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GOVERNMENT ASSIGNMENTS FOR CHARTERED ACCOUNTANTS


There is always debate in the minds of practicing Chartered Accountants over the size of the firms and their role in innovation. Some argue for their importance of large size having the top slab of the categories of firms, while some others argue for small size firms. In fact, the size of a firm is not clear in our minds that are correlated with the innovatory advantage. We are going to point advantages and disadvantages of small and large firms in innovation, especially related to the government audits i.e Bank Audits, Insurance Audits, audits from C & AG, Audits for RRBs and other scheme based audits.

Motivated by theories of the CA firm, which can be classified as arrangement or organizational structure to operate upon, there are considerable points before opting for the size of the firm across the country. It is established that on average, large firms are facing larger clients and medium and small firms are facing mixed of the clients. BIG 4 firms are really large and more or less enjoying a 
monopoly. The auditing firms are having ownership restrictions. The concept of acceptance of partnerships rather than the introduction of Joint Auditors is still not visible.

AAA. LARGE BIG 4 FIRMS.

The large firms currently referred to as the 'Big Four', all operate globally. The ICAI is trying hard to regulate the functioning of multinational accounting firms in the country. However, allegedly, they do practice under surrogate names and hence do not fall under the purview of the ICAI directly. ICAI can act only against its members or the firms registered with it in case of any malpractice or defaults. The Big Fours have come under severe criticism after the Satyam fraud where Pricewaterhouse Coopers was involved in auditing the accounts of the IT firm. ICAI has released a Report on Operation of Multinational Network Accounting Firms in India showing its helplessness in dealing the MAFs. The report clearly suggested that MAF has entered in India to set up representative office after obtaining permission from RBI under open trade agreement to do the consultancy. But in 2004, RBI has declined to ever grant any permission to operate from Indian soil. Now they are dealing in internal audits through companies in a big way and also having the audits of more than ¾ listed entities in India. Certain Indian CA firms & private limited companies associated with them hold out to public that they are actually MAFs in India whereas to the regulator, they hold out that they are purely Indian CA firms having no relationship with foreign entities. Their infrastructure, marketing skill and their strength of Chartered Accountants are the finest reasons to grow multifold. Bur so far Big 4 haven’t shown any interest in Govt. audits. Some of their move like to take the SBI Tax Audit by reducing the quantum of fees found much criticism and timely  Govt. intervention saved the tax audit opportunity with the statutory branch auditors.    

AA. LARGE FIRMS; CATEGORY I: More than 7 partners

Many of these firms operate both nationally and internationally. About 3% of Chartered Accountants belong to this segment. In the last few years, these firms are in process of restructuring. The charm of this sector is to have central auditor ship of the banks and PSU audits. However these firms if they can consolidate themselves can counter the MAFs operating through Indian firms in India. Naresh Chandra committee on corporate audit and governance  suggested that ICAI should propose to the Government a regime and a regulatory framework that encourage the consolidation & growth of Indian firms in view of the international competition they face, especially with regard to non audit services. For a government audit work these firms are eligible for the following. 

1. NORMS ON ELIGIBILITY, EMPANELMENT AND SELECTION OF STATUTORY CENTRAL AUDITORS IN PUBLIC SECTOR BANKS

(i) The audit firm shall have a minimum SEVEN full time chartered accountants, of which at least FIVE should be full time partners exclusively associated with the firm. The remaining TWO could be either exclusive partners or CA employees with a continuous association with the firm for a period of one year. These partners should have minimum continuous association with the firm i.e. one each should have continuous association with the firm at least for 15 years and 10 years, two with a minimum of 5 years each and one with a minimum of one year. Four of the partners should be FCAs. Also at least two of the partners should have minimum 15 and 10 years experience in practice.

(ii) The number of professional staff (excluding typists, stenographers, computer operators, secretary/ies and sub-ordinate staff etc.), consisting of audit and articled clerks with the knowledge in book-keeping and accountancy and are engaged in outdoor audit should be 18.

(iii) The standing of the firm should be of at least 15 years which would be reckoned from the date of availability of one full time FCA continuously with the firm.

(iv) The firm should have minimum statutory central audit experience of 15 years of Public Sector Banks (before or after nationalization) and/ or by way of statutory branch audit thereof or that of statutory audit experience of a private sector bank with deposits resources of not less than Rs.500 Crore.

(v) The firm should have statutory audit experience of 5 years of the Public Sector Undertakings (either Central or State Government undertaking. While calculating such experience, more than one assignment given to a firm during a particular year or more than one year's statutory audit (audits in arrears) assigned to the firm will be reckoned, as one year experience only, for the purpose of counting such experience.)

(vi) At least two partners of the firm or its paid Chartered Accountants must possess CISA / ISA qualification.

(vii) A full time partner does not include a person who is a partner in other firm or employed full time/part time elsewhere, practicing in own name or engaged in practice otherwise or engaged in other activity which would be deemed to be in practice.

2. SELECTION CRITERIA OF CA FIRMS FOR APPOINTMENT AS STATUTORY AUDITORS OF PSUS MAJOR AUDITS.WHERE AUDIT FEE IS ABOVE RS 1.50 LACKS.

 (i) The firm should have at least 6 CAs (out of which 5 should be partners and one could be a full time paid CA employee), which is indicative of capacity to handle big audits.

(ii) At least one partner should have an association of 10 years or more with the firm and at least 3 partners of the firm should have an association of 5 years or more with the firm and the remaining two should have an association of one year or more with the firm, to demonstrate stability over time.

(iii) The firm itself should have been in existence for 10 years or more, to prove that it is a well established firm. Allotment of major audits is based not only on the size of the firm considering the number of partners, and their association with the firm, number of Chartered Accountant employees, and the Zone in which the firms’ head office is located but also on the basis of factors such as 
sector experience, capability of handling big audits, past performance, eligibility of the firm to conduct a particular audit, location of the firm’s branch offices etc.

3. SELECTION CRITERIA OF CA FIRMS FOR APPOINTMENT AS STATUTORY AUDITORS OF REGIONAL RURAL BANKS Category I may be drafted for large scale amalgamated RRBs.

A. MEDIUM SIZED FIRMS: CATEGORY I: More than 5 Partners

This includes the so called 'second tier firms’. Many of these firms operate nationally. About 8 % of Chartered Accountants belong to this segment. In the last few years firms restructuring is evident in this category with a sole purpose to have big advances statutory branch audits. The firm is not eligible for Major audits of the PSU. 

1. NORMS FOR THE EMPANELMENT OF AUDIT FIRMS TO BE APPOINTED AS STATUTORY BRANCH AUDITORS FOR PUBLIC SECTOR BANKS

Here FIVE numbers of CAs should be exclusively associated with the firm on Full time basis. But out of total number of CAs, THREE numbers of PARTNERS exclusively associated with the firm on full time basis. The minimum strength of Professional staff is EIGHT. The firm or at least one of the partners should have a minimum of 8 years experience of branch audit of a nationalized bank and/ or of a private sector bank & the audit firm standing should be more than EIGHT years. A full time partner does not include a person who is a partner in other firm or employed full time/part time elsewhere, practicing in own name or engaged in practice otherwise or engaged in other activity which would be deemed to be in practice.

2. SELECTION OF CA FIRMS FOR APPOINTMENT AS STATUTORY AUDITORS OF PSUS WHOSE AUDIT FEES ARE UP TO RS 1.50 LACKS

The selection is made by correlating the point score earned by each firm of Chartered Accountants towards empanelment with the size of the audit fee. The point score is based upon the experience of the firm, number of partners and their association with the firm, number of Chartered Accountant employees, as follows:

 (i) Experience of the firm 0.5 point for every calendar year -Maximum 15. (Counted from the date of constitution of the firm with one full time FCA or date of joining of the firm by the existing partner having the longest association with the firm whichever is later.)

(ii) Full Time FCA Partners 5 points each for first 5 partners and 2.5 points each from 6th partner onwards.

(iii) Full Time ACA Partners3 points each for first 5 partners (including FCA partners) and 1.5 points each from 6th partner onwards.

(iv) Points for long association with the same firm5 points for each partner above 25 years. (4 points for each partner above 20 years.- 3 points for each partner above 15 years -2 points for each partner above 10 years- 1 point for each partner below 10 Years but above 5 Years.

(v) Full Time CA Employees1 point each for first 20 C.A Employees-Maximum 20 points.

(vi) CISA/ISA Qualified Partners 2 points each for three partners. -maximum 6 points.

(vii) CISA/ISA Qualified Employees1 point each – Maximum 3 points for 3 employees.

3. SELECTION CRITERIA OF CA FIRMS FOR APPOINTMENT AS STATUTORY AUDITORS OF REGIONAL RURAL BANKS Category I may be drafted for large scale amalgamated RRBs.

B. MEDIUM SIZED FIRMS: CATEGORY II. 

This includes the so called 'third tier firms’. This includes Chartered Accountants working in public practice in metros and in the smaller firms. . About 8 % of firms belong to this segment. To date, most of these firms have operated exclusively in local markets. These firms are eligible for big advances statutory branch audits. The firm is not eligible for Major audits of the PSU.

1.NORMS FOR THE EMPANELMENT OF AUDIT FIRMS TO BE APPOINTED AS STATUTORY BRANCH AUDITORS FOR PUBLIC SECTOR BANKS

Here THREE numbers of CAs should be exclusively associated with the firm on Full time basis. But out of total number of CAs, TWO numbers of PARTNERS exclusively associated with the firm on full time basis. The minimum strength of Professional staff is SIX. The firm or at least one of the partners should have preferably conducted branch audit of a nationalised bank or of a private sector bank & the audit firm standing should be more than SIX years for the firm or at least one partner. A full time partner does not include a person who is a partner in other firm or employed full time/part time elsewhere, practicing in own name or engaged in practice otherwise or engaged in other activity which would be deemed to be in practice.

2. SELECTION OF CA FIRMS FOR APPOINTMENT AS STATUTORY AUDITORS OF PSUS WHOSE AUDIT FEES ARE UP TO RS 1.50 LAKH Same as above for category I ( 5+ )

3. SELECTION CRITERIA OF CA FIRMS FOR APPOINTMENT AS STATUTORY AUDITORS OF REGIONAL RURAL BANKS  For Standalone RRBs Statutory Auditors may be drawn from Category II 

C. SMALL FIRMS: CATEGORY III 

This includes Chartered Accountants working in public practice, in practice through small partnerships or in the smaller firms. About 8 % of firms belong to this segment.  To date, most of these firms have operated exclusively in local markets. For a statutory bank branch Audit this is the comfortable category to get in to the statutory audits. These firms are largely spread over to the country and involve in every kind of professional service from financing, taxation to audits.

1. NORMS FOR THE EMPANELMENT OF AUDIT FIRMS TO BE APPOINTED AS STATUTORY BRANCH AUDITORS FOR PUBLIC SECTOR BANKS

Here TWO numbers of CAs should be exclusively associated with the firm on Full time basis. But out of total number of CAs, ONE numbers of PARTNERS exclusively associated with the firm on full time basis. The minimum strength of Professional staff is FOUR. The firm or at least one of the CAs should have preferably conducted branch audit of a nationalised bank or of a private sector bank for at least THREE years & the audit firm standing should be more than FIVE years for the firm or at least one partner. A full time partner does not include a person who is a partner in other firm or employed full time/part time elsewhere, practicing in own name or engaged in practice otherwise or engaged in other activity which would be deemed to be in practice.

2. SELECTION OF CA FIRMS FOR APPOINTMENT AS STATUTORY AUDITORS OF PSUS WHOSE AUDIT FEES ARE UP TO RS 1.50 LAKH Same as above for category i ( 5+ )

3. SELECTION CRITERIA OF CA FIRMS FOR APPOINTMENT AS STATUTORY AUDITORS OF REGIONAL RURAL BANKS For Standalone RRBs Statutory Auditors may be drawn from Category III

D. SMALL AND SOLE FIRMS: CATEGORY IV

Sole Proprietors Chartered Accountants are working in public practice in their individual names or through their firms. As a matter of fact, 71 per cent of the profession is comprised of proprietors and, even after 65 years of the profession, most of the members still wait for a bank audit assignment as their major work sphere. THIS is the most sufferer class of the Chartered accountants. The majority of the doors of professional opportunities are closed to them. They are neither  eligible for PSU audits nor for  Concurrent Bank & Statutory Bank Branch audits is also banned for Initial three years. Above all, these Sole Proprietors firms are not being considered for statutory audit of RRBs.

1. NORMS FOR THE EMPANELMENT OF AUDIT FIRMS TO BE APPOINTED AS STATUTORY BRANCH AUDITORS FOR PUBLIC SECTOR BANKS

Here TWO numbers of CAs should be exclusively associated with the firm on a Full time basis. But both the PARTNERS exclusively associated with the firm on a full time basis.  Even proprietorship concern without bank audit experience may be considered as hitherto. The proprietary concerns of Chartered Accountants with ONE paid CA, TWO professional staff and not having any statutory branch audit experience of a nationalized bank or of a private sector bank will be treated at par with the partnership firm after deducting their 3 years seniority from the date of their establishment. The minimum strength of Professional staff is TWO. No experience required & the audit firm standing should be more than THREE years for the firm or at least one partner.
India Adopts Place of Effective Management Concept


20 May 2015, India has amended section 6 of the Income Tax Act to introduce Place of Effective Management (POEM) as the test to determine the place of residence of companies in the country. The change was included in Finance Act, 2015, which received the President's assent on May 12, 2015. The change will take effect from April 1, 2016, and will, accordingly, apply from the 2016/2017 year of assessment.

Under the amended law, a company shall be considered resident in India in any previous year, if it is an Indian company; or its POEM, in that year, is in India. POEM has been defined to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity, as a whole, are in substance made.

Under the existing provisions, a company is said to be resident in India in any previous year, if it is an Indian company; or during that year, the control and management of its affairs is situated wholly in India. Due to the requirement that whole of control and management should be situated in India , and that too for whole of the year, these conditions are seldom met and easily avoided.

A Memorandum published by the Ministry of Finance alongside Budget 2015 explained: "A company can easily avoid becoming a resident by simply holding a board meeting outside India. This facilitates creation of shell companies which are incorporated outside but controlled from India."

"POEM is an internationally recognized concept for determination of residence of a company incorporated in a foreign jurisdiction. Most of the tax treaties entered into by India recognize the concept of POEM for determination of residence of a company as a tie-breaker rule for avoidance of double taxation. Many countries prefer the POEM test to be appropriate test for determination of residence of a company."


"The modification in the condition of residence in respect of company by including the concept of [POEM] would align the provisions of the Income Tax Act with the Double Taxation Avoidance Agreements entered into by India with other countries and would also be in line with international standards. Since POEM is an internationally well accepted concept, there are well recognized guiding principles for determination of POEM, although it is a fact-dependent exercise. However, it is proposed that in due course, a set of guiding principles to be followed in determination of POEM would be issued for the benefit of the taxpayers as well as [the] tax administration," it continued.
Taxable Income of NRIs: Things to Know


June 07, 2015, If you have moved abroad recently, you may be worried about ensuring your tax compliance in India for financial year 2014-15. Whether an individual has to pay tax and file a return in India depends upon his/her residential status. Let's first understand how residential status is determined. You need to find out your residential status in financial year 2014-15. You are a non-resident Indian (NRI) if you have spent less than 60 days in India. If you are an Indian citizen leaving India for a job abroad or as crew on an Indian ship and you have spent less than 182 days in India, you will be considered non-resident. The time limit of 182 days is also allowed to persons of Indian origin (PIO) who come on a visit to India. Let's say you have spent more than 60 days but less than 182 days in India, in such a case if you have spent a total of 365 days in the past 4 years in India, you will be considered a resident.

There is also a third category - a resident but not ordinarily resident, also referred to as RNOR. The tax implications for RNORs and NRIs are largely similar. When an NRI earns an income from a source in India, such income is taxable in India. Income from a job where services are rendered in India is also taxable in India. So, though you may be an NRI, if you worked in India for a part of financial year 2014-15 and earned salary, this salary will be included in your taxable income in India. If you have rented out a property situated in India, you have to pay tax in India on the rent that it earns. There's a similar tax treatment for capital gains on sale of assets located in India. In short, you have to sum up all the incomes which either originate in India or are received here.

In case any of these incomes are also taxable in your country of residence, you can take the benefit of DTAA (Double Tax Avoidance Agreement). By seeking relief under DTAA, NRIs can avoid paying tax on the same income twice - once in the country of residence and once again in India. DTAAs between two countries either provide you an exemption from tax in one of the countries, or where it is taxable in both, you will be allowed to claim relief for tax paid in one of the countries.

The tax slabs applicable to NRIs are the same as residents. Rules have been laid down for TDS (tax deducted at source) on certain payments made to NRIs. Those paying rent to NRIs have to deduct TDS. Like residents, you can take credit of the TDS against your final tax due. Let's understand total taxable income of an NRI with an example. Arvind is an NRI and lives in the US. Salary is paid to him in dollars in the US. He has some money in a bank account in India and earns interest on it. He owns an apartment in Delhi and has given it on rent for Rs.35,000 per month. He gifts a car to his parents and transfers Rs.10,000 every month to their account to help with their household expenses. He also purchases an insurance policy of Rs 20,000 in India for his parents. His total income from rent is Rs 4,20,000. As per Section 24 of the Income Tax Act, a standard deduction of 30 per cent is allowed from income via house property.


So Arvind's income from this house is Rs 2,94,000. Add to this interest income from bank accounts of Rs 30,000. This brings Arvind's total income to Rs 3,24,000, which shall be taxed in India. He can claim a deduction of Rs 20,000 under Section 80C towards life insurance purchased for his parents. Therefore, total taxable income is Rs 3,04,000, on which income tax slabs shall be applied and tax paid accordingly. He will also have to file a return in India. Do note that the gift of car and the Rs 10,000 sent for his parents is not taxable for Arvind and also not taxable for his parents.
FPIs skip applying for treaty exemption on MAT




June 11, 2015, Foreign Portfolio investors (FPIs) have decided to not file an application seeking exemption from the Minimum Alternate Tax (MAT) by citing DTAAs (Double Taxation Avoidance Agreements). FPIs decided to not apply for an exemption because of the uncertainty over whether an officer who received such an application had the power to withdraw his order (the tax demand), said a source with direct knowledge of the matter. Besides, appeals on the matter were pending before the Dispute Resolution Panel (DRP). Relief was also expected from the A P Shah committee, set up to study if MAT can be levied on FPIs.

Patrick Pang, Managing Director of the Asia Securities Industry & Financial Markets Association, which has FPIs of Asian markets as members, said FPIs need to take the DRP route due to lack of provisions to retract assessment notices. "Once issued, there is no specific ability for tax assessment notices to be retracted. Therefore, FPIs who had received such notices (even if they are from favourable tax treaty jurisdictions) will find that they will have to go through the DRP process. This is despite the fact that the ministry subsequently issued a clarification that tax treaty applies. There is no process for such FPIs to apply for treaty relief pending the DRP. Obviously, after the ministry clarification on tax relief, we should not expect to see any more tax assessment notices issued to treaty-relief FPIs." DTAAs with nations such as Mauritius and Singapore specifically exempt FPIs from paying capital gains tax, leading to a relief on MAT. The government had announced on April 27 that institutions based in treaty jurisdictions can apply for an exemption and a decision would be taken within a month.

"Since the issue involved in such cases is limited, such claims should be decided expeditiously," said the government notification. "It has, therefore, been decided that in all cases of Foreign Institutional Investors seeking treaty benefits under the provisions of the respective DTAAs (Double Taxation Avoidance Agreements), decisions may be taken on such claims within one month from the date such claim is filed… officers concerned have been directed accordingly." However, applying for exemption under DTAAs has not been seen as a viable solution. Interestingly, a tax official said officers were free to modify an order until it was signed, based on the response of the entity to whom the notice was sent. If officers had declined to do so, it might be out of ignorance. "We had given a way for FPIs to seek relief from MAT demand. But if FPIs want to take legal recourse, it is entirely up to them," said the person.

In the case of a draft order, said another person familiar with the matter, the tax officer concerned had the power to revise it only if there were apparent mistakes in the order, based on the material on record. Taxing a foreign investor would be a considered position taken on levying MAT on treaty jurisdiction entities, he said. "It is not entirely clear if this can be revised based on an application and a rectification order. There is ambiguity. DRP may be the appropriate forum," added the person. Two of the top three nations from which India receives foreign portfolio flows, are treaty jurisdictions - US, Mauritius and Singapore. Foreign investors looking for a resolution might wait for a decision of the DRP, the judiciary or the A P Shah committee. Officers had been asked to put actions on hold while the committee looks into the issue. Cases are pending in DRP and the Bombay High Court, in addition to a clarification being awaited from the Supreme Court.

MAT was originally introduced in 1987. Many companies made significant profits but paid minimal taxes on account of various exemptions. The MAT provision required all companies to pay a minimum tax of around 20 per cent, irrespective of the exemptions. Recently, the tax department had taken a view that this will also be applied to foreign portfolio investors, effectively raising their tax liability from as little as Zero Per cent to 20 Per cent. This was based on a ruling by the Authority for Advance Rulings in a case involving Castleton Investment. The matter is now pending in the Supreme Court. The tax department had issued notices to 68 entities for a claim of Rs 602.83 crore, according to an April 24 government statement in Parliament.
India and South Korea have signed a revised double taxation avoidance pact and agreed to begin talks from mid next year to widen the scope of free trade pact to boost bilateral economic cooperation.

The agreement came during a summit meeting Prime Minister Narendra Modi held with South Korean President Park Geun-hye when they also called upon the business community in both the countries to leverage the enormous synergies between their economies for mutual prosperity.

They welcomed “commencement of negotiations to amend the India-Korea CEPA by June 2016 with a view to achieving qualitative and quantitative increase of trade through an agreed roadmap,” a joint statement issued after the meeting said.

India and South Korea had implemented the free trade pact, Comprehensive Economic Partnership Agreement (CEPA), in January 2010.
The statement further said the leaders also welcomed “signing of the revised Double Taxation Avoidance Agreement (DTAA)”.

The existing DTAA came into effect in 1986. Modi in his remarks said “we will also establish a channel Korea Plus to facilitate their investment and operations in India”.
Both the leaders shared the view that the trade between the two nations is well below potential.
“We agreed to review the Comprehensive Economic Partnership Agreement and other market access related issues.  I conveyed our desire to see a balanced and broad-based growth in bilateral trade,” Modi added.

The bilateral trade is in favour of South Korea. Trade deficit increased from USD 5.1 billion in 2009-10 to USD 8.27 billion in 2013-14.
The Ministry of Strategy and Finance and the Export- Import Bank of Korea expressed their intention to provide USD 10 billion for mutual cooperation in infrastructure, the statement said.
Guidance Note on Accounting for Expenditure on Corporate Social Responsibility Activities (Issued May 15, 2015)



(The Council of the Institute of Chartered Accountants of India (ICAI) has issued this Guidance Note on Accounting for Expenditure on Corporate Social Responsibility Activities which comes into effect from the date of its issuance. Pending finalisation of the Guidance Note, as it was under discussion with the relevant authorities, the Corporate Laws & Corporate Governance Committee had issued ‘Frequently Asked Questions on the provisions of Corporate Social Responsibility under Section 135 of the Companies Act 2013 and Rules thereon’ which, inter alia, provided an interim guidance with regard to certain accounting issues. On issuance of this Guidance Note on Accounting for Expenditure on Corporate Social Responsibility Activities, the FAQs related to areas covered by the Guidance Note stand withdrawn.)

Introduction

1. Section 135 of the Companies Act, 2013 (the Act), requires the Board of Directors of every company having a net worth of Rupees 500 crore or more, or turnover of Rupees 1,000 crore or more or a net profit of Rupees 5 crore or more, during any financial year, to ensure that the company spends in every financial year atleast 2% of the average net profits of the company made during the three immediately preceding financial years on Corporate Social Responsibility (CSR) in pursuance of its policy in this regard. The Act requires such companies to constitute a Corporate Social Responsibility Committee which shall formulate and recommend to the Board a Corporate Social Responsibility Policy which shall indicate the CSR activities to be undertaken by the company as specified in Schedule VII to the Act.

Objective

2. The objective of this Guidance Note is to provide guidance on recognition, measurement,  presentation and disclosure of expenditure on activities relating to corporate social responsibility.

Scope

3. What constitutes CSR activities is specified in Schedule VII to the Act. Reference is also invited to the circular issued by the Ministry of Corporate Affairs (MCA) No. 21/2014 dated October 24, 2014. Accordingly, the Guidance Note does not deal with identification of activities that constitute CSR activities but only provides guidance on accounting for expenditure on CSR activities in line with the requirements of the generally accepted accounting principles including the applicable Accounting Standards.

Definitions

4. For the purpose of this Guidance Note, the definitions mentioned at sl. nos. (a) to (f) are reproduced from the Companies Act, 2013, and the Companies (Corporate Social Responsibility Policy) Rules, 2014 and in the event of any change in the Act or the Rules made thereunder, these definitions shall stand automatically revised/modified to that extent:

(a) Any financial year: “any financial year” referred under sub-section (1) of Section 135 of the Act read with Rule 3(2) of Companies CSR Rule, 2014, implies ‘any of the three preceding financial years’. (Clarification vide MCA General Circular No. 21/2014)

(b) Average Net Profit: Average Net Profit is the amount as calculated in accordance with the provisions of Section 198 of the Companies Act, 2013.

(c) Financial Year: “financial year”, in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up:

Provided that on an application made by a company or body corporate, which is a holding company or a subsidiary of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Tribunal may, if it is satisfied, allow any period as its financial year, whether or not that period is a year:

Provided further that a company or body corporate, existing on the commencement of this Act, shall, within a period of two years from such commencement, align its financial year as per the provisions of this clause;

(d) Net Profit: “net profit” means the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the Act, but shall not include the following, namely:-
(i) any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and
(ii) any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act:

Provided that net profit in respect of a financial year for which the relevant financial statements were prepared in accordance with the provisions of the Companies Act, 1956, (1 of 1956) shall not be required to be recalculated in accordance with the provisions of the Act:

Provided further that in case of a foreign company covered under these rules, net profit means the net profit of such company as per profit and loss account prepared in terms of clause (a) of sub-section 

(1) of section 381 read with section 198 of the Act.

(e) Net worth: “net worth” means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation;

(f) Turnover: “turnover” means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year;

(g) Spend: The term ‘spend’ in accounting parlance generally means the liabilities incurred during the relevant accounting period.

5. Rule 4 of the Companies (Corporate Social Responsibility Policy) Rules, 2014, requires that the CSR activities that shall be undertaken by the companies for the purpose of Section 135 of the Act shall exclude activities undertaken in pursuance of its ‘normal course of business’. The Rules also specify that CSR projects or programmes or activities that benefit only the employees of the company and their families shall not be considered as CSR activities in accordance with the requirements of the Act. Such programmes or projects or activities, that are carried out as a pre-condition for setting up a business, or as part of a contractual obligation undertaken by the company or in accordance with any other Act, or as a part of the requirement in this regard by the relevant authorities cannot be considered as a CSR activity within the meaning of the Act. Similarly, the requirements under  relevant regulations or otherwise prescribed by the concerned regulators as a necessary part of running of the business, would be considered to be the activities undertaken in the ‘normal course of business’ of the company and, therefore, would not be considered CSR activities.

Recognition and Measurement of CSR Expenditure in Financial Statements

Whether Provision for Unspent Amount required to be created?

6. Section 135 (5) of the Companies Act, 2013, requires that the Board of every eligible company, “shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy”. A proviso to this Section states that “if the company fails to spend such amount, the Board shall, in its report … specify the reasons for not spending the amount”.

7. Further, Rule 8(1) of the Companies (Corporate Social Responsibility Policy) Rules, 2014, prescribes that the Board Report of a company under these Rules shall include an annual report on CSR, containing particulars specified in the Annexure to the said Rules, which provide a Format in this regard.

8. The above provisions of the Act clearly lay down that the expenditure on CSR activities is to be disclosed only in the Board’s Report in accordance with the Rules made thereunder. In view of this, no provision for the amount which is not spent, i.e., any shortfall in the amount that was expected to be spent as per the provisions of the Act on CSR activities and the amount actually spent at the end of a reporting period, may be made in the financial statements. The proviso to section 135 (5) of the Act, makes it clear that if the specified amount is not spent by the company during the year, the Directors’ Report should disclose the reasons for not spending the amount. However, if a company has already undertaken certain CSR activity for which a liability has been incurred by entering into a contractual obligation, then in accordance with the generally accepted principles of accounting, a provision for the amount representing the extent to which the CSR activity was completed during the year, needs to be recognised in the financial statements.

9. Where a company spends more than that required under law, a question arises as to whether the excess amount ‘spent’ can be carried forward to be adjusted against amounts to be spent on CSR activities in future period. Since ‘2% of average net profits of immediately preceding three years’ is the minimum amount which is required to be spent under section 135 (5) of the Act, the excess amount can not be carried forward for set off against the CSR expenditure required to be spent in future.

Other Considerations in Recognition and Measurement

10. A company may decide to undertake its CSR activities approved by the CSR Committee with a view to discharge its CSR obligation as arising under section 135 of the Act in the following three ways:

(a) making a contribution to the funds as specified in Schedule VII to the Act; or

(b) through a registered trust or a registered society or a company established under section 8 of the Act (or section 25 of the Companies Act, 1956) by the company, either singly or along with its holding or subsidiary or associate company or along with any other company or holding or subsidiary or associate company of such other company, or otherwise ; or

(c) in any other way in accordance with the Companies (Corporate Social Responsibility Policy) Rules, 2014, e.g. on its own.

11. In case a contribution is made to a fund specified in Schedule VII to the Act, the same would be treated as an expense for the year and charged to the statement of profit and loss. In case the  amount is spent in the manner as specified in paragraph10 (b) above the same will also be treated as expense for the year by charging off to the statement of profit and loss. The accounting for  expenditure  incurred by the company otherwise e.g. on its own would be accounted for in accordance with the principles of accounting as explained hereinafter. CSR activities carried out by the company covered under paragraph 10 (c)

12. In cases, where an expenditure of revenue nature is incurred on any of the activities mentioned in Schedule VII to the Act by the company on its own, the same should be charged as an expense to the statement of profit and loss. In case the expenditure incurred by the company is of such nature which may give rise to an ‘asset’, a question may arise as to whether such an ‘asset’ should be recognised by the company in its balance sheet. In this context, it would be relevant to note the definition of the term ‘asset’ as per the Framework for Preparation and Presentation of Financial Statements issued by the Institute of Chartered Accountants of India. As per the Framework, an ‘asset’ is a “resource controlled by an enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise”. Hence, in cases where the control of the ‘asset’ is transferred by the company, e.g., a school building is transferred to a Gram Panchayat for running and maintaining the school, it should not be recognised as ‘asset’ in its books and such expenditure would need to be charged to the statement of profit and loss as and when incurred. In other cases, where the company retains the control of the ‘asset’ then it would need to be examined whether any future economic benefits accrue to the company. Invariably future economic benefits from a ‘CSR asset’ would not flow to the company as any surplus from CSR cannot be included by the company in business profits in view of Rule 6(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014.

13. In some cases, a company may supply goods manufactured by it or render services as CSR activities. In such cases, the expenditure incurred should be recognised when the control on the goods manufactured by it is transferred or the allowable services are rendered by the employees. The goods manufactured by the company should be valued in accordance with the principles  prescribed in Accounting Standard (AS) 2, Valuation of Inventories. The services rendered should be measured at cost.. Indirect taxes (like excise duty, service tax, VAT or other applicable taxes) on the goods and services so contributed will also form part of the CSR expenditure.

14. Where a company receives a grant from others for carrying out CSR activities, the CSR expenditure should be measured net of the grant.

Recognition of Income Earned from CSR Projects/Programmes or During the Course of Conduct of CSR Activities

15. Rule 6 (2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014, requires that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company”. The term ‘surplus’ ordinarily means excess of income over expenditure pertaining to an entity or an activity. Thus, in respect of a CSR project or programme or activity, it needs to be determined whether any surplus is arising there from. A question would arise as to whether such surplus should be recognised in the statement of profit and loss of the company. It may be noted that paragraph 5 of Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies, inter alia, requires that all items of income which are recognised in a period should be included in the determination of net profit or loss for the period unless an Accounting Standard requires or permits otherwise. As to whether the surplus from CSR activities can be considered as ‘income’, the Framework for Preparation and Presentation of Financial Statements issued by the Institute of Chartered Accountants of India, defines ‘income’ as “increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants”. Since the surplus arising from CSR activities is not arising from a transaction with the owners, it would be considered as ‘income’ for accounting purposes. In view of the aforesaid requirement any surplus arising out of CSR project or programme or activities shall be recognised in the statement of profit and loss and since this surplus can not be a part of business profits of the company, the same should immediately be recognised as liability for CSR expenditure in the balance sheet and recognised as a charge to the statement of profit and loss. Accordingly, such surplus would not form part of the minimum 2% of the average net profits of the company made during the three immediately preceding financial years in pursuance of its Corporate Social Responsibility Policy.

Presentation and Disclosure in Financial Statements

16. Item 5 (A)(k) of the General Instructions for Preparation of Statement of Profit and Loss under Schedule III to the Companies Act, 2013, requires that in case of companies covered under Section 135, the amount of expenditure incurred on ‘Corporate Social Responsibility Activities’ shall be disclosed by way of a note to the statement of profit and loss. . From the perspective of better financial reporting and in line with the requirements of Schedule III in this regard, it is recommended that all expenditure on CSR activities, that qualify to be recognised as expense in accordance with paragraphs 10-14 above should be recognised as a separate line item as ‘CSR expenditure’ in the statement of profit and loss. Further, the relevant note should disclose the break-up of various heads of expenses included in the line item ‘CSR expenditure’.

17. The notes to accounts relating to CSR expenditure should also contain the following:
(a) Gross amount required to be spent by the company during the year.
(b) Amount spent during the year on:



In cash
Yet to be paid in cash
Total
(i)
Construction/acquisition of any asset





(ii)
On purposes other than (i) above






The above disclosure, to the extent relevant, may also be made in the notes to the cash flow statement, where applicable.
(c) Details of related party transactions, e.g., contribution to a trust controlled by the company in relation to CSR expenditure as per Accounting Standard (AS) 18, Related Party Disclosures.


(d) Where a provision is made in accordance with paragraph 8 above the same should be presented as per the requirements of Schedule III to the Companies Act, 2013. Further, movements in the provision during the year should be shown separately.

This blog is Created by CA Anil Kumar Jain.