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A h m e d a b a d C h a rt e re d A cco u n t a n ts Jo u rn a l A p r il , 2 0 1 4 1

Journal Com mitteeCA. Ra jni M. Sha h CA. Asho k C. Ka t a ria

Chairman Convenor

MembersCA. Bha ra t C. Me hta CA. He ma n t N. Sh a h CA. Ja yesh C. Sha red a la l

CA. Sha ilesh C. Sha h CA. Yo g i K. Upa d hya ya

CA. Pra ka sh B. Sh et h [Pre sid e nt (Ex-Of ficio )] CA. Ch in ta n M . Do sh i [Ho n . Se cre ta ry (Ex-Of ficio )]

Volume : 38 Part : 01 April, 2014

In this issue

E-mail : caaahmedabad@gmai l . com Website : w w w.caa -ah m.org

C o n t e n t s A u t h o r ' s N a m e Pa g e N o .

Editor's V iew s C A . Rajni M . Shah 3

President's M essage C A . Prakash B. Sheth 5

A r t i c l e s :

A case study u nder Section 13 8 of N egotiab le

Instrum ent A ct C A . Pradip K . M odi 6

C om panies A ct, 2013 - C A . A nuj J. Sharedalal 9

Provisions relating to D epreciation

C o l u m n s :

G lim p ses of Suprem e C ourt Rulings A dvocate Sam ir N . D ivatia 17

From the C ourts C A . C . R. Sharedalal & 18

C A . Jayesh C . Sharedalal

Tribunal N ew s C A . Y ogesh G . Shah & 21C A . A parna Parelkar

U nreported Judgem ents C A . Sanjay R. Shah 25

C ontroversies C A . K aushik D . Shah 31

Judicial A nalysis A dvocate Tushar P. H em ani 33

S t a t u t e U p d a t e

(a) Service Tax Judgem ents C A . A shw in H . Shah 37

(b) Fem a U pdate C A . Savan A . G odiaw ala 39

(c) V alue A dded Tax C A . Bihari B. Shah 41

(d) C orporate Law s C A . N aveen M andovara 43

(e) C irculars & N otifications C A . K unal A . Shah 55

From Published A ccounts C A . Pam il H . Shah 56

N ew s Lounge M r. M anthan Khokhani 58

A ssociation N ew s C A . C hintan M . D oshi & 60C A . A bhishek J. Jain

U pdates from IC A I C A . U day I. Shah 16

Ahmedabad Chartered Accountants Journal

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A h m e d a b a d C h a r t e r e d A c co u n t a n t s Jo u r n a l A p r i l , 2 0 1 42

Attent ionM e m b e r s / S u b sc ri b e r s / A u t h o r s / C o n t r ib u t o r s

1. Journals are carefully posted. If not received, you are requested to w rite to the A ssociation's O ffice w ithin

one m onth. A copy of the Journal w ould be sent, if extra copies are available.

2. You are requested to intim ate change of address to the A ssociation's O ffice.3. Subscription for the Financial Year 2014-15 is ` 400/-. Single C opy (if available)` 40/-.

4. Please m ention your m em bership num ber / journal subscription num ber in all your correspondence.

5. W hile send ing A rticles for this Journal, please confirm that the sam e are not published / not even m eant

for publishing elsew here. No correspondence w ill be m ade in respect of Articles not accepted for

publication, nor w ill they be sent back.

6. The opinions, view s, statem ents, results published in this Journal are of the respective authors / contributors

and C hartered A ccountants A ssociation, A hm edabad is neither responsible for the sam e nor does it

necessarily concur w ith the authors / contributors.

7. M em bership Fees (For ICA I M em bers)

Life M em bership ` 7500/-

Entrance Fees ` 50 0/-

O rdinary M em bership Fees for the year 2014-15 ` 600/- /` 750/-

Financial Year : A pril to M arch

Published By

C A . Ra jn i M . Sh a h ,

on behalf of C hartered A ccountants Association, A hm edabad, 1st Floor, C . U . Shah C ham bers, N ear G ujarat

Vidhyapith, A shram Road, Ahm edabad - 380 014.

Phone : 91 79 27544232

Fax : 91 79 27545442

N o part of this Publication shall be reproduced or transm itted in any form or by any m eans w ithout the

perm ission in w riting from the C hartered Accountants Association, Ahm edabad.

W hile every effort has been m ade to ensure accuracy of inform ation contained in this Journal, the Publisher

is not responsible for any error that m ay have arisen.

Prof essional Aw ards

The best articles published in this Journal in the categories of 'D irect Taxes', 'C om pany Law and Auditing' and

'A llied Law s and O thers' w ill be aw arded the Trophies/ C ertificates of Appreciation after being vetted by

exp erts in the profession.

A rticles and reading literatures are invited from m em bers as w ell as from other professional colleagues.

Pr in ted : Prat iksha Pr in terM -2 H asubhai C ham bers, N ear Tow n H all, Ellisbridge, A hm edabad - 380 006.

M obile : 98252 62512 E-m ail : pratikshaprinter@ yahoo.co.in

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T h a n k y o u

This is m y last editorial for the C A A , A hm edabad’s Journal. The one year term com es to an end as I bid adieu to m y

fellow professionals and avid readers. I grab this opportunity to express m y sincere thanks and gratitude for all theSupport that I have received over the past year.

Thanks and G ratitude m ust be used freely for acknow ledging others for their support, C o-operation and help. The

im pact of expressing gratitude is trem endous and far reaching.

The pow er of gratitude is such that it induces the other person to also reciprocate sim ilar feelings and this w ay a strong

netw ork is built up m aking all happy.

The w orld is an easy place to live w hen you are generous w ith your “thank yous”. Right from your beginning of the day,

there are so m any people and so m any events w ho support you and m ake you to achieve w hat you w ish. Even the G O D

nature helps you to live better. The feeling of gratitude should not be just a form ality but m ust com e from w ithin

naturally. The ill feelings w ill be elim inated am ongst the people and at the end of the day there w ill be happiness that

is w hat for the w orld is in search of all the tim e.

Particularly for the professionals, the need of cultivating a habit of expressing gratitude is m axim um as the theory of

gratitude on one hand releases the professional stress and on the other helps in grow th and developm ent of the

profession, per se.

M ore energy, m ore forgiving attitudes, less depression, social connection and better physical health are direct benefits

of gratitude.

Initially one m ay feels that the expression of thanks and gratitude is a form ality and just to please others, people are

expressing but on a longer run the positive energy is experienced by both the person expressing gratitude and to w hom

it is being expressed.

I have observed positive negativity in the concept being discussed and few sarcastic exam ples are w orth m entioning…

1. Thanks to Yuvraj Singh’s innings in the W C T20, 2014, M anm ohan Singh w ould have heaved a sigh of relief. His

innings isn’t the w orst anym ore.

2. Thanks to the recent police action, they can now aptly be called “Cannon Ke Rakhw ale”.

3. Thanks to the recent chain of events in the BC C I, it has proved that it is m ore of “Board of C ontrol;”rather than

“Cricket in India”.

4. The Rupee used to m ake a lot of sense. Thanks to the devaluation it now only m akes cents.

5. Thanks to the corrupt business practices, ‘Business Ethics’has becom e the m ost glorified oxym oron.

6. Thanks to tw itter, even Indian bow ling attack has becom e tw itter friendly. No one crosses 140.

7. Thanks to the entertainm ent channels w ho have started to show reality show s, the new s channels have started to

show fiction.

8. Thanks to the BJP’s Prim e m inisterial candidate’s rich geographic know ledge, even if you are from Som aliya, he

w ould relate you to G ujarat.

9. Thanks to M r. A rnab G osw am i, w e now have a different m easure available to m easure the sound decibel.

10. Thanks to the C onstitution of India, the people of India enjoy freedom of speech in a country w here its ow n PM is

yet to experience it.

Editor ' s View s

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Editor's View s

11. Thanks to the terror attacks in the N ation, the G overnm ent of India has started to look m ore like an Insurance

C om pany rather than securing the people.

12. The dollar value increases against Rupee: Thanks to RBI for m aking sure that som ething is rising along w ith

inflation.

13. A erial Surveys are com m on in Election tim e: Thanks to high fliers politicians to g ive a w hole new m eaning of “

Surv e y Bhavantu Sukhani”

14. 14 Fake C ounters allegedly took place in last decade in the state of G ujarat: Thanks to H um an Rights C om m ission

for not bothering those w ho carried out other 1400 encounters across the country.

15. O ur daily w ages no longer guarantee daily veggies: Thanks to inflation.

16. Thanks to the politicians’nasty com m ents, w e no longer need a source of entertainm ent.

17. A am A adm i Party Convener changed his stands fast: Psychiatrists of the country thank h im for providing unique

case for their study.

18. The Incom e tax departm ent is issuing various notices, w ithholding refunds of taxes and not proceeding w ith m any

pending applications: Thanks to them from C A fraternity for keeping them busy even in slack season.

19. M any citizens m ake new friends in traffic jam : Thanks to the BRTS

20. M iddle aged parents (Couples) get a chance to com e closer to one another: Thanks to their kids to m ove to foreign

countries leaving parents here.

21. Fam ily m em bers today do not get tim e to quarrel: Thanks to d aily TV soaps and new s channels.

22. The gam e of cricket is m ore of “Betting and bow ling”now : Thanks to financially poor C ricketers

23. IC A I earned huge profit for the year: Thanks to C A students for donating generously.

24. O nly few thousands people got dead in a natural calam ity: Thanks O ur A rm y for restricting the death toll.

25. D espite all odds com m on m an is still optim istic: TH A N K G O D

In the end, a gentle rem inder in view of the ensuing elections, - ‘PLEASE V O TE’.

Let us all hope that the ensuing elections do not bring a yet another ‘Fractured m andate’w ith a ‘coalition Dharna’asan integral part and p arcel !. Let our dream s not rem ain a distant dream .

Thank you

C A . R a jn i M . S h a h

E d i t o r

rm shah @ satyam .net.in

08.04.2014

“ G r a t i t u d e i s n o t t h e g r e a t e s t o f v i r t u e s b u t the parents o f a l l o thers . : C icero”

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D e a r P r o f e s s i o n a l C o l l e a g u e ,

This is the last tim e I am com m unicating w ith

m em bers as the President of this august A ssociation.

A s I w rite, I am experiencing a m ixed set of em otions.

O n one hand I consider m yself fortunate w here I

could lead the C hartered A ccountants Association for

one year as the President and on the other hand

understanding the fact that I w ill not be able to w rite

as the President henceforth.

By the tim e m em bers receive the A pril’2014 issue of

the Journal, m ost of them w ou ld have done through

the bank statutory aud it assignm ent. H ow ever,

considering the new criteria and lim it of advancesfor bank branch audit, the total num ber of branches

have reduced considerably. A part from reduction in

num ber of bank branches for statutory audit, the

environm ent around a chartered accountant is

w itnessing a sea w ide change. N ew law s are taking

over the old provisions including. The C om panies Act

–2013 has replaced the C om panies A ct of 1956.

D TC and G ST are at the do or steps of the

professionals. A s from 01/04/2014, 183 m ore

sections of C om panies Act have been m ade operative

and also the rules have been notified. It is the tim e

w hen w e w ill have to start learning/discussing thecom plexity of various provisions of the n ew

C om pan ies A ct. M oreover, w ith the ad vent of

technology, the procedural aspects are also going

through a m ajor change. Filing of returns and TD S

statem ents, online, are the exam ples of this changing

era.

In view of this ever changing environm ent, I salute

and adore our m otto ‘Change A dopt A bide”. A s the

‘change’is im perative, w e have to prepare ourselves

to such an extent that w e adapt each and every

change faced from the external environm ent. This

rule of ‘change’and its adaptation is to be abided byfor sustainable g row th. Thus, “C h a n g e A d a p tA b i d e”w as the them e under the backdrop of w hichall the activities of the A ssociation w ere carried out

during the year.

I indeed take pride in inform ing the m em bers that

one m ore prestigious function of Felicitation of

Seniors m em bers of our A ssociation, “ 5 0 Y e a rs o f

Preside nt 's M essag eCA. Prakash B. [email protected]

Excel lence” is to be held on 3rd M ay, 2014 at IC A I

Bhaw an at 4.00 P.M . The function is to honor thesenior m em bers of the A ssociation w ho have

com pleted 50 years as a chartered accountant, as a

m em ber of IC A I. I am fortunate enough that the

event is held in m y tenure as the President. It is an

opportunity for all the m em bers to express their

gratitude tow ards the p ioneers of this noble

profession and hence I request all m em bers to rem ain

present in large num bers as the A ssociation felicitates

its ‘Jew els’.

The m onth of A pril is also very im portant at the

national level. The election for the new Parliam ent is

being held during the m onth of A pril’14 and M ay’14.

Everyone is w ishing for a change after a dism al

perform ance of U PA -II governm ent in last 10 years.

It is the duty of every citizen to go out and vote. I

believe, the person w ho fails to exercise his right to

vote is com m itting a crim e b ecause it is this

indifference tow ards the nation, people w ho should

not be the part of the legislative system , get elected.

It is alw ays better to participate constrictively than to

regret later. The voting in G ujarat is to be held in a

single phase on 30-04-2013. I appeal everyone to

go out and participate in this great festival of

dem ocracy.

A s this is the last m essage from m e as the President

of C hartered A ccountants A ssociation, A hm edabad,

I w ould like to put on record m y sincere appreciation

and gratitude to all office bearers, executive

com m ittee m em bers, all past presidents, all chairm en,

all conveners, m em bers of respective com m ittees, all

panel m em bers of know ledge clinic, all authors of

articles and colum nists, all faculties, all m em bers of

association an d office staff for their support,

guidance and encouragem ent provided to m e. I pray

the A ssociation scales new heights in the days tocom e.

W ith best regards,

C A . P r a k a s h B . S h e t hPresident

08/04/2014

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The Section 138 of the Negotiable Instrum ent Act 1881

( herein after referred as “Act”) w as brought on statuteby C entral A ct 66 of 1988 w .e.f. A pril 1, 1989 w ith a

view to penalise the accused in cases of dishonour of

certain cheques for insufficiency of funds in the accounts

of the D raw er. The object of bringing Section 138 on

statute appears to be to inculcate faith in the efficacy of

banking operations and credibility in transacting business

on negotiable instrum ents. D espite civil rem edy, Section

138 intended to prevent dishonesty on the part of the

draw er of negotiable instrum ent to draw a cheque w ithout

sufficient funds in his account m ainly m aintained by him

in a bank and induce the payee or holder in due course

to act upon it. Section 138 draw s presum ption that onecom m its the offence if he issues the cheque dishonestly.

It is seen that once the cheque has been draw n and

issued to the payee and the payee has presented the

cheque and thereafter, if any instructions are issued to

the Bank for non-paym ent and the cheque is returned to

the payee w ith such an endorsem ent, it also am ounts to

dishonour of cheque and it com es w ithin the m eaning of

Section 138 (M/S. Electron ics Trade & vs M /S. Indian

Technolog ists, AIR 1996 SC 2339).

Therefore, H ow far it is correct to say that once cheque

is issued by draw er , need to be honoured at any cost toavoid consequences of im prisonm ent under section 138

of A ct. It is necessary to bring to notice that section 139

of Act provides opportunity for rebuttal of allegations on

D raw er. In view of this , the discussion of section 138

is essential. Section 138 is reproduced as under:

“138. Dishonour of cheque for insuff iciency, etc., of

funds in the accounts. Where any cheque drawn

by a person on an account maintained by him

w ith a banker for payment of any amount of

money to another person from out of that account

for the d ischarge, in who le or in part, of any debt or ot her liability, is returned by the bank unpaid,

either because of the amount of money standing

to t he credit of that account is insuff icient o f the

amount of money standing to the credit of t hat

account is insuff icient t o honour the cheque or

that it exceeds th e amount arrang ed to be paid

from that account by an agreement made with

that bank, such person shall be deemed t o have

A case stud y unde r Section 138 o fNegotiable Instrument Act CA. Pradip K. Modi

[email protected]

committed an off ence and shall, w ithout prejudice

to any other provision of th is Act, be pun ished w ith imprisonment fo r a term w hich may extend

to one, or with f ine which may extend to tw ice

the amount of the cheque, or w ith both:

Provided that not hing cont ained in this section shall apply

unless:

(a) the cheque has been presented to the bank within

a period of six mont hs from the date on which it is

drawn or w ithin t he period of its validity, whichever

is earlier ;

(b) the payee or the holder in due course of the cheque,

as th e case may be, makes a demand f or t he

payment o f the said amount of money by giving a

not ice in writ ing, to the drawer of t he cheque, within

fift een days of t he receipt of information by him

from the bank regarding t he return of t he cheque

as unpaid ; and

(c) the drawer of such cheque fails to make the payment

of t he said amount o f money to the payee or as the

case may be, to t he holder in due course of the

cheque w ithin fif teen days of t he receipt of the said

notice.

Explanation. For t he pu rposes of th is section , “debt or

ot her liability” means a legally enforceable debt or o ther

liability.”

The perusal of section gives em ergence to follow ing five

ingredient s (Kusum Ingot s & A lloys Ltd., Etc. vs Pennar

Peterson Securit ies Ltd , 20 00 (1) ALD Cri 770 ) for

com pliance of section 138.

(i) a person m ust have draw n a cheque on an account

m aintained by him in a bank for paym ent of a

certain am ount of m oney to another person from

out of that account for the discharge of any d e b to r o t h e r l i a b i l i t y;

(ii) that cheque has been presented to the bank w ithin

a period ofsi x m o n t h s from the dale on w hich it is

draw n of w ithin the period of its validity w hichever

is earlier;

(iii) that cheque is returned by the bank unpaid, either

because of the am ount of m oney standing to the

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A case study under Section 13 8 of N egot iable Instrument Act

credit of the account is i ns uf f i c ie nt to honour the

cheque or that it e xc e e d s t h e a m o u n t a r ra n g e d

to be paid from that account by an agreem ent m ade

w ith the bank;

(iv) the pa y e e or the holder in due course of the cheque

m akes a dem and for the paym ent of the said

am ount of m oney by giving a notice in w riting, tothe draw er of the cheque,w it h in 1 5 d a y s of the

receipt of inform ation by him from the bank

regarding the return of the cheque as unpaid;

(v) the d r a w e r of such cheque fails to m ake paym ent

of the said am ount of m oney to the payee or the

holder in due course of the cheque w it h i n 1 5 d a y s

of the receipt of the said notice.

N e x u s o f C h e q u e a n d L i b i l i t y t o p a y :

If the aforem entioned ingredients are satisfied then the

person w ho has draw n the cheque shall be deem ed tohave com m itted an offence. In the explanation to the

section clarification is m ade that the phrase “ d e b t o r

o t h e r l i a b i l i t y ” m e a n s a l e g a l l y e n f o r c e a b l e debt

or other liability. In other w ords if cheques are given for

som e transactions ,w hich cannot be used by payee for

another transaction w ithout confirm ation . The nexus of

cheque issuance and legally enforceable liability m ust

be established by payee apart from com pliance of all

aforesaid ingredients. W ithout sufficient reason, if “STO P

PA YM EN T” instruction issued to banker by D raw er is

frustrated ground of argum ents. M erely obtaining cheques

in security form , shall not serve the purpose of payee. Itis equally im portant for the draw er to issue cheques w ith

forw arding letter that for w hat business, the post dated

cheques are issued. O nce draw er of cheque rebut the

liability under section 139 and establish the facts that

dues are not legally enforceable, the onus is shifted to

payee to prove the nexus of liability and paym ent due.

P u n i s h a b l e O f f e n c e f o r w h o m :

Section 141 of A ct is a provision specifically dealing w ith

the offences by com panies. Therein it is laid dow n, inter

alia, that if the person com m itting an offence under

Section 138 of A ct is a com pany, every person w ho, at

the tim e the offence w as com m itted, w as in charge of,

and w as responsible to the com pany for the conduce of

the business of the com pany, as w ell as the com pany,

shall be d eem ed to be guilty of the offence and shall be

liable to be proceeded against and punished accordingly.

U nder the proviso to Sub-section (1) it is laid dow n that

nothing contained in this sub-section shall rendered any

person liable to punishm ent if he proves that the offence

w as com m itted w ithout his know ledge, or that he had

exercised all due diligence to prevent the com m ission of

such offence.

Sub-section (2) of the Section 141 , m akes any director/

m anager/secretary or other officer of the com pany in

connivance or any neglect on the part of w hom , anoffence under the A ct has been com m itted by the

Com pany, such director/m anager/secretary or other officer

is deem ed to be guilty of that offence and shall be liable

to be proceeded against and punished accordingly. The

signatory to the cheque is an em ployee m ay also held

guilty for this punishable offence.

J u r i s t i c t i n a l i s s u e f o r T r i a l ( C a s e F i l i n g ) :

U nder Section 177 of the C rim inal proceeding C ode

“every of fence shall ordinar i ly be inquired into and tried

in a court w ithin w hose jurisdiction it w as committ ed .”

The locality w here the bank (w hich dishonoured the

cheque) is situated cannot be regarded as the sole criteria

to d eterm ine the p lace of offen ce. It m ust be

rem em bered that offence under Section 138 w ould not

be com pleted w ith the dishonour of the cheque. It attains

com pletion only w ith the failure of the draw er of the

cheque to pay the cheque am ou nt w ithin the expiry of

15 days m entioned in C lause (c) of the proviso to Section

138 of the Act. It is norm ally difficult to fix up a particular

locality as the place of failure to pay the am ount covered

by the cheque. A place, for that purpose, w ould depend

upon a variety of factors. It can either be at the placew here the draw er resides or at the place w here the payee

resides or at the place w here either of them carries on

business. H ence, the difficulty to fix up any particular

locality as the place of occurrence for the offence under

Section 138 of the A ct(K. Bhaskaran vs Sank aran

Vaidhyan Balan, AIR 1999 SC 3762).

Even otherw ise the rule that every offence shall be tried

by a court w ithin w hose jurisdiction it w as com m itted is

not an unexceptional or unchangeable principle. Section

177 of C r P.C . itself has been fram ed by the legislature

thoughtfully by using the precautionary w ord ‘ordinari ly’

to indicate that the rule is not invariable in all cases.

Section 178 o f the C ode suggests that if there is

uncertainty as to w here, am ong different localities, the

offence w ould have been com m itted the trial can be

had in a Court having jurisdiction over any of those

localities. The provision has further w idened the scope

by stating that in case w here the offence w as com m itted

partly in one local area and partly in another local area

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A case study under Section 13 8 of N egot iable I nstrume nt Act

,the C ourt in either of the localities can exercise jurisdiction

to try the case. Further again, Section 179 of the C ode

stretches its scope to a still w ider horizon. It reads thus:

179. Offence triable where act is done or consequence

ensues. -When an act is an off ence by reason o f

any th ing w hich has been done and of a

consequence wh ich has ensued, the of fence may

be inquired into or tried by a Court w ithin w hose

local jurisdiction such thing has been done or such

consequence has ensued.

The above provisions in the Code should have been borne

in m ind w hen the question regarding territorial jurisdiction

of the C ourts to try the offence w as sought to be

determ ined.

The offence under Section 138 of the A ct can be

com pleted only w ith the concatenation of a num ber of

acts. Follow ing are the acts w hich are com ponents of

the said offence : (1) D raw ing of the cheq ue, (2)

Presentation of the cheque to the bank, (3) Returning

the cheque unpaid by the draw ee bank, (4) G iving notice

in w riting to the draw er of the cheque dem anding

paym ent of the cheque am ount, (5) failure of the draw er

to m ake paym ent w ithin 15 days of the receipt of the

notice.

It is not necessary that all the above five acts should

have been perpetrated at the sam e locality. It is possible

that each of those five acts could be done at 5 different

localities. But concatenation of all the above five is a

sine qua non for the com pletion of the offence underSection 138 of the C ode.

In this context a reference to Section 178(d) of the Code

is useful. It is extracted below :

Where th e of fence consist s of several acts done in

diff erent local areas, it may be inquired into or t ried by a

Court having jur isdiction over any of such local areas.

Thus it is clear, if the five different acts w ere done in five

different localities any one of the courts exercising

jurisdiction in one of the five local areas can becom e the

place of trial for the offence under Section 138 of the A ct.In other w ords, t h e c o m p l a i n a n t c a n c h o o s e a n y

o n e o f t h o s e c o u r t s h a v i n g j u r i s d i c t i o n o v e r a n y

o n e o f t h e l o c a l a r e a s w i t h in t h e t e r r it o r i a l li m i t s

o f w h i ch a n y o n e o f t h o s e f iv e a c t s w a s d o n e .

T i m e L i n e C o m p l i a n c e :

O n the part of the payee , he has to m ake a dem and by

‘giving a notice’in w riting. If that w as the only

requirem ent to com plete the offence on the failure of

the draw er to pay the cheque am ount w ithin 15 days

from the d ate of such ‘giving’the travails of the

prosecution w ould have been very m uch lessened. But

the legislature says that failure on the part of the draw er

to pay the am ount should be w ithin 15 days ‘of the

receipt’of the said notice. It is, therefore, clear that ‘givingnotice’in the context is not the sam e as receipt of notice.

G iving is a process of w hich receipt is the accom plishm ent.

It is for the payee to perform the form er process by

sending the notice to the draw er in the correct address.

If a strict interpretation is given that the draw er should

have actually received the notice for the period of 15

days to start running no m atter that the payee sent the

notice on the correct address, a cheque draw er w ould

get the prem ium to avoid receiving the notice by different

strategies and he cou ld escape from the legal

consequences of Section 138 of the A ct.

The context envisaged in Section 138 of the A ct invites

a liberal interpretation for the person w ho has the

statutory obligation to give notice because he is presum ed

to be the loser in the transaction and it is for his interest

the very provision is m ade by the legislature. The w ords

in C lause (b) of the proviso to Section 138 of the A ct

show that payee has the statutory obligation to ‘m ake a

dem and’by giving notice. The thrust in the clause is on

the need to ‘m ake a dem and’. It is only the m ode for

m aking such dem and w hich the legislature has prescribed.

A payee can send the notice for doing his part for giving

the notice. O nce it is despatched his part is over and the

next depends on w hat the sender does.

It is w ell settled that a notice refused to be accepted by

the addressee can be presum ed to have been served on

him , ( Harcharan Singh v. Smt . Shivran i and Ors. ,

and Jagdish Singh v. Natt hu Singh , 1988 AIR 2127 )

If the notice is returned as unclaim ed and not as refused.

W ill there be any significant different betw een the tw o

so far as the presum ption of service is concerned? In this

connection a reference to Section 27 o f the G eneral

C lauses Act w ill be useful. The Section reads thus:

27. Meaning of service by post. - Where any central Act

or Regulation made after th e commencement of

this Act autho rizes or requires any document to be

served b y post, w hether the expression ‘serve’ or

either of the expressions ‘give’ or ‘send’ or any other

expression is used, then, unless a diff erent int ention

c o n t d . o n p a g e n o . 2 0

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I . In t ro d u ct io n :

Com panies Act, 2013 has brought a lot of challengesfor all com panies, m ore for the private com panies.

Before one could realize the im pact, m ost of the

provisions of the C om panies Act, 2013 w ere placed

into operation by issuance of tw o m ain notifications

i.e. one in Septem ber, 2013 and the other in the

last w eek of M arch, 2014. In m y opinion, the last

few years quite challenging for Indian professionals

and business ow ners because of a plethora of

changes introduced in procedures in tax law s and

corporate law s. A s a business ow ner, on e has to

constantly stay in touch and keep on updating one’s

business strategies in line w ith the changes. A s a

professional, one need s to study the changes

thoroughly, exam ine the im pact on his/her clients

and advise them accordingly. I w ould call today’s

environm ent as one in w hich a person has to take

tom orrow ’s decision, ‘yesterday’i.e. be prepared

w ell in advance.

There are certain provisions of the Com panies Act,

2013, w hich w ill affect all the com panies right from

day one i.e. 1st April, 2014. O ne of them being

adjustm ent to carrying am ounts of certain fixed assets

and recalculation of depreciation thereon. This article

focuses on the provisions of the Com panies Act 2013

w ith respect to assets and depreciation thereon.

I I . D e p re cia t io n u n d e r C o m p a n ie s A ct , 2 0 1 3 -

S e c t i o n 1 2 3 , S e c t i o n 1 9 8 & S c h e d u l e I I :

Sections 123 and 198 w ere m ade effective from 1st

A pril, 2014 vide notification issued by the M inistry

of Corporate A ffairs dated 26th M arch, 2014.

Section 198 provides the m ethod for calculating the

net profits of a com pany for any financial year.

O ne m ay argue that Section 198 is applicable only

to public com panies w ho intend to pay m anagerial

rem un eration because the opening lines of the

section are “In computing t he net profit s of a

company in any financial year for th e purpose of

sect ion 197” . H ow ever, in m y opinion, since the

term ‘net profits’is not defined anyw here else under

the act, one w ill have to rely on Section 198 for

Com panie s Act, 2013 - Provisionsrelating to Depreciation

understanding the m eaning of the sam e. Thus,

Section 198 w ill apply to all the cases w here net

profits are to be calculated under the C om panies

Act, 2013.

Section 198(4) provides for the various deductions

to be m ade from the incom e of the com pany to

arrive at net profits, in w hich clause ‘k’deals w ith

depreciation.

Clause ‘k’gives a reference to Section 123. Section

123(2), in turn, provides that the depreciation shall

be calculated in a m anner provided in Schedule II of

the A ct. O ne m ay again argue that Section 123

applies only to com panies w hich declare dividend,w hich m ay lead to a thought that com panies w hich

do not declare dividend can arrive at net profits

w ithout providing for depreciation or com panies m ay

choose not follow Schedule II of the Act and provide

depreciation in som e other m anner. The argum ent

that on e can d o aw ay w ithout providing for

depreciation w ould not bear m uch w eight because

not providing for depreciation is a violation of

accounting standards. O n the other side, definition

of dep reciation or the m anner of calculating

depreciation is not given anyw here else under the

Act except under Schedule II. Thus, Schedule II w illapply to all the cases w here depreciation is to be

calculated under the C om panies A ct, 2013.

To sum up, depreciation is to be calculated in the

m anner provided in Schedule II to arrive at the net

profits of the com pany, subject to other adjustm ents

given in Section 198 w ith effect from 1st A pril, 2014.

I I I . Sc h e d u le I I:

Schedule II of the A ct has also com e into force from

1st April, 2014 vide notification issued by the M inistry

of C orporate A ffairs dated 26th

M arch, 2014.

The Schedule is divided into three parts:

- P a r t A – D e p r e c i a b l e a m o u n t , U s e f u l l i f e ,

r e s i d u a l v a l u e , i n t a n g i b l e a s s e t s , e t c . :

Paragrap h 1 of pa rt A lays do w n tha t

“depreciation is th e sy ste m a t ic a l loc a t ion of

CA. Anuj J. Shareda [email protected]

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A h m e d a b a d C h a r t e r e d A c co u n t a n t s Jo u r n a l A p r i l , 2 0 1 41 0

Companie s Act, 2013 - Provisions rela ting to Depre ciation

the d e p r e c i a b l e a m o u n t of an asset over its

u s e f u l l i f e ”.

There are a few term s in Paragraph 1 w hich need

to be understood here:

a . Syst e m i c A l lo c a tio n : This term is now here

defined in the A ct or A S 6 –Depreciation

Accounting. The w ord “allocation”has been

defined as “apportionm ent”or “allotm ent”

or “an allow ance m ade upon an account”

in the Cham ber’s dictionary. The w ord

“system atic”has been defined as “according

to system ”or “m ethodical”in the Cham ber’s

dictionary.

Thus, clubbing the dictionary m eanings of

the tw o w ords, one can say that the term

system atic allocation m eans “m e t h o d i c a l

a p p o r t i o n m e n t”of som ething.

b . D e p r e ci a b le a m o u n t : D ep reciab le

am ount has been explained under Part A as

the cost of an asset or substituted cost less

it’s residual value.

c . U se f ul Lif e : U seful Life has to be taken as

given under Part C .

d . Re sid u a l V a lu e : A s given under Part C of

Schedule II,“Ordinarily, the residual value

of an asset is oft en insignificant bu t it should

g e n e r a l l y b e n o t m o r e t h a n 5 % of the

original cost of the asset.”

A different useful life and residual value can be

taken , only if the sam e is justified by the

Com pany. Such departure has to be disclosed in

the accounts as per Note 3 to Part C .

S c h e d u l e I I d o e s n o t a p p l y t o I n t a n g i b l e

A s s e t s :

Part A also m entions that Schedule II does not apply

to intangible assets and they w ill be covered under

relevant accounting standards. Thus, intangible

assets can be continued to b e am ortized as per

prevailing accounting standards in the sam e m anner

as it is being done at present until new accounting

standards are prescribed under Section 133 of the

C om panies A ct, 2013.

- P a r t B – U s e f u l l i f e o r r e s i d u a l v a l u e o f a n y

s p e c i f i c a s s e t :

In cases w here a Regulatory A uthority constituted

und er an A ct of Parliam ent or the C en tral

G overnm ent notifies U seful life or residual value of

any specific asset for accounting purposes, then for

such assets, requirem ents of Schedule II shall not

apply.

- Pa r t C – Us e fu l l i v e s , pa r t o f a n a s s e t ha v ings i g n i f i c a n t v a l u e , r e s i d u a l v a l u e , t r a n s i t i o n a l

p r o v is io n s e t c . :

Para 5 under Part C enlists useful lives for various

kinds of assets like buildings, m achines, ships, m otor

cars, furniture etc. A specim en of Schedule II has

been given in the form of an A nnexure to this article.

A s s e t s u s e d f o r a p a r t o f t h e y e a r :

An asset w hich has been used for a part of the year

has to be depreciated on a pro rata basis. This is

sim ilar to the requirem ent under Section 350 readw ith Schedule XIV of the Com panies A ct, 1956.

D i f f e r e n t u s e f u l l i v e s f o r d i f f e r e n t s i g n i f i c a n t

p a r t s o f a n a s s e t :

Another im portant consideration w ould be in case

of those assets w here individual parts are of

significant value as com pared to total cost. In such

cases, useful life of that part can be determ ined

separately. Typical exam ple in this case is that of an

airplane. The cabin interiors, airfram es and engine

of an airplane w ould have different lives. Each of

them m ay be having a significant value. In that case,the parts can be separately depreciated over their

respective useful lives. This concept or process is

called ‘com ponetization’under IFRS.

O ne point of caution is that this process requires

professional jud gm ent and also involvem ent of

technical experts. A rule of thum b is to look for such

item s that w ill require an overhaul or replacem ent

before the end of the entire asset’s useful life, and

to treat such item s as com ponents.

E x t r a S h i f t d e p r e c i a t i o n :

Another im portant change is the m anner in w hich

extra shift depreciation has to be claim ed. If an asset

is used for any tim e during the year for double shift,

the depreciation w ill increase by 50% for that period

and in case of the triple shift the depreciation w ill

increase by 100% for that period. Thus, at first the

depreciation has to be calculated norm ally by

system atically allocating the depreciable am ount i.e.

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A h m e d a b a d C h a rt e re d A cco u n t a n ts Jo u rn a l A p r il , 2 0 1 4 1 1

Companie s Act, 201 3 - Provisions relat ing to De preciation

cost less residual value, over its useful life as per

Part C . Then this depreciation has to be increased

by 50% or 100% for that period for w hich the asset

has w orked in tw o shifts or three shifts during the

financial year. It m ay be noted that continuous

process plants, i.e. plants that w ork for tw enty four

hours a d ay, are not eligible for extra shiftdepreciation since the sam e has already been

considered by reducing the useful life of such asset

in the Schedule.

R e s i d u a l V a l u e :

A s seen earlier, residual value cannot be taken as

m ore than 5% of the original cost of asset. How ever,

a higher residual value can be taken if the sam e is

justifiable. Typical exam ple w ould be that of a luxury

m otor car w hich w ould have a residual value of m ore

than 5% even if sold after its useful life as given

under Schedule II i.e. eight years is over.

The follow ing Paragraph 10 of A S 6 is notew orthy

in the context of residual value:

“10. Determination of residual value of an asset is

n o r m a l l y a d i f f i c u l t m a t t e r . If such value is

considered as insignificant , it is normally regarded

as nil. On t he con trary, if the residual value is likely

to be significant, it is estimat ed at t he time o f

acquisition/installation, or at t he time of subsequent

revaluation of the asset. O n e o f t h e b a s e s f o r

d e t e r m i n i n g t h e r e s i d u a l v a l u e w o u l d b e t h e

r e a l isa b l e v a lu e o f sim i la r a sse t s w h i c h h a v e r e a c h e d t h e e n d o f t h e i r u s e f u l l i v e s a n d

h a v e o p e r a t e d u n d e r c o n d i t i o n s s i m i l a r t o

t h o se i n w h i ch t h e a s se t w i ll b e u s e d . ”

T r a n s i t i o n a l e f f e c t o f S c h e d u l e I I :

The m ost im portant and challenging aspect of

Schedule II is the effect to be given in the books of

account on the date of transition, i.e. 1st A pril, 2014.

Reproduced below is N ote 7 to Part C of Sched ule

II,

“7. From t h e d a t e t h i s S c h e d u l e c o m e s i n t o

e f f e c t , the c a r r y i n g a m o u n t o f t h e a s s e t a s

o n t h a t d a t e -

(a) shall be d e p r e c i a t e d o v e r t h e r e m a i n i n g

useful l i fe of the asset as per t his Schedule;

(b) aft er retaining th e residual value, shall be

recognized in the opening balance of r e t a i n e d

e a r n i n g s w h e r e t h e r e m a i n i n g u s e f u l li f e

o f a n a s s e t i s n i l . ”

There could be tw o possibilities regarding the

assets as on 1st A pril, 2014 in context of the

above note:

1 . A s se t ’ s r e m a i n i n g u se f u l li f e a s p e rS c h e d u l e I I i s n i l :

In that case, as per Note 7(b), the carrying

am ount has to be adjusted in the opening

balance of retained earnings in the balance

sheet after retaining the residual value.

2 . A s se t ’ s r e m a i n in g u se f u l li fe i s a s p e r

S c h e d u l e I I i s n o t n i l :

If one reads Note 7, specifically clause (a),

then one has to continue depreciating the

balance as on 1st April, 2014 systematically

over the rem aining useful life afterrecalculating the rate of depreciation. In that

case, no effect of restating the carrying

am ou nt w ill be ne eded to b e g iven.

H ow ever, there is another possibility here,

discussed later.

A p p l i c a b i l i t y o f A c c o u n t i n g S t a n d a r d 6 v i s -

à - v i s C o m p a n i e s A c t , 2 0 1 3 :

Section 133 of the Com panies Act, 2013 gives pow er

to the C entral G overnm ent to prescribe accounting

standards after considering recom m endation of the

ICAI and the National Financial Reporting Authority.

Section 133 cam e into force from 12 th Septem ber,

2013, how ever no standards have been prescribed

till date. It w as clarified vide G eneral Circular No.

15/2013 dated 13th Septem ber, 2013, that till

standards are prescribed under Section 133 ,

accounting standards notified under Com panies Act,

1956 shall be applicable.

The sam e has been reiterated in C om panies

(A ccounts) Rules, 2014 that have com e into force

w ith effect from 1st A pril, 2014. A s per Rule 7 of the

said rules, the standards of accounting as specifiedunder the Com panies Act, 1956 shall be deem ed to

be the accounting standards until accounting

standards are specified by the C entral G overnm ent

under Section 133. A ccounting for depreciation is

covered by AS –6 –Depreciation A ccounting.

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W h e t h e r p r o v id i n g d e p r e c i a t io n a s p e r

S c h e d u l e I I a m o u n t s t o c h a n g e i n m e t h o d o f

d e p r e c i a t i o n :

Before going to the above question, it is necessary

to understand the situation that existed till now and

com pare the sam e w ith the provisions of the new

A ct.

There w ere tw o m ethods of depreciation given under

Schedule XIV of the C om panies A ct, 1956:

(i) Straight Line M ethod (SLM )

(ii)W ritten Dow n Value m ethod or reducing balance

m ethod (W D V)

Rates of depreciation w ere different under both these

m ethods. How ever, the rates w ere calculated in such

a m anner that any of these m ethods w ould enable

a com pany to w rite off the asset upto its residual

value over the sam e period of tim e.

E.g. The rate of depreciation under Schedule XIV

for “M otor-cars, m otor cycles, scooters & other

m opeds (N ESD)”is 25.89% and 9.5% under W D V

and SLM m ethods respectively. This m eans, that

irrespective of the m ethod that a com pany chooses,

the asset w ill be com pletely w ritten off barring its

residual value in 10 years.

N ow , let us com pare both these m ethods w ith the

m ethod of depreciating an asset given in Schedule

II of the C om panies A ct, 2013.

U nder Schedule II, depreciation has to be provided

on a systemat ic basis over the useful life of the

asset.

A lso, the definition of “depreciation”under A S –6

is som ew hat sim ilar:

“3.1 Depreciation is a measure of the w earing out ,

consumpt ion or ot her loss of value of a depreciable

asset arising f rom use, eff luxion of t ime or

obsolescence thro ugh technology and market

changes. D e p r e c i a t i o n i s a l l o c a t e d s o a s t o

c h a r g e a f a i r p r o p o r t i o n o f t h e d e p r e c i a b l e a m o u n t i n e a c h a c c o u n t i n g p e r i o d d u r i n g

t h e e x p e c t e d u s e f u l l i f e o f t h e a s se t .

Depreciation includes amortisation of assets whose

useful life is predet ermined .”

Paragraph 20 of the standard is also notew orthy in

this regard:

“20. The depreciable amount o f a depreciable asset

sh o u l d b e a l lo c a t e d o n a sy st e m a t i c b a s is to

each account ing period du ring the useful life of the

asset.”

AS –6 p erm its both the m ethods, W D V as w ell as

SLM .

T h u s, in m y o p in i o n , b o t h t h e a b o v e m e t h o d s

i . e . SLM & W D V c a n b e sa i d t o b e

“ s y s t e m a t i c a l l o c a t i o n ” o f d e p r e c i a b l e

a m o u n t o v e r t h e u s e f u l l i f e o f t h e a s s e t .

Thus, w hat has been proposed under the new A ct is

o n l y a r e v i s i o n o f e s t i m a t e d u s e f u l l i v e s o f

assets, there is n o c h a n g e i n m e t h o d p r o p o s e d.

In such a situation, w hen there is change in estim ate,

Paragraph 23 of A S -6 com es into play:

“ W h e r e t h e r e i s a r e v isi o n o f t h e e st i m a t e d

u s e f u l l i f e o f a n a s se t , t h e u n a m o r t i se d

d e p r e c i a b l e a m o u n t s h o u l d b e c h a r g e d o v e r

t h e r e v i s e d r e m a i n i n g u s e f u l l i f e . ”

Sim ilar principle is laid dow n under Note 7(a) of

Schedule II:

“7. From t h e d a t e t h i s S c h e d u l e c o m e s i n t o

e f f e c t , the c a r r y i n g a m o u n t o f t h e a s s e t a s

o n t h a t d a t e -

(a) shall be d e p r e c i a t e d o v e r t h e r e m a i n i n g

useful l i fe of the asset as per this Schedu le;”

Thus, com panies w ill have to recalculate the rates

of depreciation u nder SLM or W D V m ethod,

depending on the m ethods w hich they use at

present, and continue depreciating the carrying

am ount as on 1 st A pril, 2014 at the re-calculated

rates.

Now , w e have seen that the new Act has only

provided for a change in estim ated useful lives of

the assets as com pared to the old Act i.e. C om panies

Act, 195 6. There is no requirem ent to change the

m ethod of depreciation.

A n o t h e r p o s s i b i l i t y - C h a n g e i n m e t h o d o f

d e p r e c i a t i o n :

Another possibility here is for com panies w hich w ant

to change the m ethod of “system atically allocating”

depreciation. Before going to the sam e, it is

im portant to note that change in the m ethod of

depreciation is not perm itted frequently, and,


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generally the m ethod of depreciation is to be applied

consistently from period to period as per AS –6.

U nlike the Com panies A ct, 1956, w hich spelt out

rates as per SLM and W D V m ethods, Schedule II

lays dow n the useful lives of assets. Thus, under

C om panies Act, 1956, generally, one had to follow

either SLM or W D V m ethod, w hich m ay not be thecase under C om panies Act, 2013.

Schedule II of Com panies Act, 2013, lays dow n that

“depreciation is the sy ste m a t ic a l loc a t ion of the

d e p r e c i a b l e a m o u n t of an asset over its u s e f u l

l i fe ”. S ystem atic allocation, m eaning “m ethodical

or rational apportionm ent”of som ething, is a very

w ide term and goes beyond SLM and W DV m ethods.

It m eans any form ula that is logical and acceptable

can be applied for depreciating assets. The m ethod

used under the aegis of system atic allocation could

be “rate based” or “activity based”. E.g.D epreciating an asset over a 10-year period w ith

the sam e am ount of depreciation expense each year

is system atic and rational. O n the other hand,

depreciating the asset on the basis of the output in

each period is also system atic and rational.

Thus, there is a possibility for com panies w hich feel

that the present m etho d of depreciation needs to

be changed in view of a m ore system atic allocation

m ethod being perm issible from FY 2014-15 onw ards.

Schedule II doesn’t provide any guidance for cases

in w hich there is a chang e in the m ethod ofdepreciation. Thus, one has to refer the A ccounting

standard for guidance in a situation w here there is a

change in accounting policy/m ethod.

Reproduced below are Paragraphs 15 and 21 of the

standard:

“15. The met hod o f d epreciat ion is a p p l i e d

consistent ly to provide comparability of t he results

of t he operations of t he enterprise from period t o

per iod . A c h a n g e f r o m o n e m e t h o d o f

p r o v i d i n g d e p r e c i a t i o n t o a n o t h e r i s m a d e

o n ly if t h e a d o p t i o n o f t h e n e w m e t h o d is

required by statute or for compliance with an

account ing standard or if it is considered that the

change w o u l d r e s u l t i n a m o r e a p p r o p r i a t e

p r e p a r a t i o n o r p r e s e n t a t i o n o f t h e f i n a n c i a l

s t a t e m e n t s o f t h e e n t e r p r i s e . W h e n su ch a

c h a n g e i n t h e m e t h o d o f d e p r e c i a t i o n i s

m a d e , d e p r e c i a t i o n i s r e c a l c u l a t e d i n

a c c o r d a n c e w i t h t h e n e w m e t h o d f r o m t h e

d a t e o f t h e a s s e t c o m i n g i n t o u s e . T h e

d e f i c i e n c y o r s u r p l u s a r i s i n g f r o m

r e t r o s p e c t i v e r e c o m p u t a t i o n o f d e p r e c i a t i o n

i n a c co r d a n c e w i t h t h e n e w m e t h o d i s

a d j u st e d i n t h e a c c o u n t s in t h e y e a r i n w h i ch

t h e m e t h o d o f d e p r e c i a t i o n i s c h a n g e d . In case the change in t he method result s in deficiency

in dep reciatio n in respect of past years, t h e

d e f i c i e n c y i s c h a r g e d i n t h e s t a t e m e n t o f

pro f i t a nd loss. In case the change in the met hod

result s in surplu s, the surplus is credited to the

stat ement o f p rofit and loss. S u c h a c h a n g e i s

t r e a t e d a s a c h a n g e i n a c c o u n t i n g p o l i c y

a n d i t s e f f e c t i s q u a n t i f i e d a n d d i s c l o s e d .

21. The depreciation method selected should be

a p p l i e d c o n s i s t e n t l y from p eriod t o period. A

c h a n g e f r o m o n e m e t h o d o f p r o v id i n g

d e p r e c i a t i o n t o a n o t h e r s h o u l d b e m a d e o n l y

if t h e a d o p t io n o f t h e n e w m e t h o d is requi red

by statut e or fo r compliance w ith an account ing

standard or if it is considered that the ch a n g e w o u l d

r e s u l t i n a m o r e a p p r o p r i a t e p r e p a r a t i o n o r

p r e s e n t a t i o n o f t h e f i n a n c i a l s t a t e m e n t s o f

t h e e n t e r p r i s e . W h e n s u ch a c h a n g e i n t h e

m e t h o d o f d e p r e c i a t i o n i s m a d e , d e p r e c i a t i o n

sh o u l d b e r e c a l c u la t e d i n a c co r d a n c e w i t h

t h e n e w m e t h o d f r o m t h e d a t e o f t h e a s s e t

c o m i n g i n t o u s e . T h e d e f i c i e n c y o r s u r p l u s

a r i s i n g f r o m r e t r o s p e c t i v e r e c o m p u t a t i o n o f d e p r e c i a t i o n i n a c c o r d a n c e w i t h t h e n e w

m e t h o d s h o u l d b e a d j u s t e d i n t h e a c c o u n t s

i n t h e y e a r in w h i c h t h e m e t h o d o f

d e p r e c i a t i o n i s c h a n g e d . In case the change in

the method results in deficiency in depreciation in

respect of past years, t h e d e f i c i e n c y s h o u l d b e

c h a r g e d i n t h e s t a t e m e n t o f p r o f i t a n d l o s s .

In case the change in t he method results in surp lus,

t h e s u r p l u s s h o u l d b e c r e d i t e d t o t h e

s t a t e m e n t o f p r o f i t a n d l o s s . Such a change

should be treated as a change in account ing policy

and it s effect should be quant ified and disclosed.”

As m entioned earlier, change in the m ethod of

depreciation is not perm itted frequently, and,

generally the m ethod of depreciation is to be applied

consistently from period to period. C hange in

m ethod of depreciation can be do ne only if such a

change fulfills the criteria given in the above

paragraphs of A S –6. C areful consideration is


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required on part of the com pany w anting to change

the m ethod of depreciation. Appropriate reasons and

justifications for the sam e should be taken on record

and docum ented. The sam e needs to be disclosed

in the financial statem ents also.

Thus, as per A ccounting Standard 6, the follow ing

needs to be done on 1st A pril, 2014 in cases w herethe com pan y go es for change in m etho d of

depreciation:

1. Docum ent the reasons behind change in m ethod

of depreciation and also include the im pact of

such change on the financial position of the

com pany.

2. The above docum ent should be presented and

approved at a Board of Directors m eeting by

passing a board resolution.

3. Ascertain the depreciable am ount for each assetor significant part of asset i.e. cost of asset

(O riginal purchase price) less residual value.

4. Re-calculate depreciation as per m ethod given

in Schedule II of C om panies Act, 2013 for the

period upto 31 st M arch, 2014 i.e. using new

m ethod.

5. D educt such depreciation as calculated in Step

4 from the depreciable am ount.

6. C om pare the new carrying am ount arrived at in

Step 5 w ith the present carrying am ount.

7. C harge the excess depreciation to be provided

to Profit & Loss Account and vice versa.

8. From the finan cial year 2014-15 onw ards,

depreciation w ill be p rovided on the new ly

arrived carrying am ount as per Schedule II.

9. In case the rem aining useful life as on 1st April,

2014 is already nil, the effect w ill be given to

retained earnings account as discussed earlier.

I m p a c t o f A S – 2 2 A c c o u n t i n g f o r t a x e s o n

I n c o m e :

The im pact of this restatem ent w ill also have to be

seen in the light of AS –22 –Accounting for taxes

on Incom e. N ecessary effect w ill have to be given

to the deferred tax account of the com pany by

recalculating the deferred tax im pact again. In m y

opinion , the sam e w ill be sm oother if books of

account’s asset base and incom e tax block of assets

base are com pared instead of depreciation values.

C o n c l u s i o n :

The im pact of Schedule II and A S 6 provisions w ill be big

on each and every com pany having a significant asset

base. In m y opinion, the task w ould be a com fortable

one if the com pany’s fixed assets register is in perfect

order.

The follow ing can be concluded regarding provisions

relating to D epreciation under the new C om panies Act,

2013:

A n n e x u r e

S C H E D U LE I I ( Se e se c t i o n 1 2 3 ) U S E FU L LI V E S

T O C O M P U T E D E P RE C IA T I O N

PA RT ‘A’’

1. Depreciation is the system atic allocation of the

depreciable am ount of an asset over its useful life.

The depreciable am ount of an asset is the cost ofan asset or other am ount substituted for cost, less

its residual value. The useful life of an asset is the

period over w hich an asset is expected to be available

for use by an entity, or the num ber of production or

sim ilar units expected to be obtained from the asset

by the entity.

2. For the pu rpo se of this Sched ule, the term

depreciation includes am ortisation.

3. W ithout prejudice to the foregoing provisions of

paragraph 1,—

(i) In case of such class of com panies, as m ay be

prescribed and w hose financial statem ents

com ply w ith the accounting standards prescribed

for such class of com panies under section 133

the useful life of an asset shall not norm ally be

different from the useful life and the residual

value shall not be different from that as indicated

in Part C , provided that if such a com pany uses


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a u seful life or residual value w hich is different

from the useful life or residual value indicated

therein, it shall disclose the justification for the

sam e.

(ii) In respect of other com panies the useful life of

an asset shall not be longer than the useful life

and the residual value shall not be higher thanthat prescribed in Part C .

(iii) For intangible assets, the provisions of the

Accounting Standards m entioned under sub-para

(i) or (ii), as applicable, shall apply.

PART ‘B’’

4. The useful life or residual value of any specific asset,

as notified for accounting purposes by a Regulatory

A uthority constituted under an Act of Parliam ent or

by the C entral G overnm ent shall be applied in

calculating the depreciation to be provided for suchasset irrespective of the requirem en ts of this

Schedule.

PART ‘C’’

5. Subject to Parts A and B above, the follow ing are

the useful lives of various tangible assets:

N a t u r e o f A sse t s U se f u l Lif e

I Buildings [N ESD]

(a) Buildings (other than factory

buildings) RC C Fram e Structure 60 years

(b) Buildings (other than factory

buildings) other than RC C

Fram e Structure 30 years

(c) Factory buildings -do-

XV H ydraulic w orks, pipelines

and sluices [N ESD ] 15 years

Note : Paragraph 5 has been intentionally shortened.

For entire Paragraph please refer the C om panies

A ct, 2013.

Notes.-

1. “Factory buildings”does not include offices,

godow ns, staff quarters.

2. W here, during any financial year, any addition

has been m ade to any asset, or w here any asset

has been sold, discarded , dem olished or

destroyed, the depreciation on such assets shall

be calculated on a pro rata basis from the date

of such addition o r, as the case m ay be, up to

the date on w hich such asset has been sold,

discarded, dem olished or destroyed.

3. The follow ing inform ation shall also be disclosed

in the accounts, nam ely:—

(i) depreciation m ethods used; and

(ii)the useful lives of the assets for com puting

depreciation, if they are different from the

life specified in the Schedule.

4. Useful life specified in Part C of the Schedule is

for w hole of the asset. W here cost of a part of

the asset is significant to total cost of the asset

and useful life of that part is different from the

useful life of the rem aining asset, useful life of

that significant part shall be determ ined

separately.

5. Depreciable am ount is the cost of an asset, orother am ount substituted for cost, less its residual

value. O rdinarily, the residual value of an asset

is often insignificant but it should generally be

not m ore than 5% of the original cost of the

asset.

6. The useful lives of assets w orking on shift basis

have been specified in the Sched ule based on

their single shift w orking. Except for assets in

respect of w hich no extra shift depreciation is

perm itted (indicated by NESD in Part C above),

if an asset is used for any tim e during the yearfor double shift, the depreciation w ill increase

by 50% for that period and in case of the triple

shift the depreciation shall be calculated on the

basis of 100% for that period.

7. From the date this Schedule com es into effect,

the carrying am ount of the asset as on that

date—

(a)shall be depreciated over the rem aining

useful life of the asset as per this Schedule;

(b)after retaining the residual value, shall be

recognised in the opening balance of retained

earnings w here the rem aining useful life of

an asset is nil.

8. Continuous process plant m eans a plant w hich

is required and designed to operate for tw enty-

four hours a day.


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A p p l i c a b i l i t y o f t h e C o m p a n i e s A c t , 2 0 1 3 t o

A u d i t o r ’ s R e p o r t t o F Y 2 0 1 4 - 1 5

The M inistry of Corporate A ffairs, on 26th M arch 2014

notified a m ajority of the rem aining sections of the

C om panies Act, 2013, including sections 139 to 148,

relating to audits and auditors. The A ct w as stated to

be effective from 1st A pril, 2014.

A ccordingly, queries are being raised by a num ber of

m em bers as to w hether any auditor’s report of a

com pany being signed on or after 01st April, 2014 w ould

be in accordance w ith the requirem ents of section 143

of the C om panies Act, 2013.

In this context, it m ay be noted that the M inistry of

C orporate A ffairs (M C A ) has, on 04th A pril 2014, vide

its G eneral C ircular N o. 08/2014, clarified that the

financial statem ents (and docum ents required to be

attached thereto), auditor’s report and Board’s report

in respect of financial years that com m enced earlier

than 01st April, 2014 shall be governed by the relevant

provisions/Schedules/rules of the C om panies Act 1956.

This M C A C ircular can b e seen at U RLh t t p : / /

w w w . m c a . g o v . i n / M i n i s t r y / p d f /

G e n e r a l _ C i r c u l a r _ 8 _ 2 0 1 4 . p d f.

Therefore, it is clear from M CA’s aforesaid G eneral

C ircular that the au ditor’s report of a co m pan y

pertaining to any financial year com m encing on or

before 31st m arch 2014, w ould be in accordance w ith

the requirem ents of the C om panies Act, 1956 even if

that financial year ends after 01st A pril 2014. For

exam ple, w here the financial year of a com pany is 01st

January 2014 to 31st D ecem ber 2014, the statutoryauditor’s report signed therefor w ould be in accordance

w ith the requirem ents of the Com panies Act, 1956.

A s a corollary to M CA’s G eneral C ircular, it appears

that the provisions of the 2013 Act w ould apply only to

the financial years com m encing on or after 01st April

Updates from ICAI

2014. Thus, for exam ple, the statutory auditor’s report

signed in respect of the financial year of the com pany

ended 31st M arch 2015 w ould need to be issued in

accordance w ith the provisions of the C om panies Act,

2013.

A n n o u n c e m e n t r e g . a b s t a i n i n g f r o m s h a r i n g o f

F i r m d e t a i l s i n t e n d e d f o r c o m p a r i s o n o f F i r m s .

- ( 3 0 - 0 3 - 2 0 1 4 )

In this regard, M em bers are hereby inform ed that

sharing of details of their C hartered A ccountants firm s

in the aforesaid m anner does not fall w ithin the

perm itted categories , and w ould therefore be violative

of Item 6 of Part-I of First Schedule to The C hartered

A ccountants A ct, 1949 . Further, as it is know n

beforehand that the inform ation regarding firm s w ould

be used for ranking purposes, the sharing of such details

w ould tacitly result in claim ing superiority of one firm

over other, w hich is prohibited in term s of the

A dvertisem ent G uidelines of the IC A I under Item 7 of

Part –I of First Schedule to The C hartered A ccountants

A ct, 1949. M em bers are therefore advised to abstain

from such sharing of details of their C harteredA ccountants Firm s.

C l a r i f i c a t i o n o n p r o h i b i t i o n o f s i m u l t a n e o u s l y

u n d e r t a k i n g C o n c u r r e n t A u d i t a n d Q u a r t e r l y

R e v i e w o f t h e s a m e B a n k .

Since queries are being received from m em bers at large

on the issue, it is accordingly hereby clarified that

concurrent audit and the assignm ent of quarterly review

of the sam e Bank cannot be undertaken sim ultaneously

as the concurrent audit being a kind of internal auditand the quarterly review being a kind of statutory audit

undertaken sim ultaneously are prohibited under the

provisions of ‘G uidance Note on Independence of

Auditors’

Compiled by CA. Uday I. Shah

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Glimpses of Suprem eCourt Rulings

Advocate Samir N. [email protected].

S co p e o f M o n i t o r in g o f i n q u i r y/

i n v e s t i g a t i o n b y C o u r t

The m onitoring of investigations/inquires by the Court is

intended to ensure that proper progress takes place

w ithout directing or channeling the m ode or m anner of

investigation. The w hole idea is to retain public

confidence in the im partial inquiry/investigation into the

alleged crim e; that inquiry/investigation into every

accusation is m ade on a reasonable basis irrespective of

the position and status of that person and the inquiry/

investigation is taken to the logical conclusion in

accordance w ith law . The m onitoring by the Court aim sto lend credence to the inquiry/investigation being

conducted by CBI as prem ier investigating agency and

to elim inate any im pression of bias, lack of fairness and

objectivity therein.

How ever, the investigation/inquiry m onitored by the court

does not m ean that the court supervises such investigation/

inquiry. To supervise w ould m ean to observe and direct

the execution of a task w hereas to m onitor w ould o nly

m ean to m aintain surveillance. The concern and interest

of the court in such “court-directed”or “court-m onitored”

cases is that there is no undue delay in the investigation,and the investigation is conducted in a free and fair

m anner w ith no external interference.

( M a n o h a r l a l S h a r a V s. P r in c ip a l S e c r e t a r y

[ ( 2 0 1 4 ) 2 S C C ]

N e g o t i a b l e I n s t r u m e n t A c t , 1 8 8 1 –

R e p r e s e n t a t i o n o f c h e q u e a f t e r d i s h o n o r .

Lim itation period for filing com plaint for dishonor of

cheque upon re-presentation of cheque –D ate from

w hich to be reckoned –Legal notice to draw er m ust beissued w ithin 30 days of that dishonor of cheque, w hich

m atures into com plaint –Though first legal notice w as

issued w ithin tw o days of first dishonor of cheque, second

legal notice issued to draw er of cheque beyond the

lim itation of period of 30 days. Although the com plaintant

had right to present the said cheque for encashm ent a

second tim e after its dishonor, the legal notice pursuant

to second dishonor has to be issued w ithin 30 days of

the receipt of inform ation as to second dishonor from

bank.

( K a m l e s h k u m a r V s S t a t e o f B i h a r ) ( 2 0 1 4 ) 2

S C C 4 2 4 )

S e r vi ce l a w – P r o p o r t i o n a l it y o f p e n a l t y/

p u n i s h m e n t

It is now w ell-settled that it is open to the Courts in all

circum stances, to consider w hether the punishm ent

im posed on the delinquent w orkm an or officer as the

case m ay be, is com m ensurate w ith the A rticles of charge

leveled against him . If, the conscien ce of the C ourt is

shocked as to the severity or in-appropriateness of the

punishm ent im posed, it can be rem and the m atter back

to fresh consideration to the disciplinary authority

concerned.

(Ishwarchandra Jaiswal Vs. UOI – (2014) 2SCC 748)

D i s p o s a l o f m e r c y p e t i t i o n o f d e a t h

c o n v i c t s

“M ercu jurisprudence is a part of evolving standard of

decency, w hich is the hallm ark of society. “Prolonged

delay in execution of a sen tence of death has a

dehum anizing effect and this has the constitutional

im plication of depriving a person of his life in an unjust,

unfair and unreasonable w ay so as to offend the

fundam ental right under Article 21 of the C onstitution.

Right to seek for m ercy under Articles 72/161 of the

C onstitution is a constitutional right an d not at the

discretion or w him s of the executive. Every constitutional

duty m ust be fulfilled w ith due care and diligence;

otherw ise judicial interference is the com m and of the

C onstitution for upholding its values.”

The fundam ental right to m ove the Suprem e C ourt can

be appropriately described as the cornerstone of the

dem ocratic edifice raised by the C onstitution.

S h a t r u g h a n C h a u h a n V s . U n i o n o f I n d i a

[ ( 2 0 1 4 ) 3 S C C , P a r a 7 ]

1

4

2

3

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S ec . 8 0 H H C ( 4 ) : M e a n i n g o f “ a l o n g w it h

t h e R e t u r n o f I n c o m e ” :

C I T v / s . G o d h a C h e m i c a l s ( P ) L t d .

( 2 0 1 4 ) 2 2 0 T a xm a n 3 1 ( Ra j a st h a n ) (M a g ) : ( 2 0 1 3 )

3 5 3 I T R 6 7 9 ( R a j )

Issue :

W hat is the m eaning of “along w ith the Return of

Incom e” in Sec. 80 HH C (4) ?

H eld :

H igh Court has interpreted the above provision in the

follow ing w ords :

Expression ‘along w ith the return of incom e’as occurring

in sub section (4) of sec. 80H H C could alw ays be

interpreted as directory so far it relates to tim e of filing

report and, hence, even if report is filed during assessm ent

proceedings, assesee can not be denied claim of

deduction.

D i f f e r e n c e i n S t o c k d e t a i l s i n q u a n t i t y

a n d v a l u e f o r o b t a i n i n g l o a n f r o m B a n k :

C I T v / s . R i d d h i S t e e l a n d T u b e s ( P ) L t d .

(2 0 1 4 ) 2 2 0 T a xm a n 1 4 8 (G u j )

Issue :

O n the facts that the assessee had given statem ent of

stock to bank w hich w as inflated in quantity and value,

w hether addition to incom e can be m ade on that basis?

H eld :

Tribunal had held as under :

O n perusal of the various decisions, it is gathered that

courts have laid dow n that additions cannot be m ade

on account of difference arising in the quantity and valueof stock show n in the books of account and statem ent

furnished to the banking authorities, adm ittedly to avail

higher credit facilities. C ourts have laid dow n the

follow ing guidelines w hile dealing w ith the issue.

(a) The stock in quantity and value is inflated on estim ate

basis in the statem ent furnished to the banking

authorities to avail higher financial credits;

CA. C. R. Sharedalaljcs@crsha red a lalco.com .

(b) The inflated and estim ated stock is hypothecated

and not pledged;

(c) No actual verification of stock is carried out by the

officer of banking authorities during the year or as

on the date of valuation of stock;

(d) The assessee has m aintained stock register;

(e) The assessee’s books of account are not found to

be defective or non genuine by A .O .

(f) The books of account m aintained by the assessee

and accepted by the excise and /or Sales Tax

Departm ent;

O n elaborating each guideline w ith reference to the facts

on records the Tribunal upheld the say of the assessee.

H igh C ourt held that :

“It is a settled law as rightly held by the Tribunal that

only on account of inflated statem ent furnished to the

banking authorities for the purpose of availing of larger

credit faculties, no addition can be m ade if there appears

to be a difference betw een the stock show n in the books

of account and the statem ent furnished to the banking

authorities. If for the purpose of fulfilling the m argin

requirem ents of the base purely on inflated estim atebasis, w hen the stock statem ent has reflected inflated

value of the stock in w ake of otherw ise satisfactory

explanation, both for purpose of value as w ell as quantity,

w e find no reason to interfere w ith the order of the

Tribunal”.

S e c . 2 6 3 : J u r i s d i c t i o n t o i s s u e n o t i c e :

I B M I n d i a ( P ) Lt d . v / s. C I T

(2 0 1 3 ) 2 1 6 T a xm a n 1 7 0 (M a g )

( K a r n a t a k a )

Issue :

M ere expression that certain expenses w ere to be

exam ined w ould give jurisdiction to C IT to issue notice

u/s 263 ?

H eld :

In the case, assessm ent w as com pleted u/s 143(3). C IT,

issued a notice u/s 263 stating that there w as a need to

From t he CourtsCA. Jayesh C. [email protected].

1

2

3

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From the Courts

exam ine assessm ent order on certain aspects. In absence

of recording an opinion over w hy order of assessm ent

required initiation of revisionary proceedings, m ere

expression that certain item s of expenses etc. w ere

required to be exam ined did not satisfy the requirem ent

of issue of show cause notice u/s 263. Therefore,

im pugned notice deserved to be quashed.

W e ig h t t o t h e h e a d in g t o a se ct io n :

S m t . R e k h a K r i sh n a r a j v / s. I T O

( 2 0 1 3 ) 2 6 1 C T R 7 9 ( K a r) : ( 2 0 1 3 ) 9 1

D T R ( K a r ) 1 3 2

Issue

W hat w eightage sho uld be given to the heading to a

section ?

H eld ;

In the case of w eight age to heading (cash credits) u/s

68, H igh C ourt has held as under :

A heading is to be regarded as giving the key to the

interpretation of the clauses ranged under it, unless the

w ording is inconsistent w ith such interpretation. The

headings m ight be treated as pream bles to the provisions

follow ing them . Though the C ourt is entitled to look at

the headings in an Act of Parliam ent to resolve any doubt,

they m ay have as to am biguous w ords, the law is clear

that those headings of a section cannot be used to give

a different effect to clear w ords in the section w here

there cannot be any doubt as to the ordinary m eaning of

the w ords. The title of chapter be legitim ately used to

restrict to the plain term s of an enactm ent. The headings

prefixed to sections or entries cannot control the plain

w ords of the provision; they cannot also be referred to

for the purpose of construing the provision w hen the w ords

used in the provision are clear and unam biguous; nor

can they be used for cutting dow n the plain m eaning of

the w ords in the provision. O nly in the case of am biguity

or doubt the heading or sub heading m ay be referred to

as an aid in construing the provision but even in such a

case it could not be used for cutting dow n the vide

application of the clear w ords used in the provision. Those

headings are not m eant to control the operation of

enacting the w ords and it m ay be a w rong to perm it

them to do so.

S e c . 2 7 1 ( 1 ) (c ) : E xp l a n a t i o n 1 :

R e q u i r e m e n t s :

C I T v/ s. M a n j u n a t h a C o t t o n & G i n n i n g

F a c t o r y

( 2 0 1 3 ) 2 6 3 C T R 1 5 3 ( K a r ) : ( 2 0 1 3 ) 9 2 I T R ( K a r )

1 1 1Issue :

W hat are the requirem ents for levy of penalty u/s

271(1)(c)

H eld :

A fter insertion of Explanation 1 to Sec. 271(1)(c), the

law on concealm ent and penalty has becom e stiffer. The

explanation as it stands now is a com plete code having

the follow ing features :

(1) Every difference betw een reported and assessed

incom e needs an explanation.

(2) If no explanation is offered, levy of penalty m ay be

justified.

(3) If explanation is offered, but is found to be false,

penalty w ill be eligible.

(4) If explanation is offered and it is not found to be

false, penalty m ay not be leviable.

(a) Such explanation is bonafide.

(b) The assessee has m ade available to the A .O .

all the facts and m aterials necessary in

com putation of incom e.

Therefore the Explanation 1, understood in the proper

context in particular, C l. (c ) of sub sec (1) of Sec. 271

m akes the intention of the legislature m anifest. It clearly

sets out w hen penalty is leviable and w hen penalty is

not leviable. The condition precedent for levying the

penalty is the satisfaction of the authority that there is

concealm ent of particulars of the incom e or inaccurate

particulars are furnished to avoid paym ent of tax.

S e c . 4 1 ( 1 ) : P r in c i p l e s : Y e a r :

G e n u i n e n e s s o f t r a n s a c t i o n :

C I T v / s . J a i n E x p o r t s ( P ) L t d .

( 2 0 1 3 ) 2 1 7 T a xm a n 5 4 (M a g ) ( D e lh i ) : ( 2 0 1 3 )

8 9 D T R ( D e l ) 2 5

Issue :

W hat are the principles for applicability of Sec. 41(1).

W hich is the year of addition w hen genuineness is

assailed.

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6

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H eld :

C essation of liability m ay occur by reason of it becom ing

unenforceable in law by creditor coupled w ith debtors

intention not to H onour his liab ility or by a contract

betw een parties or by discharge of debt.

G enuineness of transaction w as required in year w hen

liability had arisen and addition could not be m ade on

such ground, treating it as assertion of trading liability,

w hen assessee had acknow led ged its liab ility

successively.

S e c. 4 5 ( 3 ) / 4 5 ( 4 ) o f t h e A c t :

A p p l i c a b i l i t y o n r e c o n s t i t u t i o n o f f i r m :

C I T v / s. P .N . P a n j w a n i

( 2 0 1 3 ) 3 5 6 I T R 6 7 5 ( K a r n )

Issue :

W hether provisions of sec. 45(3)/45(4) are attracted w henshare of existing partners is reduced on entry of new

partners?

H eld :

Partnership existed betw een three partners having equal

share. Four new partners w ere adm itted w ho brought

7

Rs. 3.50 crores as their capital. O n reconstitution shares

of the existing partners w ere reduced to half. Existing

partners had w ithdraw n Rs. 1,16 ,66,666/- each on

reconstitution. A .O . held that the said A.O . m ade am ount

on the existing partners before reconstitution and added

the am ount of the 1,16,66,666/- in each of the partners.

O n appeal it is held as under :Landed property in the firm w as not ow ned by the

erstw hile partners. It w as ow ned by the firm . The

erstw hile partners w ithdrew the m oney brought in by

the incom ing partners as draw ings. They did not retire

from the firm . They continued to be partners of the firm .

H ow ever, their share got reduced. In other w ords, 50

percent of their share held before reconstitution becam e

the share of the incom ing partners. A s the property w as

not ow ned by the erstw hile partners, it could not be said

they transferred 50 percen

Journal 38

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