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June 29, 2011

Annual Information Return and Income Tax secrutiny

The Central Board of Direct Taxes (CBDT) issues a list of high-value transactions every year, which can land you in the scrutiny net. These transactions constitute the Annual Information Report (AIR) under Section 285BA, rule 114E, which requires certain 'specified person(s)' to file the report every year.

When you make high-value transactions — investment in property and/or mutual funds — your bank or the respective financial institution (mutual fund house, for example) reports this to the I-T department through an AIR. The department keeps track of such transactions through your permanent account number (PAN).

The following AIR transactions need to be reported when filing returns:

  • Cash deposits of Rs 10 lakh and above
  • Credit card bills of Rs 2 lakh and above
  • Mutual fund investment of Rs 2 lakh and above
  • Purchase of bonds/ debentures worth Rs 5 lakh and above
  • Purchase of stocks worth Rs 1 lakh and above
  • Purchase of immovable property worth Rs 30 lakh and more
  • Sale of immovable property worth Rs 30 lakh and above
  • Purchase of RBI bonds worth Rs 5 lakh and above

Remember that you can file only one AIR for a financial year. However, if you want to rectify a mistake or want to furnish additional information in the report, you can file ‘supplementary information'.

“There are three situations when you may need to file supplementary information. (a) When you respond to a notice from the I-T commissioner (central information branch) within the time allowed by the commissioner. (b) To furnish additional details not submitted in the original AIR (c) In response to any deficiency indicated by the tax information network (TIN) in the provisional receipt,”

CBDT decided that senior citizens and small taxpayers, filing income-tax returns in ITR-1 and ITR-2, will be subject to scrutiny only when the department has credible information.

“For this purpose, senior citizens would be individuals who are 60 years or more. Small taxpayers would be individual and HUF (Hindu undivided family) taxpayers whose gross total income, before availing deductions under Chapter VIA, does not exceed Rs 10 lakh,” the circular said.

June 28, 2011

Consolidation of Financial Statements

 Section 212 of the Companies Act, 1956 via its sub section clearly cast an obligation to attach with the Balance Sheet of the Company certain specified document. kindly refer Section 212 (1) (a) to (g)

These documents are - Balance sheet, Profit & Loss Account, Director's Report, Auditor's Report, a statement of the holding company's interest in the subsidiary, a statement containing information specified in Section 212(5) and the report containing information specified in Section 212(6).

Now a company having a subsidiary has two options -

1. Prepare Consolidated Accounts; or

2. Comply the requirements of Section 212(1)

As per ICAI clarification AS-21 is mandatory if an enterprise presents consolidated financial statements. AS-21 does not mandate an entity to present consolidated financial statements, but where an entity presents consolidated financial statement on its own or for complying with the requirements of any statute of otherwise, it should prepare and present consolidated financial statements in accordance with AS-21
Section 212 applies to all companies i.e. public as well as, in your case, pvt co. which holding co. is required to prepare consolidated financial statement of their susidiary(ies)
As per AS 21
A subsidiary is an enterprise that is controlled by another enterprise (known as the parent).

(a) The ownership, directly or indirectly through subsidiary (ies), of more than one-half of the voting power of an enterprise; or
(b) Control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise so as to obtain economic benefits from its activities.

The Securities and Exchange Board of India, vide its circular SMI3RP/Policy/Cir.44/01 dated August 31, 2001 has amended clause 32 of the listing agreement which now requires the listed companies to publish consolidated financial statements in addi­tion to the separate financial statements in its annual report. The amended clause further requires that the statutory auditors of the company should audit the consolidated financial statements. The filing of consolidated financial statements with stock exchanges has also been made mandatory.

Similarly, the Reserve Bank of India, vide its circular no. DBOD No. BR13C. 72/21.04,018/2001‑02 dated February 25,2003 have required the banks to prepare consolidated financial statements to facilitate consolidated financial supervision.

GPRS and EDGE in Mobile Phone Bills

Most common GPRS classes in use are as follows:

Upload/ Download Speed
Class 2
8 - 12 kbps upload / 16 - 24 kbps download
Class 4
8 - 12 kbps upload / 24 - 36 kbps download
Class 6
24 - 36 kbps upload / 24 - 36 kbps download
Class 8
8 - 12 kbps upload / 32 - 40 kbps download
Class 10
16 - 24 kbps upload / 32 - 48 kbps download
Class 12
32 - 48 kbps upload / 32 - 48 kbps download
Generally speaking, the higher the GPRS class, the faster the data transfer rates.

EDGE (Enhanced Data rates for GSM Evolution) or EGPRS provides data transfer rates significantly faster than GPRS or HSCSD. EDGE increases the speed of each timeslot to 48 kbps and allows the use of up to 8 timeslots, giving a maximum data transfer rate of 384 kbps. In places where an EDGE network is not available, GPRS will automatically be used instead. EDGE offers the best that can be achieved with a 2.5G network, and will eventually be replaced by 3G.

Benefits of Filling Income Tax Returns

The finance minister recently indicated that salaried employees earning below Rs. 5 lakh and not having any other sources of income would be exempt from filing the income-tax returns.
The due date for filing tax returns by individuals depends on the category one belongs to. In case of individuals whose accounts are required to be compulsorily audited, the return is to be filed by 30 September. For the rest, July 31 is the due date.

Benefits of tax filing
Filing of tax returns ensures that the individual is compliant with the tax laws. There are other benefits also. By staying within the time lines, the individual would be able to manage his financial affairs effectively. For instance:

  • The acknowledgment for filing the tax returns would come in handy in case a visa is required to be obtained; the document would serve as proof of the financial soundness of the individual.
  • If a loan is required to be obtained from a financial institution, the tax returns would be required to prove the ability of the person to repay the loan
  • Excess taxes paid by an individual either by way of tax deduction or advance/self-assessment tax can be refunded only by filing tax returns.

June 24, 2011

IFRS Implementaion on Real Estate Companies

Indian Infrastructure and Real Estate companies are booking revenues even before they start the construction. This is possible under the currently used percentage of completion method of accounting, which allows companies to book revenues provided an agreement of sale has been signed with the buyer and a specified percentage of the project cost has been incurred. As a result, Indian Infrastructure and Real Estate companies’ revenues are higher by as much as 30% as compared to the work done by them. The adoption of International Financial Reporting Standards (IFRS) will reflect more appropriately the revenues of Indian real estate developers and their ability to deliver projects.


Investment Property are defined as real estate held to earn passive rental income or capital appreciation and generating cash flows largely independently of the other assets held by the entity. IFRS has a distinct standard addressing investment property and it allows a choice of using either the fair-value model or the cost model to account for such properties. Property, Plant, and Equipment (PPE) comprises property held by the owner for use in the production or supply of goods or services or for administrative purposes. Depending on the exact nature of other services provided, other owners of real estate such as hotels and seniors’ residences may be required to classify their investments as PPE. IFRS requires entities to account for PPE using the cost model, unless fair value can be measured reliably, in which case the revaluation model may be used. Inventory would comprise property held by a real estate entity for sale in the ordinary course of business or in the process of development for sale (e.g., condo units or houses). Inventories are required to be recorded at the lower of cost and net realizable value.

According to the percentage of completion method, developers can recognize revenues in proportion to the construction cost incurred in a year provided the ownership of the apartment has been transferred to the buyer. Furthermore, land cost is allowed to be the part of construction cost and the agreement of sale between buyer and seller is supposed to transfer the ownership to the buyer.
Let us consider the following example to understand the percentage of completion accounting method.
For a project, which has total cost of $100 (of which $30 is the land cost) and revenue of $120, if a developer has incurred 30% of the total cost ($30), he/she can recognize 30% of revenue (i.e., $36). Since the land costs are usually a part of the construction cost, developers can recognize this revenue even prior to starting any construction. Hence, it is not surprising that developers have started using this provision to their advantage and have started booking revenues for projects even before any construction commenced.

Ideally, revenues should be close to the cash received from customers especially because most customer payments are construction-linked but they can exceed the cash received from customers when:-

·         Revenues have been booked but no invoice has been raised to the customer because the company has not reached any construction milestone.
·         The customer has been invoiced but the builder has yet to receive payments.

According to IFRS guidelines on real estate that will be adopted in India in 2011 IFRIC (International
Financial Reporting Interpretations Committee) 15), revenues can be recognized only when the risk and rewards of ownership have been transferred. IFRS allows the use of the percentage completion method only if one of following conditions is met:
• If the contract is a construction contract, i.e., the contract is such that buyer has complete control over the design and specification of the property until its completion.
• If the contract is for rendering services, i.e., if the buyer provides the materials and the contracting entity only provides services.
• If the control, risks, and rewards of ownership of the work-in-progress passes on a regular basis to the buyer (as the construction progresses).

IFRS addresses the following two key risks involved in revenue recognition with respect to the sale of real estate projects (under construction).

The developer has the right to
change the layout plan,
including changes in location,
the number of apartments the number of floors, and specifications.
Specifications are decided by the seller and not by the buyer.
Since buyers do not have any
control over specifications,
IFRS would not allow this revenue recognition.
In case of a delay, the developer
will be liable to pay a penalty
charge of INR 5–10 per sq. ft.
The buyer’s right is limited to receiving penalty; the buyer does not have the right to take the possession of an incomplete apartment.
Control/Risk and reward of the work in process is not being transferred; hence, IFRS will not allow this revenue recognition.
If the buyer is unable to pay
Progress payments within the specified period, the developer have the right to forfeit the earnest money and cancel the sale.
The developer has more control over the apartment than the buyer.
Since there is no transfer of control, the percentage completion method will not be allowed to be used for revenue recognition.
If the developer is not able to deliver, the developer is liable to return the full amount along with some interest.
The contract does not mention the timeline that will be used to determine as to whether the developer will be able to deliver, signifying lack of Ownership of the buyer.
The percentage completion method will not be allowed.

• Market Risk – A fall in real estate prices below the purchase prices would result in homebuyers asking for a refund of their payment amount. Most builders allow refund after deducting a penalty.
Therefore, if sales are recognized at the time of signing of sale agreement, sales will have to be reversed at the time of cancellation.

Execution Risk – Execution risk becomes critical, especially during an economic downturn when most projects get delayed because the builders have little or no cash. For partially completed projects, recognizing a portion of the total revenues may not properly reflect the execution risk inherent in these projects. Since IFRS allows revenue recognition only if the project has been delivered, an IFRS compliant company’s financial statement will provide a better perspective of its execution capabilities.

While IFRS would make it difficult for builders to evade the completed contract method of accounting, real estate developers may minimize the downside by restructuring their sale agreements so that they transfer the risk and reward continuously to the buyers (during the construction period). This also bodes well for homebuyers since it would make sale agreements more favourable for them than they currently are and since they will get more control and ownership of the apartment (while it is being constructed).