The Hindu Business Line : Expense is what is paid out or away

THIS is from a partnership deed that had to be dissected by the Kerala High Court in the Kajah & Co case recently: "Each partner shall be paid a remuneration of 2.5 per cent of the net profits of the business and it shall be treated as an expenditure of the firm. Net profits for the purpose of working out the aforesaid remuneration shall mean the net profits worked out after deducting all expenses, including interest on loans as well as capital, but without deducting the remuneration to the partners."

If that reminds you of a school problem in accountancy, the clause was however able to confuse the tax authorities. So much so, the Tribunal, when it had to deal with the case, observed: "We do not agree with the Commissioner of Income-tax (Appeals) that income-tax liability is to be considered as an expenditure as normally understood in common parlance." So, what's expenditure? "Spending in the sense of paying out of money is the primary meaning of expenditure. Expense is what is paid out or paid away. Income-tax represents the levy by the government after the net profit has been arrived at. It is a case of application of profit after it has been earned."

While it seems strange that the taxman could have a doubt as basic as that, imagine how the problem would have become tougher if the clause had stipulated remuneration at 2.5 per cent of net profit `after' charging such remuneration.

Audits of unseen books

THERE are disturbing facts for accountants in Bangalore Education Trust vs Director of Income-tax, that engaged the attention of Karnataka High Court not long ago. What follows is from a submission from a CA:

"I regret to say that I have not in fact seen the books of account for any of the years nor have I in fact conducted any audit of the books of account or the financial statements such as balance sheet, income and expenditure account, and receipts and payments account. One senior colleague of mine in my own profession had approached me from time to time with a request to certify these balance sheets and other accounts."

There's more: "I admit that I have done improper acts of giving certificates of audit... even though I have in fact not even seen the books of the trust. I regret sincerely my misconduct and swear by god that I would not repeat such misconduct in future."

Justice R. Gururajan noted that CAs hold a position in the society. "Their certificates are accepted and acted upon by the authorities in terms of various laws governing the field. In the case on hand, rather unfortunately, the CA prima facie seems to have failed in his professional duties," he said, directing the Department to send a copy of the verdict to the ICAI for its information. Will they act on it?

Mix makes manufacture

ALUMINIUM paint was among the topics that reached the portals of the apex court recently. TN State Transport Corpn Ltd manufactures bus bodies. When officials from the Excise Department, Madurai, went there on an inspection, they found that the company was also manufacturing aluminium paint and applying the same on the buses. Did you pay duty on paint, asked the officers, and the company said no.

From the company's side, the argument before the Supreme Court was that there was no manufacture and so there could be no levy; they had only mixed aluminium paste, metal lacquer and thinner — a process that did not amount to manufacture; also, that since the shelf life of the paint was only 8-10 hours, one cannot say it is marketable.

Justices S. N. Variava and H. K. Sema observed: "We see no substance in these submissions. After the aluminium paste, metal lacquer and thinner are mixed in exact proportions, a separate and distinct product with a distinct identity comes into existence. It is a paint which is known in the market as `aluminium paint'."

The contention of short shelf life too was dismissed, stating that 8-10 hours was enough to market it. To apply the logic to politics, when you put different constituents, there is a new coalition; and even if life expectancy were short for the mix, you can't say there is too little time to stake claim for power.

Helter-skelter over tax shelters

HERE is something from AccountingWeb (US) about an upcoming legislation (HR 3220) to cheer inveterate tax-planners: "The House bill would send the message that the widely criticised style of income shifting associated with WorldCom and Tyco in order to avoid state taxes is just fine with Congress." But it is feared that there would be "an inevitable surge in opportunistic tax sheltering" leading to "new state revenue shortfalls in 40 states - and more in New York City and other cities around the US".

Also, that the "new epidemic of tax sheltering would put a further crimp on essential services such as education, transportation and infrastructure at a time of already historic state budget shortfalls." Now, who's running for cover?

Son of boss

EVER heard of `Son of Boss' tax shelter? AccountingWEB informs that the US taxman the Internal Revenue Service is asking those who invested that `abusive' scheme have about a month more "to accept an IRS settlement offer to resolve their tax issues". What are these? "These transactions were developed and marketed by an interlocking network of commercial interests, including leading law firms, accounting firms and investment banks. Son of Boss deals had only one purpose — the elimination of tax." IRS estimates understatement to be "in excess of $6 billion", with many of the transactions generating "tax losses of between $10 million and $50 million". A different SOB, for regulators.

Shhhh... is the word

CITING Financial Times, there is a posting on AccountingWeb that the EU's efforts to tackle tax evasion have been hampered by Swiss demands for banking secrecy. It seems that the Swiss, who are outside the EU, want guarantees that EU arrangements on border controls would never force Switzerland to compromise its banking secrecy over cases of tax evasion, which is not a crime there.

Tailpiece

"When EVMs are so fast, why are not they making EAMs?"

"Electronic accounting machines?"

"No, election analysis machines."

Detaxification@TheHindu.co.in

D. Murali

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