With India as a Country earning substantial foreign reserves from Exports across the Globe, the need for receiving the export proceeds in foreign currency and maintaining them as Foreign Currency by avoiding unnecessary fluctuations and associated costs was felt, resulting in the concept of Exchange Earner’s Foreign Currency (EEFC) Account being introduced by RBI. Various Circulars, Regulations and Notifications have been issued from time to time on this matter. We will be discussing about the What, Why and For Whom is an EEFC Account in detail in this Article.
What is an EEFC Account?
It is an account that can be maintained in foreign currency with an Authorized Dealer Category-I Banker by foreign exchange earners including exporters to credit their earnings and maintain it in Foreign Currency not having to convert it into Indian Rupees immediately. All Categories of Foreign Exchange Earners such as Individuals, Companies etc. who are Resident in India may open EEFC Accounts.
CURRENT NORM:
It is very important to note that with effect from 1st November 2008, all EEFC Accounts shall only be permitted to be opened and maintained in the form of non-interest-bearing current accounts.
100% of foreign exchange earnings can be credited to the EEFC account subject to the following condition:
Sum total of the accruals in the EEFC account during a calendar month should be converted into Rupees on or before the last day of the succeeding calendar month after adjusting for utilization of the balances for approved purposes.
SEZ Units cannot open EEFC account. However, a unit located in a Special Economic Zone can open a Foreign Currency Account with an Authorized Dealer in India subject to conditions stipulated in Regulation 4 (D) of Foreign Exchange Management (Foreign Currency Accounts by a person Resident in India) Regulations dated January 21, 2016.
Withdrawals
There is no restriction on withdrawal in rupees of funds held in EEFC account.
Cheque Books:
Authorized Dealer may issue cheque books of separate series with the superscription “EEFC Account” and satisfy themselves that the payment made by the account holder by issue of a cheque is permissible as per Regulations.
Credit Facilities:
RBI has withdrawn the facility of granting any fund based and non-fund-based loans by authorized dealers to account holders against balances held in EEFC Accounts.
Hedging:
EEFC account balances can be hedged. The balances in the account sold forward by the account holders have to remain earmarked for delivery. However, the contracts can be rolled over.
LIMITS OF CREDITS INTO EEFC ACCOUNT:
CAN AN EEFC ACCOUNT BE HELD AS A JOINT ACCOUNT?
RBI Permits Resident Indians to include non-resident close relatives (as defined under Companies Act 2013) as a joint holder on “former or survivor” basis. The non-resident relative cannot operate the account during the life time of the resident account holder.
PERMISSIBLE CREDITS AND DEBITS INTO AND FROM EEFC ACCOUNT
| PERMISSIBLE CREDITS |
PERMISSIBLE DEBITS |
1) Any inward remittance received by the recipient in foreign exchange as discussed above in Limit of Credits Table.
2) Interest earner on the funds held in the account.
3) Recredit of unutilized foreign currency earlier withdrawn from the account. (* Amounts withdrawn in Rupees cannot be converted again into Foreign Currency and cannot be recredited)
Note: RBI has clarified that the balances in EEFC Accounts may be allowed to be credited to NRE Account at the request of the account holder’s consequent upon change of residential status from resident to non-resident.
|
1) Payments outside India for any permitted current account and capital account transaction
2) Payment in Foreign Exchange towards cost of goods purchased from a 100% EOU, Export Processing Zone, Software Technology Park, Electronic Hardware Technology Park.
3) Payment of Customs duty in accordance with the provisions of Export Import Policy of Central Government for the time being in force.
4) Trade related loans and advances by an exporter to his importer customer subject to compliance with Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations 2000
5) Payment in foreign to a person resident in India for supply of goods and services including payments for air fare and hotel expenses |
RESTRICTIONS ON EEFC ACCOUNT HOLDERS:
For making the following remittances, prior approval of RBI is needed:
- 1) Remittances exceeding US$ 1,00,000 by an entity in India by way of reimbursement of pre-incorporation expenses.
- 2) Commission per transaction to agent abroad for sale of residential flats or commercial plots in India exceeding USD 25000 or 5% of the inward remittances whichever is more.
REPAYMENT OF PACKING CREDIT ADVANCES OUT OF EEFC ACCOUNT:
Exports can now repay Packing Credit Advances and Pre-shipment Credit Advances by using the funds available in EEFC account to the extent exports have actually taken place.
Conclusion :
The introduction and time to time modification of the regulations with respect to EEFC accounts have definitely been a great boon to resident exporters and earners of foreign exchange by way of improving the simplicity of handling and receiving foreign exchange.
In this Audit season, we have discussed about related party transactions in the previous month Infini Evolve Issue for the benefit of audit firms, articled assistants and Companies. In this issue, we will discuss about certain restrictions and important provisions related to Loans and advances given/accepted by Companies and the various compliance requirements related to it.
I. Acceptance of Loan by Companies:
Loans are one of the major sources of funding for the efficient operations of any Company. There are certain limitations laid out in the Companies Act for accepting loans by the Companies whether public or private limited companies. There are two major restrictions for receiving loans which are detailed below:
1. Loans will be treated as Deposits in certain cases:
Loans are not defined in the Companies Act, whereas Sec 2(31) defines Deposits as, “deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include.... and Sec 73 (1) on acceptance of deposits says, no company shall invite, accept or renew deposits under this act from public except in a manner provided under this chapter. And there is a separate Companies (Acceptance of Deposits) Rules, 2014 amended from time to time, rule 2(c) of the said rules defines deposit as: “deposits” include any receipt of money by way of deposit or loan or in any other form by a company...
Thus, as per the definition of deposit, any receipt of money by the Company including by way of loan is treated as deposits. And there are certain exemptions provided to the definition which need not be treated as deposits under this rule. Limiting to the topic, provided below are the exemptions specifically relating to the loans and not to be treated as deposits:
- a) Any amount received as loan from Banks or Financial Institutions
- b) Any amount received from a person, who at the time of receipt of amount by the Company, was a director or relative of a director of the Company provided that the director or his relative declares that the amount is given out of their own acquired funds and not out of any funds borrowed from any other person.
- c) Any amount received by one company from another Company.
From the above exemption list, it is evident that the company whether public or private limited company, it is only permitted to accept loans only from banks or financial institutions or director or his relative or another Company. Thus, if a company wishes to obtain loans from any other person it has to comply with the Companies (Acceptance of Deposits) Rules which will include obtaining credit rating, issuing circular, creating deposit repayment reserve account, etc.,
2.Power of the Board is restricted for accepting loans:
As per Section 180(1)(c), the board is permitted to borrow money only to the extent of the Company’s Paid up capital plus free reserves and securities premium. If the board has to borrow money at any point of time, the proposed loan amount along with the borrowings already accepted by the Company cannot be more than the paid up capital plus free reserves and security premium. This limit does not include any temporary loan accepted by the company from it’s bankers. Temporary loans are in the nature of short term loans repayable on demand or within six months, cash credit facilities availed, etc. The Shareholders of the Company may pass a special resolution in a general meeting of the Company to decide an amount up to which the Board of directors can borrow money.
3. Exemption to Private Limited Companies:
This applicability of provisions of section 180(1)(c) is specifically exempted to Private Limited Companies by way of notification dated 5th June 2015. Thus, the Board of Directors of a Private Limited Company do not have any restrictions to borrow money in excess of the paid up capital plus free reserves and securities premium.
4.Compliances required for acceptance of Loans by the Company:
- a) Every Company which has outstanding receipt of money or loan and not treated as deposits from 1st April 2014 to 31st March 2019 has to file e-form DPT 3 on or before 29th June 2019.
- b) Every Company accepting loans from the director or their relatives has to obtain a declaration stating that the funds given to the company are out of their own acquired funds and not out of borrowed funds from any other person.
- c) Every Company except Private Limited Companies, has to pass a special resolution in the General Meeting to borrow in excess of the limits specified in Sec 180(1)(c).
II. Loans and Advances made by the Company
We have briefly understood the restrictions and compliance requirements for accepting loans by Company, now let’s discuss on the restrictions for a Company to give loan and the related compliances required.
1. Loans to Directors, etc:
- i) As per Section 185(1) of the Act, Companies cannot give loan or provide guarantee to any loan taken by the Director of the Company or of it’s holding company or any partner or relative of the Director or any firm in which the Director or his relatives are partners.
- ii) Companies can give loan to the following persons by passing a special resolution in the general meeting of the Company and with the condition that the loans borrowed are utilised for the principal business activities:
- a) A private Company in which the director of the lending company is a director or member.
- b) Any Body Corporate at a general meeting, in which not less than 25% of the voting power may be exercised or controlled by the director of the lending company.
- c) Any Body Corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.
- iii) Following loans are allowed by way of exemption provided in section 185:
- a) Loans provided to Managing or Whole time Director as part of service conditions extended by the Company to all its employees or pursuant to any scheme approved by way of special resolution.
- b) Loans provided by a company in its ordinary course of business for due repayment and in respect of the loans, interest is charged at a rate not less than the prevailing yield of Government securities.
- c) Loan provided by a holding Company to its wholly owned subsidiary company.
- d) Guarantee given by holding company to banks for the loans availed by its wholly owned subsidiary company.
2.Exemption to Private Limited Companies:
Section 185 shall not be applicable to Private Limited Companies subject to the following:
- a. No Body Corporate has invested in the Share capital of the Company
- b. The borrowings of the private limited company from banks or financial institutions or holding company are less than twice of it’s paid up share capital or 50 crore rupees whichever is lower.
- c. And the company has no default in repayment of such borrowings subsisting at the time of entering into any transaction under this section.
3.Limit on the loans and advances made by the Company:
- a. As per Section 186(2) no company shall give loan to any person or Body Corporate exceeding 60% of its paid up capital plus free reserves and securities premium or 100 % of free reserves and securities premium whichever is more.
- b. Company has to pass special resolution in the general meeting to provide loan exceeding the limits specified above.
- c. The provisions do not apply for loans provided by the Company to its wholly owned subsidiary company.
Summary
| Loan |
Allowed/Restricted |
Compliance requirement |
Applicability to Private Companies |
|
| Received by the Company |
Allowed |
From the Director
From the Director's relative
From Any other Company |
Not treated as deposit, to file DPT 3. When loans are received from director or his relative, a declaration stating that loans are given out of their own funds and not borrowed funds to be received. |
Yes |
| Allowed |
Board cannot accept borrowings in excess of paid up capital, free reserves and securities premium |
Special resolution passed by the shareholders in the general meeting to specify the limit exceeding the limit specified in 180(1)(c) for the Board to borrow |
No |
|
Given by the Company
|
Restricted |
To Director
To Director of holding company
To Any partner or relative of director
To Firm in which director or his relative are partners
|
Not applicable subject to the following:
- No Body Corporate is the shareholder of the Company
- The borrowings are less than twice of it’s paid up share capital or 50 crore rupees whichever is lower.
- And the company has no default in repayment of such borrowings.
|
|
Allowed |
To Private Company in which director is member or director
To Any Body Corporate at a general meeting, in which not less than 25% of the voting power may be exercised or controlled by the director of the lending company
To Any Body Corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.
|
|
|
Restrictions |
No company can give loan in excess of 60% of its paid up capital plus free reserves and securities premium or 100% of paid up capital and free reserves and securities premium. Whichever is more.This is not applicable to loans given to WOS |
Special resolution passed by the shareholders in the general meeting and loans are to be utilised for the principal business activities |
Yes |
Introduction :
Income Computation and Disclosure Standards (ICDS) was notified by the CBDT under Section 145(2) of the Income Tax Act, 1961 vide Notification dated 29th September 2016 applicable from A.Y. 2017 – 18 onwards. The Notified ICDS shall supersede the existing accounting standards notified by CBDT (existing Tax AS).
Applicability of ICDS:
ICDS is applicable to any assessee who follow mercantile system of accounting (except an individual and HUF who is not required to get his accounts audited under Section 44AB). ICDS would be applied on Income under the head Profits and Gains from Business or Profession (PGBP) and Income from Other Sources (IFOS).
Hence, an assessee who follows Cash system of Accounting or Presumptive Taxation method need not comply with the ICDS.
ICDS is not applicable for MAT Computation, it is only meant for Normal Tax Computation.
When there is a conflict between ICDS and Income Tax Act, the provision as per the Income Tax Act shall prevail.
Where to disclose?
In case there is a deviation from ICDS, disclosure about its deviation and effect on the profit or loss shall be disclosed in Clause 13(d), 13(e) and 13(f) under Form 3CD.
Under Clause 13(d) of Form 3CD,
“whether any adjustment is required to be made to the profits or loss complying with the provisions of income computation and disclosure standards notified under Section 145(2)” shall be provided for.
Under Clause 13(e) of Form 3CD, if the answer to Clause 13(d) is affirmative,
“the effect of ICDS on the Profit or loss leading to increase or decrease in profit and the net effect on profit shall be disclosed”.
Under Clause 13(f) of Form 3CD,
“Disclosures under each ICDS with remarks or comments is to be provided”.
CBDT has notified 10 ICDS till date which are as follows:
| ICDS I |
Accounting Policies |
AS – 1 & IND AS - 1 |
| ICDS II |
Valuation of Inventories |
AS – 2 & Ind AS – 2 |
| ICDS III |
Construction Contracts |
AS – 7 & Ind AS - 11 |
| ICDS IV |
Revenue Recognition |
AS – 9 & Ind AS - 18 |
| ICDS V |
Tangible Fixed Assets |
AS – 10 & Ind AS – 16 |
| ICDS VI |
The Effects of Changes in Foreign Exchange Rates |
AS – 11 & Ind AS - 21 |
| ICDS VII |
Government Grants |
AS – 12 & Ind AS - 20 |
| ICDS VIII |
Securities |
Ind AS - 32 |
| ICDS IX |
Borrowing Cost |
AS – 16 & Ind AS – 23 |
| ICDS X |
Provision, Contingent Liabilities and Contingent Assets |
AS - 29 & Ind AS - 37 |
In this Article we will understand in detail about ICDS I.
ICDS I –Significant Accounting Policies
Preamble:
The preamble to ICDS-I states that this standard is applicable for computation of Income Chargeable under the head Profits and Gains from Business of Profession or Income from Other Sources and not for the purpose of maintenance of books of accounts.
Scope:
ICDS I deal with Significant Accounting Policies and shall apply with effect from AY 17-18.
ICDS-I is applicable to derivates not within the scope of ICDS-VI.
Prudence Concept recognized by Accounting Standards not recognized by ICDS:
ICDS I provide that expected losses and marked-to-market losses are not to be recognized/allowed unless permitted by ICDS.
The Delhi High Court in Chamber of Tax Consultants vs Union of India (2017) held that concept of prudence is embedded in Section 37(1) of the Act which allows deduction in respect of expenses "laid out" or "expended" for the purpose of business.
"The phrase "laid down" (sic) connotes setting aside or storage for future. The expression "laid out" in Section 37 thus encompasses not only actual outflow of expenses but amounts parked in the present for future settlement. Accordingly, the concept of Prudence is inherent in the business income deductions."- As clarified by ICAI in its technical guide. In view of this, it was held that ICDS is contrary to the provisions of Income Tax Act.
To overcome the above, Finance Act 2018 made the following amendments to the Act with retrospective affect from AY 17-18:
- 1. New clause (xviii) inserted in section 36(1) of the Act to provide that marked to market loss or other expected loss as computed in the manner provided in ICDSs shall be allowed deduction.
- 2. New clause (13) inserted in section 40A of the Act to provide that no deduction or allowance in respect of marked to market loss or other expected loss shall be allowed except as allowable under newly inserted clause (xviii) of sub-section (1) of section 36.
Income Tax Act or AS or Ind AS do not define Marked to Market Loss or Other Expected Loss. There are scenarios wherein applicable accounting standards and or ICDS require the carrying value of an asset to be marked to its market price or fair value, the resultant gain or loss being routed through the Statement of Profit and Loss. Though such losses of gains are not actual losses or gains, they are expected to be recognizes on the last day of a financial year up to which the financial statements are prepared.
ILLUSTRATIVE LIST
| MARKED TO MARKET LOSSES (MMTL) |
OTHER EXPECTED LOSSES (OEL) |
| Write down of cost of current investments to market value (MV) wherever MV is less than cost. |
Loss because of possible un-favorable outcome on account of pending cases |
| Impairment Loss on Fixed Assets |
Guaranteed provided by an entity to subsidiary or any other person which may result in liability. |
| Inventory Valuation at Net Realizable Value (NRV) where NRV is lower than Cost. |
Change in market condition of policy which have unfavorable impact on cash flow realization. |
ILLUSTRATIVE LIST OF MMTL OR OEL as per AS and IND AS
| Particulars |
AS and Ind AS Reference |
| Valuation of inventories either at cost or NRV whichever is lower |
AS 2, Ind AS 2 |
| Provision for future/anticipated losses in construction contract |
AS 7, Ind AS 11 and Ind AS 109. |
| Foreign exchange fluctuation loss |
AS 11, Ind AS 21 |
| Valuation of current investment at cost or market value whichever is lower |
AS 13, Ind AS 109, Ind AS 39 |
| Sale and lease back transaction where it turns out to be operating lease - any profit or loss shall be recognized immediately. |
AS 19, Ind AS 17 |
For the allowance of loss, it must be computed in accordance with ICDS. It implies that the computation must be in conformity with or as required by or as provided for in the relevant provisions of ICDS. Only such loss for which ICDS provides for the manner of computation is allowed. For example, ICDSs do not provide manner of computation of impairment losses on fixed assets. Therefore, no deduction shall be allowed in respect of any provision for the same.
ICDS I vs AS 1
| Particulars |
ICDS I |
AS I |
| Prudence |
Expected losses or mark-to-market losses shall not be recognized unless permitted by any other ICDS. |
Provision to be made for known Losses as per AS 1 |
| Materiality |
No such concept prevails as per Act |
Concept of Materiality for selection of accounting policies and disclosure in financial statements |
| Change in Accounting Policies |
Cannot be done without reasonable cause |
Can be done for better presentation |
| Disclosure requirements |
ICDS does not specify it, but Form 3CD specifies disclosure requirements |
AS 1 provides for the disclosure requirements to be made in Financial Statements |
ICDS I vs Ind AS 1
| Particulars |
ICDS I |
Ind AS I |
| Scope |
Deals with disclosure of accounting policies |
Wider in scope as it deals with presentation of financial statements. |
| Deviation |
Deviation is allowed when ICDS is conflicting with Income Tax Provisions |
Deviation is allowed if Management feels compliance would make financial statements misleading |
| True and Fair View |
Deviation from ICDS not allowed even if such Deviation will help in showing a true and fair view. |
Management can decide to override Ind AS if compliance leads to misleading FS, thereby True and Fair Override is allowed |
| Assessing Going Concern Assumptions |
No guidance on how appropriateness of Going Concern Assumption is to be done. |
Management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period. Wide range of factors are considered before it can satisfy itself that the going concern basis is appropriate. |
| Disclosures of Going Concern Assumption is not appropriate |
The fact shall be disclosed. |
The fact together with the basis on which it is prepared the financial statements and the reason why the entity is not regarded as a going concern. |
FUNDAMENTAL ACCOUNTING ASSUMPTIONS:
Note: Only when the fundamental accounting assumptions is not followed the fact shall be disclosed.
It appears that deviation from a fundamental accounting assumption needs to be disclosed even if the deviation has statutory sanction. Some examples are discussed below:
| Scenario |
Remarks |
| Interest on refund of tax, duty or cess to be recognized on cash basis in the year of receipt as per ICDS IV |
This treatment, though at variance with fundamental accounting assumption of accrual, will still have to be disclosed against Clause 13(f) of Form No. 3CD |
Items to be taxed on cash basis under IFOS:
- a) sum of money/property received sans consideration or for inadequate consideration-section 56(2)(vii) by individual/HUF
- b) receipt of shares of closely held company for consideration or for inadequate consideration by firm/AOP-section 56(2)(viia)
- c) receipt of shares for consideration less than FMV by a closely held company-section 56(2)(viib)
- d) interest received on compensation or enhanced compensation-section 56(2)(viii).
|
There will be departure from accrual principle though such departure is backed by provisions of the Act. Disclosures of these deviations will be required against Clause 13(f) of Form No. 3CD. |
ACCRUAL :
Neither the ICDS-I (New) nor the Act defines accrual basis of accounting/mercantile basis of accounting. ICAI's "Guidance Note on Accrual Basis of Accounting" defines "Accrual basis" or "Mercantile basis" as under:
"The method of recording transactions by which revenues, costs, assets and liabilities are reflected in the accounts in the period in which they accrue. The 'Accrual Basis of Accounting' includes considerations relating to deferrals, allocations, depreciation and amortization. This basis is also referred to as 'Mercantile Basis of Accounting'."
The accounting treatments contained in the Accounting Standards, Guidance Notes, Statements issued by ICAI are primarily based on accrual accounting. Thus, compliance with the Notified ASs and accounting pronouncements of ICAI will assure that company has followed the accrual basis of accounting.
In terms of section 128(1) of the Companies Act, 2013, it is obligatory for companies to follow the accrual system of accounting.
GOING CONCERN ASSUMPTION:
ICDS-I defines "Going Concern Assumption" as "the assumption that the person has neither the intention nor the necessity of liquidation or curtailing materially the scale of business, profession or vocation for the foreseeable future and intends to continue his business, profession or vocation for the foreseeable future".
(AS)1 defines the GCA with reference to the enterprise (the enterprise is assumed to intend to continue in operation in foreseeable future), ICDS-I (New) defines it with reference to "business, profession or vocation".
The Expert Advisory Committee of ICAI has opined that if GCA is no longer appropriate, the enterprise should prepare its statements on liquidation basis and disclose the basis of preparation in the notes to accounts.
Liquidation basis implies that:
- The various assets including inventories and debtors would be valued at amounts the assets would realize if disposed of.
- The liabilities should be valued at the amounts that would be payable to the creditors in the event of liquidation.
- Liabilities such as gratuity and leave encashment will have to be provided for on the basis how much would actually become payable [Vol XX, page 127-Compendium of Opinions.
Liquidation basis is endorsed by ICDSs to the limited extent of valuation of inventories under ICDS II.
If Liquidation basis is adopted where Going Concern Assumption is not valid, some/many of the adjustments made in accounts under Liquidation basis may be liable to be disallowed. These adjustments that are not in consonance with the Act will have to be reflected in Item No. 13(f) of Form No. 3CD.
ACCOUNTING POLICIES:
The accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by a person.
The words "in the preparation and presentation of financial statements" which occur in the definition of "accounting policies" in (AS)1 have been omitted in the definition of the term given in ICDS-I (New). This gives rise to the question whether the term "accounting policies" in ICDS-I (New) would refer to "Income Computation Policies" rather than "Accounting Policies". Income Computation and Disclosure Standards are meant for computation of taxable income and not for maintenance of books of account or for accounting purposes.
Thus 'accounting policy' refers to accounting policies followed in preparation of financial statements. Any deviation from accounting policy for the purpose of complying with ICDS for computation of taxable income is merely "an adjustment required to be made to profit or loss for complying with the provisions of income computation and disclosure standards" and is not an accounting policy.
Variance with accounting policy followed in financial statements for the purpose of complying with ICDS is just merely 'an adjustment to profit or loss' and not an accounting policy.
Clause 13(d) of Form No.3CD reads as:
Whether any adjustment is required to be made to profits or loss for complying with the provisions of income computation and disclosure standards notified under section 145(2)"
SUBSTANCE OVER FORM:
Accounting policies adopted by a person shall be such so as to represent a true and fair view of the state of affairs and income of the business, profession or vocation. For this purpose, the treatment and presentation of transactions and events shall be governed by their substance and not merely by the legal form.
The term "substance" is not defined in AS1 or for that matter in any other AS or even in ICDSs. According to the "Framework for Preparation and Presentation of Financial Statements" issued by ICAI, "Substance" refers to the economic reality of a transaction. Whatever legal colour the parties may choose to give it, it is the economic reality which matters more.
Example :
(AS) 19 "Leases" as well as Ind (AS) 17 "leases" regard finance lease as nothing but a disguised way of purchasing an asset with a loan and require the lessee to account for finance lease in accordance with its substance - i.e. it is required to be accounted as if a loan has been taken and asset acquired with it. Though, ICDS on leases corresponding to AS-19/Ind (AS) 17 has not been issued by the CBDT, in view of the 'substance over form' stipulation in ICDS-I (New), Finance lease will have to be regarded as purchasing asset with a loan on the lines of (AS) 19/Ind (AS) 17.
DISCLOSURE REQUIREMENTS OF ICDS I:
All significant accounting policies adopted by a person shall be disclosed. What is "significant" is not defined or clarified.
The expression "significant" is not defined in (AS) 1. However, Eric Kohler's "Dictionary for Accountants" (6th Edition) gives the following meanings of the word "significant"
"Significant-
- of sufficient magnitude, as measured by a departure from some norm,
- of sufficient importance to warrant disclosure or the treatment accorded to larger or more important items,
- likely to influence judgments or decisions,
- other events or conditions peculiar to a given establishment"
If an accounting policy is "significant", then only it merits disclosure in terms of ICDS-I (New). If the accounting policy in question is insignificant, disclosure is not required.
Change in Accounting Policy:
Any change in an accounting policy is required to be disclosed as under:
- Any change in an accounting policy which has a material effect shall be disclosed.
- The amount by which any item is affected by such change shall also be disclosed to the extent ascertainable.
- Where such amount is not ascertainable, wholly or in part, the fact shall be indicated.
- If a change is made in the accounting policies which has no material effect for the current previous year but which is reasonably expected to have a material effect in later previous years, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted and also in the previous year in which such change has material effect for the first time.
Conclusion :
Its highly important for every Assessee who is liable to get its books audited under the Provisions of Income Tax Act to understand the applicability and nuances of ICDS. The key part of understanding that ICDS is only for Computation of Income and not for maintenance of books of accounts, and the impact ICDS could have on the taxable income irrespective of what the financial statements depict, and the resultant effect on tax payments, makes it even more important for an Assessee to have clarity on the provisions of ICDS.
The Insolvency and Bankruptcy code,2016 (IBC) is the bankruptcy law of India which seeks to consolidate and amend laws relating to reorganization and insolvency of corporate persons, partnership firms and individuals in a time bound manner. The code was passed by parliament in May 2016 and became effective from December 2016.
The code adopts its own test of insolvency which makes the code unique in its operation. The Code assumes the debtor or corporate debtor to be insolvent if there is a failure to pay irrespective of whether the corporate debtor is unable to pay. This enables the creditor to initiate insolvency proceedings on a mere default to pay irrespective of the debtor’s inability to pay.
The features of the code are highlighted below:
- 1. Applicability to all creditors
The Insolvency and Bankruptcy Code does not make any distinction between domestic and foreign creditors. The term creditor is defined as any person to whom a debt is owed and person includes resident outside India. The Code therefore provides for a level playing field between domestic and foreign creditors.
- 2. Time Limits for Speedy Disposal
The Code provides for various time limits to ensure that the insolvency resolution process is completed in a time bound manner. The Code provides that the corporate insolvency resolution process shall be completed within 180 days from the date of admission of the petition and a onetime extension of 90 days is provided.
- 3. Maximization of the value of assets
For Maximization of the value of assets, there is paradigm shift from the existing regime of ‘debtor in possession’ to ‘creditor in control’. Committee of creditors, being placed in the driving seat with the resolution professional under the supervision of the NCLT, are empowered and responsible for resolution & revival of the corporate debtor. The code aims to promote entrepreneurship, availability of credit and balance the interest of stakeholders.
Insolvency Resolution Process Stages
“Operational Creditor” means,
- All claimants for any dues against supply of goods or services
- All claimants against employment
- All claimants of a debt or dues arising under any law for the time being in force and payable to the central government, any state government or any local authority i.e. statutory dues, taxes, penalties, levies, etc.
I.Settlement Process
The Operational Creditor has to send a prior notice of demand for 10 days to the corporate debtor before the initiation of insolvency resolution process. In the event of corporate debtor not paying back the amount in that time period and not bringing to the notice of operational creditor about any dispute or any arbitration proceeding pending against it, then the operational creditor can file application for insolvency resolution.
II. Insolvency Resolution
The application for Insolvency Resolution shall be filed by the operational creditor with NCLT.
Financial creditor either by himself or jointly shall initiate filing of application before NCLT against the corporate debtor for insolvency proceedings. The proof of default and the name of the proposed insolvency professional to be appointed shall be submitted along with the application.
Where a corporate debtor has defaulted on the payment of dues to a financial or operational creditor, the corporate debtor or any applicant (i.e. the financial or operational creditor) can file the application for the initiation of insolvency resolution process along with the books of accounts and other financial documents of the business.
NCLT may reject the application if it is of the opinion that the corporate debtor is not in default or if there is any proceeding pending against the proposed resolution professional. However, NCLT has to entertain the application, within fourteen days of making application to it.
Public announcement of Moratorium
Upon the admission of insolvency resolution application before it, NCLT will make a public announcement for the submission of claims by the creditors and appoint an interim resolution professional (IRP) within 14 days and his term shall not extend beyond 30 days from the date of appointment.
The moratorium will be declared by the NCLT for prohibiting the following:
- Institution of any suit or pending suit including execution of any judgement or decree against the corporate debtor.
- Transferring, encumbering, alienating or disposing of any property or right or beneficial interest.
- Any action to foreclose, recover or creation of any security by the corporate debtor in respect of his property.
- Recovery of any property by the owner or lessor which is under the possession of the corporate debtor.
- Terminate the supply of goods and services to the corporate debtor.
Moratorium shall cease to have effect, on the date on which the resolution process is approved or on the date of liquidation order.
Insolvency professional after submission of claims by all the creditors shall form a creditor’s committee and all the creditors who have submitted the claims shall be a part of creditors’ committee. However, operational creditors cannot be members of the committee and those having aggregate dues of at least 10% of the total debt are only given the notice of the meeting.
The decision of the Creditors’ Committee with respect to the reason of inability of the corporate debtor to pay back the debts, whether it is a business or financial crisis, shall pave the way to the committee to either go for restructuring plan to the creditors or for liquidation process.
- Creditors committee shall hold their first meeting within seven days of appointment and may appoint a final insolvency resolution professional or may give affirmation to the interim insolvency professional to be appointed as insolvency professional with the approval of 75% votes of the creditors of the creditors committee.
- The partners, directors will not have voting rights but they shall attend the meeting.
- Operational creditors who are eligible to receive a notice for the meeting as mentioned above, shall have one representative joining the meeting on behalf of them but the representative shall not have the voting right.
- To enable the resolution applicant (the Corporate Debtor) to form a resolution plan, the resolution professional shall prepare an information memorandum. Resolution professional shall, if satisfied by the restructuring or repayment plan submitted by the resolution applicant, present the plan to the Creditors’ committee for approval. The plan will be confirmed based on the 75% of votes of the creditors of the Creditors’ committee in favour.
If the approval is obtained then NCLT will order the execution of the restructuring plan in a prescribed manner.
The moratorium shall cease to have effect after the approval by NCLT and the resolution professional will forward all the records and documents to the board of directors to conduct the insolvency resolution process effectively.
III. Liquidation Process
In case the Insolvency Resolution process is not working effectively for the company, then the IRP shall initiate the liquidation process.
Conclusion
Insolvency Reforms therefore can bring about myriad of benefits such as improving credit growth, investor confidence and also improving the ease of doing business rankings. The effective operation of the Code will definitely have an impact in reduction of non-performing assets and improving credit growth and this will be highly beneficial for the banking sector in India.
