is designed to grow and to get invested in many different companies and sectors it has to be well diversified.

At a period when financial markets have witnessed a dramatic downturn since the Covid-19 pandemic broke out and values of several securities reach their multi-year lows, investors have to pick stocks from certain firms that have a relatively solid balance sheet.

What will you do?

However, instead of focusing at specific firms, though, an investor will preferably participate in index funds that would have stocks of industry leaders around the board. Here, the easiest and low cost way to get invested in as many companies as possible is to invest in a mutual fund or an exchange traded fund(ETF). And an insightful solution to that is Index Investing which gives two important advantages that are: diversification and minimizing costs.  Index funds can give a broad exposure to the market. In fact, some are so broad that buying them means owing a tiny piece of almost every company in any country, with just one investment! 

Index funds have, proved to be a big success for retirement savers and other non-finance professionals, also for investors who are risk-averse and expect predictable returns as it does not require any extensive tracking. First of all, since you no longer pay someone to pick stocks for you, index funds appear to be less costly for investors than actively managed funds. In 2020, the average passive fund expense ratio is around 0.5% as compared to active managed funds having an expense ratio of 1% to @2.5%. These index fund investments are not controlled aggressively, so no plan is needed for the fund manager to devise. So, the disparity is in the expense ratio. So, Index Fund’s main USP is low expense ratio which generate comparatively higher returns on investment.

Index funds collect money from a group of investors and then buy individual stocks or other assets that form a particular index which helps to reduce the related costs that managers charge when opposed to other funds where someone is actively strategizing to include which investments and thus incurs low expenses. With an index fund, the mix of stocks — what’s known as its diversification — helps to minimize the portfolio’s related risk.

As the global business situation is volatile and the conditions are evolving quite quickly, the investors need to pick the index carefully. Ideally an individual would be invested in diversified funds such as Nifty or Sensex. When the Nifty is benchmarked with an index fund, the portfolio would make up the same 50 stocks as the benchmark. Individual investors who are not aware can hang on to investing funds for flexibility, liquidity and investment comfort. Some of the index funds to investment now are: LIC MF index Fund, ICICI Prudential Index Fund, HDFC Index Fund Nifty 50 Plan, UTI Nifty Index Fund and SBI Nifty Index Fund.

“Consistently buy an S&P 500 low-cost index fund,” Buffett said. “I think it’s the thing that makes the most sense practically all of the time.”

Section 44AB of Income Tax Act- All about Tax Audit

Anjali Garg
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Section 44AB of Income Tax Act- All about Tax Audit

Section 44AB of Income Tax Act contains provisions pertaining to the tax audit under the Income Tax Audit. Tax audit refers to the independent verification of the books of accounts of the assessee form an opinion on the matters related to taxation compliances undertaken by the assessee. While preparing the books of accounts of the business or profession for the purpose of income tax filing, the assessee has to comply with the provisions of Income Tax Act.

Objective of Tax Audit

Tax audit is conducted to achieve the following objectives:

  1. Ensure proper maintenance and correctness of books of accounts and certification of the same by a tax auditor.
  2. Reporting observations/discrepancies noted by tax auditor after a detailed examination of the books of account and facilitating the administration of tax laws by a proper presentation of accounts before the tax authorities.
  3. To report prescribed information such as tax depreciation, compliance of various provisions of income tax law etc.

Who is required to get the tax audit performed under section 44AB?

As per section 44AB of income tax act, following persons are compulsorily required to get their accounts audited

  • A person carrying on business, if the total sales, turnover or gross receipts (as the case may be) in business for the year exceed or exceeds Rs. 1 crore. This provision is​ not applicable to the person, who opts for presumptive taxation scheme under section 44AD​ and his total sales or turnover doesn’t exceeds Rs. 2 crores.

Amendment to section 44AB– w.e.f. Assessment Year 2020-21 , the threshold limit, for a person carrying on business is increased from Rs. 1 Crore to Rs. 5 crore provided that in case of that person:

(a) aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed 5% of the said amount; and

(b) aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed 5% of the said payment.

In other words, more than 95% of the business transactions should be done through banking channels.

  •  person carrying on profession, if the Gross receipts exceed Rs. 50 lakhs during the year.
  • A person carrying on business eligible for presumptive taxation under Section 44AD or Carrying on the profession eligible for presumptive taxation under Section 44ADA but claims profits or gains lower than the prescribed limit under presumptive tax scheme and has income exceeding the basic threshold limit/ amount which is not chargeable to tax.
  • A person carrying on the business declares profit for any Previous Year in accordance with Section 44AD and he decreases profit lower than the profit computed as per section 44AD, for any of the 5 Assessment Year subsequent to the Previous Year and his income exceeds the amount which is not chargeable to tax. In other words, carrying on the business and is not eligible to claim presumptive taxation under Section 44AD due to opting out for presumptive taxation in any one year of the lock in period and income exceeding basic threshold limit.
  • A person carrying on business eligible for presumptive taxation under Section 44AE, 44BB or 44BBB but claims profits or gains lower than the prescribed limit under presumptive taxation scheme.

What constitutes Audit report?

 

Tax auditor shall furnish his report in a prescribed form which is Form No. 3CA/3CB and the prescribed particulars are to be reported in Form No. 3CD which forms part of audit report.

  • Form No. 3CA is furnished when a person carrying on business or profession is already mandated to get his accounts audited under any other law.
  • Form No. 3CB is furnished when a person carrying on business or profession is not required to get his accounts audited under any other law.

Who is permitted to perform a tax audit under section 44AB?

A Chartered Accountant who holds the certificate of practice and is in full-time practice may perform tax auditing. The tax auditor (CA) performs a thorough analysis of account books according to the department’s specified formats in form no. 3CA/3CB and Form no. 3CD along with the income tax return.

Penalty of non filing or delay in filing tax audit report

Section 271B of the Income Tax Act is a penalty provision, which penalizes the assessee who fails to get the accounts audited or who fails to furnish the tax audit report within the prescribed time limit. If any taxpayer who is required to get the tax audit done but fails to do so, the least of the following may be levied as a penalty:

  1. 0.5% of the total sales, turnover or gross receipts or,
  2. Rs 1,50,000

However, according to section 271B​, no penalty shall be imposed if reasonable cause for such failure is proved.

Due date by which a taxpayer should get his accounts audited

Any person covered by section 44AB of income tax act should get his accounts audited and should obtain the audit report on or before 30th September of the relevant assessment year. For an example Tax audit report for the FY 2019-20 corresponding to the AY 2020-21 should be obtained on or before 30th September, 2020.

Due to the pandemic Covid-19, the due date for the tax audit is pushed back by a month – from September 30, 2020 to October 30, 2020 for FY 2019-20.

Point to Note

If the assessee is liable/ needed to have his account books audited under some other legislation ( say Statutory audit in compliance with the requirements of the Companies Act, 2013), in such a situation, the taxpayer need not get his accounts audited again for income tax purposes. It is sufficient if accounts are audited under such other law before the due date of filing the return and also a report by the chartered accountant in the form prescribed under section 44AB, i.e., Form No. 3CA and Form 3CD

Also Read:

THE TITAN’S TITAN STRATEGY OF “IMPURE TO PURE” AND BUILDING THE TANSIHQ BRAND

Shubham Tibra
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THE TITAN’S TITAN STRATEGY OF “IMPURE TO PURE” AND BUILDING THE TANSIHQ BRAND

Tanishq’s early commercial ads were presented in a luxurious ambiance and showed studded and diamond jewelry. All this served to win over the elite customer base. But it also served the perception that Tanishq was a high-price band.

In a ground-breaking initiative, Tanishq introduced “Karatmeter” at all its outlets, a device to check the purity of gold. And they invited customers to walk in with any piece of jewelry and measure its purity for free.

It was too irresistible an offer to miss, and women streamed in to check their gold ornaments bought from the family jeweler out of blind trust since years.

Reportedly, majority of them were shocked to discover that they had been cheated by their family jewelers.

But the sales were still the same. People still came into the stores just to check their jewellery.

The Karatmeter was telling people that their jewellery was worth less but the Tanisq was not offering any solutions to the problem. Sales were still the same and Tanishq’s teams were at their wits end.

At that time, it came up with a turnaround strategy of ‘Impure to pure’.

Women could bring in their gold jewellery and test it on the Karatmeter. If the purity of their jewellery was lower than 22 carat and higher than 19 carat, it could be exchanged for Tanishq’s 22-carat jewellery of their choice by paying only the manufacturing charges.

Yes! Tanishq would bear the cost of the gold.

As a result, Tanishq build its brand as a synonym of trust & purity. Since then, it’s been a market leader all over India.

Tanishq changed attitude of customers by winning over them with informed trust rather than blind trust.

The key had been to identify the problem and offer a solution. It was not surprising that this scheme became popular all over India. Tansihq has been growing with similar strategies ever since and is the most valuable company in this segment.

All this happened despite huge challenges of economic slowdown, unorganized market, unfavorable changes in tax structures and many others.

So what’s your turnaround strategy post lockdown for your business?

What’s the favorite turnaround strategy you have come across?

Would be happy to know in comments.

Thanks.

BIG 4 – Shift from an Accounting Firm to a Professional Service conglomerate globally!

Shubham Tibra
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BIG 4 – Shift from an Accounting Firm to a Professional Service conglomerate globally!

The Big 4’s are world’s four largest professional service firms.

We can call them as the secret Google, Microsoft, Apple & Amazon of Accounting firms. Their revenues are huge and they have strong entry barriers in their sector. They have large employee strength and presence in almost all major economies of the world.

So first let’s have a look at some brief statistics about these firms:

Now interestingly, if we look at the next big 4 firms, we realized that the closest one to them are actually too far..!

The revenue of KPMG (last of the Big 4 in terms of revenue) of $ 29.75 Billion hugely surpasses the combined revenue of Big 5 to Big 8 (BDO, RSM, Grand Thornton, & Crowe) i.e. $ 25.36 Billion.

This shows that there is no one remotely close to the Big 4 in terms of its revenue, market share, technology & employee strength.

It is estimated that Big 4 audits 80% of the Listed Companies in the world.

But interestingly, Big 4 generates only 1/3rd of their revenue from Audit Fees.

The ambit of services provided by these firms is so huge that it’s wrong to call them the Big 4 Accounting Firms.

They should be correctly called as a “Professional Service Conglomerates”

Now the question is, How they did it?

As we can see, each of the Big 4 has more than 100+ years of existence.

And all of them had done one thing in common to reach where they are today.

“Mergers & Acquisition”

Previously, there were numerous large accounting firms. Each of them used to dominate in their own country unlike today.

In 20th Century, some firms realized the importance of merger and acquisition eventually established large scale presence around the globe.

In the 20th Century, after a lot of mergers and acquisition, the Big 8 firms used to dominate the industry:

Subsequently,

Ernst & Whinney merged with Arthur Young to form Ernst & Young

Deloitte Haskins & Sells merged with Touche Ross to form Deloitte & Touche.

And Price Waterhouse merged with Coopers & Lybrand to form PricewaterhouseCoopers

Finally, the insolvency of Arthur Anderson because of the 2001 Enron Scandal left the world with the Big 4 that we have today:

  • Ernst & Young
  • Deloitte & Touche
  • KPMG
  • PricewaterhouseCoopers

It’s also worthwhile to note that they are not firms but a network of member firms agreeing to operate under a common brand name

The firms are go giant that at times it looks like these firms would continue to dominate the sector forever.

But the fall of Arthur Anderson proved that even Big firms can collapse.

On the other hand, the Big 4 has learnt a good deal of lesson with the fall of Arthur Anderson and are found to be continuously improving on Risk and Reputation matters especially in India after their alleged involvement in Satyam & IL&FS Scandals.

Honestly, they have been constantly developing advanced technologies and methodologies and are way ahead of their competition.

Now these lead me to recall the speech of our Prime Minister Shri Narendra Modi on CA Day back in 2017. He expressed a vision of having the presence of Big 4 Indian Firms among the world’s Big 8 firms.

Although with the above data, it appears to be impossible. But we should not forget, that this was the statement coming from the PM of India. And the speeches given by our PM are always well researched, well drafted & fact checked by his team. As I begin to research on the viability of the vision, I came across the following road map.

So how can we form Indian Big 4 amongst global Big 8?

Well, honestly this would include a lot of endeavor from the top Chartered Accountant firms in India. Some of them can be listed as below:

  • They have to merge within themselves and make lots of mergers & acquisitions around the globe.
  • The existing Indian Member Firms has to leave the network of Global Big 4 and join Indian Networks.
  • This Indian network firms will have to build reputation for providing quality services around the globe.
  • The business houses had to follow Nationalism by hiring Indian firms instead of Big 4’s.
  • Fall of 1 or more Big 4 firms just like Arthur Anderson due to Enron Scandal.
  • And most importantly, expecting the Big 4 not to do anything all this while.

All of this seems quite difficult, extremely superficial and rather impossible.

Even if few of the big Indian firms comes together, there would a huge challenge to work under a common brand name and maintain transparency.

But not to forgot, it’s a vision by our PM. And vision have always been of such kind. Difficult & Impractical.  After all, vision easily achievable is not a great vision at all..!

The whole vision is nice to hear & think. But its easier said than done. All we can say at this moment, Big 4 stands too Big to be replaced by any of their competitors around the globe.

Sources:

https://www.wikipedia.org/

https://www2.deloitte.com/us/en.html

https://www.pwc.com/gx/en.html

https://www.ey.com/en_us

https://home.kpmg/xx/en/home.html

Covid-19: Bankruptcy Dominoes

Rahul Manglam
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Covid-19: Bankruptcy Dominoes

As on 10th of May 2020, there are around 4.06 million reported cases of coronavirus confirmed all around the globe, costing humanity as many as 280’K lives. And, looking forward it looks like the virus isn’t going to spare companies either. Since the pandemic had brought the whole world and economies along with it to a standstill the companies and firms are having a hard time to keep their businesses afloat with no or very little cash flow and debts and liabilities piling up.

Companies have perpetual succession they usually enjoy a continuous existence whereas us human we have an end i.e. death, for companies that end is usually when they’re liquated voluntarily or when they’re forced into bankruptcy. Bankruptcy isn’t a death sentence. Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by court order, often initiated by the debtor.

Since major COVID-19 led bankruptcies are filed by US multi-national companies, we should have a brief idea about their Bankruptcy Code. In US a company can file for bankruptcy under six chapters under their Bankruptcy Code, however, the major ones are

  • Chapter 7: basic liquidation for individuals and businesses; also known as straight bankruptcy; it is the simplest and quickest form of bankruptcy available
  • Chapter 11: rehabilitation or reorganization, used primarily by business debtors, but sometimes by individuals with substantial debts and assets; known as corporate bankruptcy, it is a form of corporate financial reorganization which typically allows companies to continue to function while they follow debt repayment plans
  • Chapter 13: rehabilitation with a payment plan for individuals with a regular source of income; enables individuals with regular income to develop a plan to repay all or part of their debts; also known as Wage Earner Bankruptcy

Major companies that have filed for (Chapter 11, not Chapter 7) bankruptcy include:

  1. J.Crew Group: The classic clothing brand J.Crew, the seller of sweater vests, chinos, is one of the first major retailers to seek bankruptcy protection in the U.S. According to its May 4 filing, the group which runs both J.Crew and Madewell will convert $1.65 billion of its debt into equity with lenders and has secured $400 million in “debtor-in-possession” financing, which lets companies stay operational while undergoing bankruptcy. However, the company expects to re-open 181 J.Crew stores, 171 J.Crew factory stores, and 140 Madewell stores after coronavirus restrictions are lifted.
  2. Gold’s Gym: The fitness center chain, which started in Venice Beach, California, filed for bankruptcy on May 4. The company closed its empire of roughly 700 gyms during the coronavirus pandemic, 30 of which will remain closed after the bankruptcy. However, the company will continue to reopen the rest of its gyms throughout the process, depending on federal, state, and local guidelines.
  3. Dean & Deluca: The luxury grocer was already hanging by a thread when it was heading into 2020, as it closed its founding, flagship store in Soho, New York, in October. In its April filing, which finally cited the coronavirus pandemic as a final straw, listed only one employee and $500 million in liabilities against $50 million in assets. However, the company still hopes to reopen Dean & Deluca locations in New York in the near future.
  4. True Religion: The company filed for bankruptcy in April for the second time in three years. While the brand was already navigating a slump, the government-ordered shutdowns of brick-and-mortar stores due to the coronavirus pandemic sent the company into bankruptcy once again.
  5. Speedcast International: is an Australian satellite internet company whose global maritime network serves 80% of cruise ships around the world filed for bankruptcy in April. The company referred to their weakness in the cruise market as the coronavirus pandemic has curbed recreation and leisure travel, which worsen the company’s $600-odd million in an old debt, rendering it “impossible” to grab equity lifelines. Now that the company have filed for bankruptcy the company will restructure, backed by $90 million in debtor-in-possession financing.
  6.  Flybe: is a British airline that used to provide more than half of U.K. domestic flights outside of London, entered administration that is U.K. equivalent on bankruptcy proceedings on March 5. Most of Flybe’s flights had been cancelled and grounded as Europe which was quickly becoming the epicenter of the coronavirus pandemic. Since the company’s $128 million (100 million British pounds) aid request was denied by the U.K. government. Since the airline was already struggling and denial of aid in such times left the company with no option but to file for bankruptcy.
  7. Virgin Australia: one of Australia’s largest airlines co-founded by billionaire Richard Branson became the world’s largest carrier to file for bankruptcy through voluntary administration in Australia. The company’s plea for a $903 million (1.4 billion Australian dollars) loan from the Australian government was denied. The company haven’t had posted profits for the last 7 years prior to coronavirus pandemic, however, potential buyers believe it can survive with restructuring.

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