Analysis of Amendments in Provision of Slump Sale

The Finance Act 2021 has amended the provisions related to slump sale. It has amended the scope of the definition of the term slump sale by amending the provision of clause (42)(C) of section 2 of the Act so that all types of transfer as defined in clause (47) of section 2 of the Act are included within its scope. It has also amended the Section 50B (2) to provide the FMV of the capital assets as on the date of transfer shall be calculated in the prescribed manner. In this article we will analyse the changes made by such amendments and rational behind such changes.

♦ Insertion of section 50B and 2(42)(C)

  • Prior to Finance 1stApril 2000, there was no specific here was no specific provision in the Income-tax Act, 196 that’s specifically dealt with taxation of slump sales. Finance Act ,1999 inserted the Section 50B and Section 2(42)(C) in the act, and made applicable from 1st April,2000.
  • Section 50B contains special provision for computation of capital gains in case of slump sale, whereas Section 2(42)(C) defines the “slump sale” means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.

♦ Section2(42)(C): Prior to Amendment

  • As the definition of slump sale include the transfer only by sale, so whether other means of transfer listed in sub-section (47) of section 2 of the Act, in relation to capital asset like exchange, relinquishment etc, are excluded?
  • Hon’ble Madras High court in case of Areva T & D Ltd. v. CIT, [2020] made following observations:
    • In order to draw distinction between the term ‘sale’ and ‘exchange’, Hon’ble Madras HC referred to the definition provided in Transfer of Property Act, 1882 and Sale of Goods Act, 1930.
    • As per Sec. 54 of the Transfer of Property Act, 1882, ‘Sale’ is a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised. Further, as per Sec. 2(10) of the Sale of Goods Act, 1930, ‘price’ means the money consideration for sale of goods. Also, as per Sec. 118 of Transfer of Property Act, 1882, ‘exchange’ means mutual transfer of ownership of one thing for the ownership of another between two persons, neither thing nor both things being money only.
    • Based on the above definition the court held that that slump sale u/s 2(42)(C) of the Act shall arise only if there is a transfer of an undertaking as a result of the sale, for a lump sum consideration. If there is no monetary consideration involved in the transaction, then it would be held that not possible for the Revenue to bring the transaction done by the assessee within the definition of the term ‘slump sale’ as defined u/s 2(42)(C) of the Act.
    • Court has also placed reliance on the decision of Hon’ble Bombay HC in Bharat Bijlee (supra), wherein the Bombay HC held that the definition of slump sale under Section 2(42)(C) is only restricted to transfer resulting from ‘sale’ and does not include other ‘transfers’ as given under Section 2(47) of the Act.

♦ Section2(42)(C): After Amendment

  • As per the amended Section 2(42)(C),  “slump sale” means the transfer of one or more undertaking,by any means for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.
  • Also inserted Explanation 3,that for the purposes of this clause, “transfer” shall have the meaning assigned to it in clause (47) of section 2 of the Act;
  • By amending the provision of clause (42)(C) of section 2 of the Act all types of transfer as defined in clause (47) of section 2 of the Act are included within its scope.
  • Its also overrule the Madras HC and Bombay HC judgment as stated above, where only transfer by sale were covered by the slum sale and not other form of transfer as defied u/s 2(47).

♦ Section50B (2): Prior to Amendment

  • Section 50B (2) provides that in relation to capital assets being an undertaking or division transferred by way of such sale, the “net worth”of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement and no indexation shall be available if the slump sale treated as long term capital gain.
  • Explanation 1 to Section 50B, net worth = aggregate value of total assets of the undertaking (Ignoring Revaluation) less value of liabilities of such undertaking as appearing in its books of account.
  • Explanation 2 to Section 50B provides that for computation of net worth depreciable assets shall be taken at written down value of the block whereas non- depreciable assets at book value. In case of capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction under section 35AD, value shall be taken as nil.
  • The capital gain = Sales consideration less Cost of Acquisition (i. e.Net worth). As section 50B (2) prescribe the cost of acquisition but does not contain any provision for computation of the full value of consideration.

♦ Section50B (2): After Amendment

  • The finance act has amended the section 50B (2) of the act to provide that Fair market valueof the capital assets as on the date of transfercalculated in theprescribed manner, shall be deemed to be the full value of the consideration received or accruingas a result of the transfer of such capital asset.
  • In Explanation 2a new clause has been inserted to provide while calculation net worth, that value of capital asset being goodwill, which has not been acquired by the assessee by purchase from previous owner, shall be taken as nil.
  • The department via notification no 68/2021 dt 24thMay, 2021 notified the Rule 11UAE for Computation of Fair Market Value of Capital Assets for the purposes of section 50B of the Income-tax Act. As per the rule thethe fair market value of the capital assets shall be the FMV1 determined under sub-rule (2) or FMV2 determined under sub-rule (3), whichever is higher.
  • FMV1 shall be the fair market value of the capital assets transferred by way of slumpsale determined in accordance with the formula –

 A+B+C+D – L, where,

    • A= book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) as appearing in the books of accounts of the undertaking or the division transferred by way of slump sale as reduced by the following amount which relate to such undertaking or the division, —

(i) any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and

(ii) any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset;

    • B = the price which the jewellery and artistic workwould fetch if sold in the open marketon the basis of the valuation report obtained from a registered valuer;
    • C = fair market value of shares and securitiesas determined in the manner provided in sub-rule (1) of rule 11UA;
    • D = the value adopted or assessed orassessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property;
    • L= book value of liabilities as appearing in the books of accounts of the undertaking or the division transferred by way of slump sale, but not including the following amounts which relates to such undertaking or division, namely: —

(i) the paid-up capital in respect of equity shares;

(ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;

iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;

(iv) any amount representing provision for taxation, other than amount of income-tax paid, if any, less the amount of income-tax claimed as refund, if any, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;

(v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities;

(vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.

  • FMV2shall be the fair market value of the consideration received or accruing as a result of transfer by way of slump sale determined in accordance with the formula-

E+F+G+H, where,

      • E = value of the monetary consideration received or accruing as a result of the transfer;
      • F = fair market value of non-monetary considerationreceived or accruing as a result of the transfer represented by property referred to in sub-rule (1) of rule 11UA determined in the manner provided in sub-rule (1) of rule 11UA for the property covered in that sub-rule;
      • G = the price which the non-monetary considerationreceived or accruing as a result of the transfer represented by property, other than immovable property, which is not referred to in sub-rule (1) of rule 11UA would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer, in respect of property;
      • H = the value adopted or assessed or assessable by any authorityof the Government for the purpose of payment of stamp duty in respect of the immovable property in case the non-monetary consideration received or accruing as a result of the transfer is represented by the immovable property.
      • The fair market value of the capital assets under sub-rule (2) and sub-rule (3) shall be determined on the date of slump saleand for this purpose valuation date referred to in rule 11UA shall also mean the date of slump sale.

Compounding of offences under Companies Act 2013 | Section 441

Defaults under the Companies Act, 2013 provides for certain liabilities and the registrar of a company has powers to initiate prosecution against the company and its directors and other officers in accordance with the provisions of the law. When a provision has been violated or a default or delay has occurred, the directors may, instead of allowing the launching of a prosecution or contesting any prosecution already launched against the company and its directors and officers who are liable, apply to get the offence compounded, if the offence in question is a compoundable offence.

Section 441 of the Companies Act, 2013 deals with Compounding of offence. Compounding of offences is not new under the Company Law; similar provisions were also presents in Section 621A of the Companies Act 1956.

You can read Section 441 of the Companies Act, 2013 here: http://ebook.mca.gov.in/default.aspx

Compounding of offences is a settlement mechanism, by which, the offender is given an option to pay money in lieu of his prosecution, thereby avoiding a prolonged litigation. While there is no definition of the word “compounding” provided either in the Act 1956 or the Act 2013. However legal meaning of compounding of offence is “Doing good the default/non-compliance”. Therefore, the first and foremost step in compounding is to make the default good.

Types of Penalties:

There are five types of penalties that can be levied on the commission of the offences that have been contemplated under the Companies Act, 2013.

Penalty

Which offences are compoundable?

According to Section 441(1), as amended by the Companies (Amendment) Act 2017 and the Companies (Amendment) Ordinance, 2018, any offence punishable under the Companies Act (whether committed by a company or any officer thereof) not being an offence punishable with imprisonment only, or punishable with imprisonment and also with fine, may, either before or after the institution of any prosecution, be compoundable.

Any offence covered under Section 441(1) by any company or its officer shall not be compounded if the investigation against such company has been initiated or is pending under this Act.

According to Sub-Section (6), any offence which is punishable under this Act with imprisonment only or with imprisonment and also with fine shall not be compoundable.

Thus, the following offences under the Companies Act cannot be compounding by the NCLT or the Regional Director:

> An offence which is punishable with imprisonment only.

> An offence which is punishable with imprisonment and also with fine.

Jurisdiction to handle cases for the compounding:

A significant pre-requisite for filing application for compounding is to know where the application should be filed. The National Company Law Tribunal shall exercise the power of compounding an offence in accordance with and subject to the provisions of the Companies Act and the Rules prescribed under it.

But according to clause (b) of Sub-section (1), as amended, wherethe maximum amount of fine which may be imposed for such offence does not exceed twenty-five lakh rupees, by the Regional Director or any officer authorised by the Central Government.

Jurisdiction

Procedure to compound an offence under Companies Act, 2013:

a) Calling of Board Meeting Company will call the Board Meeting as per Companies Act, 2013 and SS­1.

b) Calculate the amount of offence Board will calculate the amount of the penalty as per the relevant section.

c) Holding of Board Meeting Pass a resolution to file application with authority for compounding of offence and authorize director of the Company and for preparation and signing of documents including application. Company will authorize any professional for follow up the matter with authority.

d) Preparation of Compounding Application Company will prepare the application of compounding as per NCLT Rules.

e) Filling of Form with ROC Procedure for making application:

Application for compounding shall be submitted electronically in e­form GNL­1. This form will be forwarded by ROC to NCLT/Regional Director as applicable. The Schedule of fees under the National Company Law Tribunal Rules 2016 has prescribed a fee of Rs, 1,000/- on an application for compounding of certain offences.

In GNL – 1, the application can be filed for Company, Director or Manager/Secretary or CEO/CFO or other officers of the Company (even jointly). Details of only 8 persons can be entered in the e Form. If number of persons is greater than 8, then additional details can be provided in optional attachment.

f) Hearing before Authority. There is no specific provision in the Act, normally, NCLT/Regional Director will give personal hearing and then pass a speaking order giving reasons. The hearing can be attended by Director/secretary/ officer of Company or by authorized representative like advocate or a practicing CS/ CA/ CMA.

Where any offence is compounded, intimation thereof shall be given by the company to the Registrar within seven days from the date on which the order is made available to the petitioner/applicant.

Permission of Special Court No More required:

As per sub-section (6)(a) of section 441 as stood  before being amended by the Companies (Amendment) Ordinance 2018, permission of the Special Court  was required for compounding  of any offence which is punishable under this Act, with imprisonment or fine, or with both. Such offences can now be compounded without the permission of the special Court in view of the said amended effective from 2nd November, 2018.

Discretionary power to reject the Application?

The Compounding application cannot be rejected without due consideration. The Company Law Board (now NCLT) in the case of Amadhi Investments Ltd., held that neither of the CLB or the Regional Director has been authorized with discretionary power to reject a compounding application without due consideration.

Whether NCLT has powers to review its own decision?

The NCLAT in the case APC Credit Rating Private Limited Vs. Registrar of Companies, NCT of Delhi and Haryana, [2018] 143 CLA 166 (NCLAT) had answered the above question, the NCLAT held that;

“it is clear that there is no inherent power to review, as is under Order 47 Rule 11 of the Code of Civil Procedure, 1980 but the Tribunal has power conferred by sub-section (2) of Section 420 of the Act, 2013 to rectify any mistake apparent from the record and to amend the order accordingly.”

Therefore, we can categorically say that NCLT has power to review its own orders unless the statue is amended to make way for such review. From the above decision of NCLAT it is clear that inherent powers under Rule 11 of the NCLT Rules can’t be said to be empowering NCLT with a power to review.

> An offence which is punishable with imprisonment only.

> An offence which is punishable with imprisonment and also with fine.

Jurisdiction to handle cases for the compounding:

A significant pre-requisite for filing application for compounding is to know where the application should be filed. The National Company Law Tribunal shall exercise the power of compounding an offence in accordance with and subject to the provisions of the Companies Act and the Rules prescribed under it.

Ind AS amendment for Financial Year 2020-21

Issued by Ministry of Corporate Affairs in consultation with the National Financial Reporting Authority 

On 24th July, 2020 the Ministry of Corporate Affair (MCA) vide notification dated 24th July, 2020 has exercised the powers conferred by section 133 read with section 469 of the Companies Act, 2013, the Central Government, in consultation with the National Financial Reporting Authority, hereby makes the following rules further to amend the Companies (Indian Accounting Standards) Rules, 2015. These amendments have been made keeping in view the current business environment caused by the pandemic. COVID-19 has not only affected the health of people across the globe it has also caused severe disturbances in the global economic environment which has consequential impact on financial statements and reporting. 

Read on to know more… 

National Financial Reporting Authority (NFRA)  

As these amendments and all other policies on accounting standard and auditing standards are now being recommended in consultation with NFRA. Let us know more about NFRA. 

It is an independent regulator to oversee the auditing profession and accounting standards in India under Companies Act 2013. It came on existence in October 2018. After the Satyam scandal took place in 2009, the Standing Committee on Finance proposed the concept of the National Financial Reporting Authority (NFRA) for the first time in its 21st report. Companies Act, 2013 then gave the regulatory framework for its composition and constitution. The Union Cabinet approved the proposal for its establishment on 1st March, 2018. It was constituted on 1st October, 2018 by the Government of India. The establishment of NFRA as an independent regulator for the auditing profession will improve the transparency and reliability of financial statements and information presented by listed companies and large unlisted companies in India. 

Further, let us understand about the new amendment, this is more of clarificatory in nature. Also very helpful in clearing the doubt of the industry. Several ambiguities were existed in these standards, for example in Ind AS 1 and Ind AS 8 on Materiality, Ind AS 116 Rent concession due to COVID-19 etc. 

SUMMARY OF THE RECENT AMENDMENTS PURSUANT TO NOTIFICATION : 

Ind AS 103 (Business Combinations): Have defined “business” in more detail, an optional test to identify concentration of fair value, element of Businesses and Assessing whether an acquired process is substantive. 

Ind AS 107 (Financial Instruments: Disclosures):  Disclosures for uncertainty arising from interest rate benchmark reform. 

Ind AS 109 (Financial Instruments): Temporary exceptions from applying specific hedge accounting requirements. 

Ind AS 116 (Leases): Due to the pandemic COVID- 19 – Related Rent concession, a clarification has been provided on accounting of Rent concessions, whether to treat as a lease modifications or not. 

Ind AS 1 and Ind AS 8 (Presentation of Financial Statements and Accounting Policies, Changes in Accounting Estimates and Errors): Change/modification in the definition of “Material”. 

Ind AS 10 (Events after the Reporting Period):  Definition for non – adjusting events and its effective date of application. 

Ind AS 34 (Interim Financial Reporting): Consequential of the above amendments. 

Ind AS 37 (Provisions, Contingent Liabilities and Contingent Assets): Consequential amendment and accounting of restructuring plan. 

Below amendments are explained in detail for more clarity. 

1. Amendment in Ind AS 103 Business Combination 

Sl. No Existing Ind AS Recent amendment 
1. In Appendix A, definition of business was Business: An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. In Appendix B B7 – A business consists of inputs and processes applied to those inputs that have the ability to create outputs. Although businesses usually have outputs, outputs are not required for an integrated set to qualify as a business. Definition of term “business” has been substituted with  Business: An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities. Accordingly, providing goods or services to customers has been added. This amendment is necessary because every business involves providing goods or services to the customers. In Appendix B In paragraph B7, the following shall be substituted, namely: – B7 – A business consists of inputs and processes applied to those inputs that have the ability to contribute to the creation of outputs. The three elements of a business are defined as follows (see paragraphs B8-B12D for guidance on the elements of a business): Consequently, the above changes have been made in the three elements of any business, such as input, process and output. Optional test to identify concentration of fair value For making the above amendment 3 paragraphs have been added after para B7. This is to permit a simplified assessment of whether an acquired set of activities and assets is business or not. An entity may elect to apply, or not apply, the test. An entity may make such an election separately for each transaction or other event. The concentration test is met if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. Elements of a Business and Assessing whether an acquired process is substantive In the practical scenario of the industry, a lot of companies were facing the difficulty for the definition of business. After this amendment, evaluation for business acquisition will be easier. 

2. Amendment in Ind AS 107 and Ind AS 109 Financial Instrument 

Hedge accounting is a method of accounting where entries to adjust the fair value of a security and its opposing hedge are treated as one. Hedge accounting attempts to reduce the volatility created by the repeated adjustment to a financial instrument’s value, known as fair value accounting or mark to market. This reduction in volatility is done by combining the instrument and the hedge as one entry, which offsets the opposing movements. 

A hedge fund is used to lower the risk of overall losses by assuming an offsetting position in relation to a particular security. The purpose of the hedge fund account is not necessarily to generate profit but instead to lessen the impact of associated losses, especially those attributed to interest rate or exchange rate. This helps lower the perceived volatility associated with an investment by compensating for changes that are not purely reflective of an investment’s performance. 

The point of hedging a position is to reduce the volatility of the overall portfolio. Hedge accounting has the same effect except that it is used on financial statements. For example, when accounting for complex financial instruments, adjusting the value of the instrument to fair value creates large swings in profit and loss. Hedge accounting treats the changes in market value of the reciprocal hedge and the original security as one entry so that large swings are lessened. 

Hedge accounting is used in corporate bookkeeping as it relates to derivatives. In order to lessen overall risk, derivatives are often used to offset the risks associated with a security. Hedge accounting uses the information from the security and the associated derivative as a single item, lessening the appearance of volatility when compared to reporting each individually. 

Changes in fair value of the designated portion of derivatives that qualify as fair value hedges are recognized in Profit or Loss immediately, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. 

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. The fair value adjustment to the carrying amount of the hedged item arising from the hedged risk is amortized to Profit or Loss from that date. 

Interest rate benchmark reform: refers to the market-wide reform of an interest rate benchmark, including the replacement of an interest rate benchmark with an alternative benchmark rate. 

For hedging relationships to which an entity applies the exceptions set out the certain exception for Uncertainty arising from interest rate benchmark reform. 

In the Ind AS 109, the entity shall disclose: 

a) the significant interest rate benchmarks to which the entity ‘s hedging relationships are exposed; 

b) the extent of the risk exposure the entity manages that is directly affected by the interest rate benchmark reform; 

c) how the entity is managing the process to transition to alternative benchmark rates; 

d) a description of significant assumptions or judgements the entity made in applying these paragraphs (for example, assumptions or judgements about when the uncertainty arising from interest rate benchmark reform is no longer present with respect to the timing and the amount of the interest rate benchmark-based cash flows); and 

e) the nominal amount of the hedging instruments in those hedging relationships. 

Following temporary exceptions have also being provided from applying specific hedge accounting requirements: 

a) For assessing highly probable requirement for cash flow hedges: For the purpose of determining whether a forecast transaction (or a component thereof) is highly probable as required by paragraph 6.3.3, an entity shall assume that the interest rate benchmark on which the hedged cash flows (contractually or non-contractually specified) are based is not altered as a result of interest rate benchmark reform. 

b) Reclassifying the amount accumulated in the cash flow hedge reserve: For the purpose of applying the requirement in paragraph 6.5.12 in order to determine whether the hedged future cash flows are expected to occur, an entity shall assume that the interest rate benchmark on which the hedged cash flows (contractually or non-contractually specified) are based is not altered as a result of interest rate benchmark reform. 

c) Assessing the economic relationship between the hedged item and the hedging instrument : For the purpose of applying the requirements in paragraphs 6.4.1(c)(i) and B6.4.4– B6.4.6, an entity shall assume that the interest rate benchmark on which the hedged cash flows and/or the hedged risk (contractually or non-contractually specified) are based, or the interest rate benchmark on which the cash flows of the hedging instrument are based, is not altered as a result of interest rate benchmark reform. 

d) Designating a component of an item as a hedged item: Unless paragraph 6.8.8 applies, for a hedge of a non-contractually specified benchmark component of interest rate risk, an entity shall apply the requirement in paragraphs 6.3.7(a) and B6.3.8—that the risk component shall be separately identifiable—only at the inception of the hedging relationship. 

In the simple words, Hedge accounting is an alternative to more traditional accounting methods for recording gains and losses. When treating the items individually, such as a security and its associated hedge fund, the gains or losses of each would be displayed individually. Since the purpose of the hedge fund is to offset the risks associated with the security, hedge accounting treats the two line items as one. Instead of listing one transaction of a gain and one of a loss, the two transactions are examined to determine if there was an overall gain or loss between the two and only the net impact is recorded. 

Due to this unprecedented situation like COVID-19, the risk of change in the fair value of Assets because of the frequent change in the interest rate is prevalent. Accordingly, the above exceptions have been provided in the current amendment. In this an entity has on option to apply the fair value as per the change in the interest rate. 

3. Ind AS 116 Leases 

Due to the COVID- 19, and thereafter the lockdown in India, many businesses have been shut or partially opened resulting into adverse impact on Revenue & Cash flow. Accordingly, the lease payment has been affected and the businesses are demanding the rent concession from their vendors. 

Now, the question arises how to account for this rent concession in the books of accounts, will it be treated as a lease modification or not? 

For the practical expedient, an amendment has been made and the businesses don’t have to treat this as a lease modification. But there are some conditions attached to it. If the below mentioned conditions are fulfilled, then we can treat the Rent concession without lease modification. 

But first of all we need to understand what lease modification is and how it is accounted for in the books of accounts. 

Ind AS 116 provides detailed guidance on accounting for lease modification, 

a) Lease modification is accounted for as a separate lease by lessee and lessor if the modification increases the scope of the lease by adding one or more right-of-use assets. 

b) If it is not accounted for as a separate lease, lessee re-measures the lease liability by discounting the revised lease payments using revised discount rate. 

Now, let us discuss the amendment in detail. 

As a practical expedient, a lessee may elect not to assess whether a rent concession that meets the conditions below is a lease modification. A lessee that makes this election shall account for any change in lease payments resulting from the rent concession in the same way if the change were not a lease modification. 

The practical expedient applies only to rent concessions occurring as a direct consequence of the covid-19 pandemic and only if all of the following conditions are met: – 

a) the change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change; 

b) any reduction in lease payments affects only payments originally due on or before the 30 June, 2021 (for example, a rent concession would meet this condition if it results in reduced lease payments on or before the 30th June, 2021 and increased lease payments that extend beyond the 30th June, 2021); and 

c) there is no substantive change to other terms and conditions of the lease. 

Disclosures in the financial statement. 

a) that it has applied the practical expedient to all rent concessions that meet the conditions in paragraph 46B or, if not applied to all such rent concessions, information about the nature of the contracts to which it has applied the practical expedient and 

b) the amount recognized in profit or loss for the reporting period to reflect changes in lease payments that arise from rent concessions to which the lessee has applied the practical expedient. 

4. Ind AS 1 and Ind AS 8 Presentation of Financial Statements and Accounting Policies, Changes in Accounting Estimates and Errors 

A new definition of material has been introduced by this amendment, this is more refined and also most expected by the industry, some of the examples of circumstances have also been provided for more clarity. 

Material: Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity. 

Materiality depends on the nature or magnitude of information, or both. An entity assesses whether information, either individually or in combination with other information, is material in the context of its financial statements taken as a whole. 

Information is obscured if it is communicated in a way that would have a similar effect for primary users of financial statements to omitting or misstating that information. The following are examples of circumstances that may result in material information being obscured: – 

a) information regarding a material item, transaction or other event is disclosed in the financial statements but the language used is vague or unclear; 

b) information regarding a material item, transaction or other event is scattered throughout the financial statements; 

c) dissimilar items, transactions or other events are inappropriately aggregated; 

d) similar items, transactions or other events are inappropriately disaggregated; and 

e) the understandability of the financial statements is reduced as a result of material information being hidden by immaterial information to the extent that a primary user is unable to determine what information is material. 

Assessing whether information could reasonably be expected to influence decisions made by the primary users of a specific reporting entity`s general purpose financial statements requires an entity to consider the characteristics of those users while also considering the entity ‘s own circumstances. 

The primary users to whom general purpose financial statements are directed. Financial statements are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyses the information diligently. At times, even well-informed and diligent users may need to seek the aid of an adviser to understand information about complex economic phenomena. 

Consequently, the above changes have been made in the Ind AS 8. 

5. Ind AS 10 Events after the Reporting Period 

A paragraph 21 of the Ind AS 10 have been substituted, in the amendment any non- adjusting events that could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements which provide financial information about a specific reporting entity have been added. 

Accordingly, the following disclosure to be provided 

a) the nature of the event; and 

b) an estimate of its financial effect, or a statement that such an estimate cannot be made. 

5. Ind AS 34 Interim Financial Reporting  

Consequential of the above amendments have been notified. 

6. Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets 

Consequential of the above amendments have been notified, and a paragraph below on accounting of restructuring plans have been substituted. 

A management or board decision to restructure taken before the end of the reporting period does not give rise to a constructive obligation at the end of the reporting period unless the entity has, before the end of the reporting period- 

a) started to implement the restructuring plan; or 

b) announced the main features of the restructuring plan to those affected by it in a sufficiently specific manner to raise a valid expectation in them that the entity will carry out the restructuring. 

Summary: 

Keeping in view the changing scenario of business, due to the pandemic COVID -19, the above amendments have been incorporated, primarily 9-10 standards are amended, essentially most of them tried to cover situations which have arisen due COVID- 19 and better financial reporting. 

ICAI, in its endeavor to remain converged with the globally acceptable International Financial Reporting Standards (IFRS Standards) issued by the International Accounting Standards Board (IASB). Also it endeavors to identify the emerging accounting issues that may warrant enforcement actions. 

Amendment In Schedule III under Companies Act 2013

Amendment In Schedule III under Companies Act 2013

The Ministry of Corporate Affairs, Government of India, issued notifications dated 24th March, 2021 to amend Schedule III to the Companies Act, 2013 to enhance the disclosures required to be made by the Company in its Financial Statement.

Purpose of Amendment:

By these amendments MCA increasing stringency in compliances and adding numerous additional disclosures in Financial Statement. The main purpose behind these amendments is more transparency.

Ministry has issues following Notifications:

S. No.Date of NotificationParticularPurpose (Amendment in)
i.24.03.2021[1]Amendment to Schedule III to the Companies Act, 2013Financial Statement

APPLICABILITY:

Above mentioned amendments shall come into force w.e.f. 01st day of April 2021.

Que: Financial year end on 31st March 2021. Balance sheet signed on 25th August 2021. Whether Company have to give effect of amendment in Financial Statement?

Ans: The above mentioned amendment shall be applicable on Companies for financial year start on or after 01st April 2021. Therefore, all these amendments shall effect the financial statement as on 31st March 2022 i.e. (f.y. 2021-22).

Therefore, one can opine that Financial Statement for financial year ending 31.03.2021 shall be same as per earlier disclosures.

Schedule III i.e. Financial Statement of Companies.

The Ministry of Corporate Affairs vide Notification dated 24 March 2021 has amended Schedule III to the Companies Act, 2013, which shall be effective from the 1st day of April 2021.

Schedule III divided into three parts:

  • Division I – Financial Statements for a company whose Financial Statements are required to comply with the Companies (Accounting Standards) Rules, 2006.
  • Division II – Financial Statements for a company whose financial statements are drawn up in compliance of the Companies (Indian Accounting Standards) Rules, 2015.
  • Division III – Financial Statements for a Non-Banking Financial Company (NBFC) whose financial statements are drawn up in compliance of the Companies (Indian Accounting Standards) Rules, 2015

The notification incorporates various additional disclosure requirements while preparing the financial statements of an entity which are covered under the three divisions of Schedule III to the Companies Act, 2013.

Purpose of Amendment:

In recent years, there have been substantial changes in the reporting requirement by the auditors, but no such corresponding amendments were made in Schedule-III for the preparation of the financial statements. Thus, to align the company’s financial statements in accordance with the auditor’s reporting requirements, the following amendments have been discussed in this write-up. majority of the amendments to Schedule III to the Companies Act, 2013 have been undertaken in response to the amendments covered in the newly issued Companies (Auditors and Report Order) 2020 and the Companies (Indian Accounting Standards) Amendment Rules, 2020.

Brief on amendments to Schedule III Division I, to the Act (for Companies whose financial statements are required to comply with the Accounting Standards):

I. General Instruction for preparation of Balance Sheet:

Rounding Off: It is option to do rounding off of figures till financial year ended 31.03.2021. For the purpose of rounding off the figures appearing in the Financial Statements for financial year ending 31.03.2022 the total income of the Company shall be considered as the basis.

Total IncomeRounding Off
Less than 100 Crore RupeesTo the nearest hundreds, thousands, lakhs or millions or decimals thereof
100 Crore Rupees or moreTo the nearest lakhs, millions or crores, or decimals thereof

II. Additional Disclosure in Notes to Balance Sheet:

i. Shareholding of Promoter: The note on Share Capital in the Financial Statements shall mention details of the Shareholding of the Promotes along with changes, if any, during the Financial Year. The format of such disclosure shall be as follows:

Shares held by promotes at the end of the Year% Change during the Year
S. No.Promoter’s NameNo. of Shares% of total shares
Total

Note:

  • Here management shall give details separately for each class of shares.
  • percentage change shall be computed with respect to the number at the beginning of the year or if issued during the year for the first time then with respect to the date of issue.”

Ques:6 [2]What is the meaning of promoter under Companies Act, 2013?

ii. Trade Payable (Creditors) ageing Schedule: Companies henceforth be required to provide ageing schedule for trade payables due for the periodicity of 1 year, 1-2-year, 2-3 year & more than 3 years. These include trade payables to MSMEs, disputed dues to MSMEs, and other dues and disputed dues. Similarly, disclosures shall also be made where no due date of payment is specified. Information for unbilled dues is also required to be disclosed separately.

Trade Payables ageing schedule: (Amount in Rs.)

ParticularsOutstanding for following periods from due date of paymentTotal
Less than 1 yr.1-2 yrs.2-3 yrs.More than 3 yrs.
(i) MSME
(ii) Others
(iii) Disputed dues- MSME
(iv) Disputed dues- Others

iii. Trade receivables (Debtors) ageing Schedule: Companies will be required to disclose the ageing schedule of its trade receivables i.e. including undisputed and disputed trade receivables considered good and doubtful with ageing classified as less than 6 months, 6 months to 1 year, 1-2 years, 2-3 years and 3 years or more along with disclosures separate disclosure for information of unbilled dues. These undisputed and disputed trade receivables which are further categorized into good and doubtful.

Trade Receivables Ageing schedule: (Amount in Rs.)

ParticularsOutstanding for following periods from due date of paymentTotal
Less than 6 months6 months- 1 year1-2 yrs.2-3 yrs.More than 3 yrs.
(i)  Undisputed Trade receivables- considered good
(ii)  Undisputed Trade Receivables- Considered Doubtful
(iii) Disputed Trade Receivables considered good
(iv) Disputed Trade Receivables considered doubtful

iv. Title deeds of Immovable Property not held in name of the Company:  The Company shall provide the details of the immovable property (other than properties where the Company is the lessee and the lease agreements are duly executed in favour of the lessee) whose title deeds are not held in the name of the Company in the prescribed format.

If such immovable property is jointly held with others, details are required to be given to the extent of the Company’s share;

v. Disclosure on revaluation of Assets:  Where the Company has revalued its Property, Plant and Equipment, the company shall disclose as to whether the revaluation is based on the valuation by a registered valuer as defined under rule 2 of the Companies (Registered Valuers and Valuation) Rules, 2017.

vi. Disclosure on Loans/ Advance to Directors/ KMP/ Related parties:  disclosures shall be made where Loans or Advances in the nature of loans are granted to promoters, directors, KMPs and the related parties (as defined under Companies Act, 2013,) either severally or jointly with any other person, that are:

(a) repayable on demand or

(b) without specifying any terms or period of repayment

Type of BorrowerAmount of loan or advance in the nature of loan outstandingPercentage to the total Loans and Advances in the nature of loans
Promoters
Directors
KMPs
Related Parties

vii. Details of Benami Property heldIn case, any proceedings have been initiated or pending against the entity under the Benami Transactions (Prohibitions) Act, 1988, the corresponding disclosures shall be provided in the financial statements. The Company shall disclose the followings:

a. Details of such property, including year of acquisition,

b. Amount thereof,

c. Details of Beneficiaries,

d. If property is in the books, then reference to the item in the Balance Sheet,

e. If property is not in the books, then the fact shall be stated with reasons,

f. Where there are proceedings against the company under this law as an abetter of the transaction or as the transferor then the details shall be provided,

g. Nature of proceedings, status of same and company’s view on same.

viii. Details of BorrowingWhere the Company has borrowings from banks or financial institutions on the basis of security of current assets, it shall disclose the following:-

a) whether quarterly returns or statements of current assets filed by the Company with banks or financial institutions are in agreement with the books of accounts.

b) if not, summary of reconciliation and reasons of material discrepancies, if any to be adequately disclosed.

ix. Wilful Defaulter:  Where a company is a declared wilful defaulter by any bank or financial Institution or other lender, following details shall be given:

a. Date of declaration as wilful defaulter,

b. Details of defaults (amount and nature of defaults),

* “wilful defaulter” here means a person or an issuer who or which is categorized as a wilful defaulter by any bank or financial institution (as defined under the Act) or consortium thereof, in accordance with the guidelines on wilful defaulters issued by the Reserve Bank of India.

x. Relationship with Struck off Companies:  Where the company has any transactions with companies struck off under section 248 of the Companies Act, 2013 or section 560 of Companies Act, 1956, the Company shall disclose the following details:-

Name of struck off CompanyNature of transactions with struck-off CompanyBalance outstandingRelationship with the Struck off company, if any, to be disclosed
Investments in securities
Receivables
Payables
Shares held by stuck off company
Other outstanding balances (to be specified)

xi. Registration of charges or satisfaction with Registrar of Companies:  Where any charges or satisfaction yet to be registered with Registrar of Companies beyond the statutory period, details and reasons thereof shall be disclosed.

xii. Compliance with number of layers of companies Where the company has not complied with the number of layers prescribed under clause (87) of section 2 of the Act read with Companies (Restriction on number of Layers) Rules, 2017, the name and CIN of the companies beyond the specified layers and the relationship/extent of holding of the company in such downstream companies shall be disclosed.

xii. Disclosure of Ratios

The amendment requires the companies covered under division I and II of schedule III to disclose the following ratios:

a. Current Ratio,

b. Debt-Equity Ratio,

c. Debt Service Coverage Ratio,

d. Return on Equity Ratio,

e. Inventory turnover ratio,

f.  Trade Receivables turnover ratio,

g. Trade payables turnover ratio,

h. Net capital turnover ratio,

i. Net profit ratio,

j. Return on Capital employed,

k. Return on investment.

Note: The company shall explain the items included in the numerator and denominator for computing the above ratios and an explanation shall be provided for any change in the ratio by more than 25% as compared to the preceding year.

xiv. Details in respect of Utilization of Borrowed funds and share premium shall be provided in respect of:

a. Transactions where an entity has provided any advance, loan, or invested funds to any other person (s) or entity/ entities, including foreign entities.

b. Transactions where an entity has received any fund from any person (s) or entity/ entities, including foreign entity.

xv. Compliance with approved Scheme(s) of Arrangements: Where any Scheme of Arrangements has been approved by the Competent Authority in terms of sections 230 to 237 of the Companies Act, 2013, the Company shall disclose that the effect of such Scheme of Arrangements have been accounted for in the books of account of the Company ‘in accordance with the Scheme’ and ‘in accordance with accounting standards’ and deviation in this regard shall be explainedof holding of the company in such downstream companies shall be disclosed.

III. Additional Disclosure in Notes to Profit & Loss Account:

i. Undisclosed Income (Reconciliation of Income Tax and Companies Act): The Company shall give details of any transaction not recorded in the books of accounts that has been surrendered or disclosed as income during the year in the tax assessments under the Income Tax Act, 1961, unless there is immunity for disclosure under any scheme and also shall state whether the previously unrecorded income and related assets have been properly recorded in the books of account during the year.

ii. CSR Disclosure: Where the company covered under section 135 of the Companies Act, the following shall be disclosed with regard to CSR activities: –

a. amount required to be spent by the company during the year,

b. amount of expenditure incurred,

c. shortfall at the end of the year,

d. total of previous years shortfall,

e. reason for shortfall,

f. nature of CSR activities,

g. details of related party transactions, e.g., contribution to a trust controlled by the company in relation to CSR expenditure as per relevant Accounting Standard,

h. where a provision is made with respect to a liability incurred by entering into a contractual obligation, the movements in the provision during the year should be shown separately.

iii. Details of Crypto Currency or Virtual Currency:

iv. Where the Company has traded or invested in Crypto currency or Virtual Currency during the financial year, the following shall be disclosed: –

a. profit or loss on transactions involving Crypto currency or Virtual Currency

b. amount of currency held as at the reporting date,

c. deposits or advances from any person for the purpose of trading or investing in Crypto Currency/ virtual currency.

promoter” means a person—

(a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or

(b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or

(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act:

 Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity;

CBDT notifies Cost Inflation Index for FY 2021-22

The cost inflation index (CII) for the financial year (FY) 2021-22 has been notified  by the Ministry of Finance. In a notification dated June 12, the finance ministry  stated that CII for FY 2021-21 has been set as 317. For the previous financial  year, CII was 317.  

This notification shall come into force with effect from the 1st day of April 2022,  and shall accordingly apply to the Assessment Year 2022-2023 and subsequent  years. 

CII number is important as it is used to arrive at the inflation-adjusted purchasing  price of assets and thereby long-term capital gains (LTCG). It is also important to  compute the long-term capital gains/long-term capital losses (LTCL) on the  assets which have been or are planned to be sold in FY 2021-22. There are two  things that people must keep in mind relating to the cost inflation index. 

Firstly, his number would be utilized to compute inflation-adjusted cost only for  those assets where inflation-adjusted (indexation benefit) is permitted. Thus, the  CII value could not be used to reach LTCG/LTCL on equity mutual funds.  

Secondly, this CII number would be necessary to compute LTCG for Financial Year  2021-22. The taxes on these gains would be paid by you while filing your income  tax returns (ITR) for Financial Year 2021-22 (AY 2022-23), that is, next year.  

The table below shows the CII of the last 5 years:



Financial Year 


CII Number
2021-2022 
317
2020-2021 
301
2019-2020 
289
2018-2019 
280
2017-2018
272