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I AM surprised to find loss being recorded as an asset in company balance-sheets. Equally hilarious is the recording of profits as liabilities. Can you please enlighten me on this score? -- Uday Chopra, e-mail

This is not the first time such a doubt has assailed a discerning student of accounts. Nor is likely to be the last. You would appreciate that shareholders are distinct from the company they are the shareholders of. Therefore, profits belonging to the shareholders is a liability as far as the company is concerned because they belong to the shareholders and are held in trust, as it were, by the company. For the same reason, losses which cannot possibly be set off against reserves are shown as assets. You would agree that to the extent of such loss the company's liability towards shareholders is reduced. Any reduction in liability can be logically viewed as an asset.

Singular problem

PROCEEDS of single premium policies are proposed to be brought under tax. Does this apply to policies taken after February 28, 2003, alone? If no, is this not breach of trust? -- Anil Shenvi, Bangalore

This applies to proceeds received from April 1, 2003, onwards. The policy might have been taken before the Budget announcement, pulling the rug from under the feet of investors in such policies. Yes, it does amount to breach of trust. But then this is not the first time. Nor is it likely to be the last. But there is also the flip side. Insurance companies have been using the exemption to virtually convert their deposit schemes into insurance schemes to lure investors. In a way, therefore, they had it coming.

(Mis)governance?

WHERE is corporate governance when at his company's expense a business tycoon gets a spacious plane converted into a palace on skies and gives lift to the rich and the powerful to South Africa so that they can enjoy the cricket World Cup? -- Anonymous

I don't know the facts. But if this indeed is true, corporate governance has indeed gone for a sixer. Levity apart, the world over, corporate governance, audit committees, and so on, have at best remained buzzwords to bamboozle the laity. No less a person than Jack Welsh of GE was heckled for working out a severance package that indulged him and his passions.

Fee on hold

CAN I claim the tax rebate towards expenditure on children's education under the proposed new clause in Section 88 if I pay the tuition fees for the academic year 2003-2004 before March 31, 2003? -- R. Srinivasan, Bangalore

No you cannot. As per Section 88(3), the qualifying investments should have been made at "any time during the previous year." If you pay the tuition fees on or before March 31, 2003, you will get the tax rebate neither for the previous year 2002-2003 (because for that year the rebate is simply not on in respect of tuition fees) nor for the previous year 2003-2004 because while the rebate is available, the requisite payment would not have been made during the previous year 2003-2004.

Rights wrongs

WHAT are the consequences if the rights offer regime as enshrined in Section 81 are not adhered to? -- Murali Manohar, e-mail

Section 81 is an example of incomplete legislation. A good legislation is one which, among others things, spells out the consequences of its violation or non-compliance. The learned author Ramiah opines in his distinguished work Guide to Companies Act that "if any shares are allotted contrary to the provisions of the section, the allotment is not per se invalid. But the procedure being illegal, it can be avoided (sic) by the company or any director or shareholder aggrieved and may be used as a weapon of defense when any right or liability arising out of such allotment is sought to be enforced."

With due respect, yours truly begs to differ. The lapse is not merely procedural. Instead, it strikes at the very root of shareholders' democracy. Therefore, the aggrieved shareholder ought be granted stay if he applies for one when the process of illegal appointment is on. It is possible that the whole thing was done clandestinely at the back of the garden-variety shareholders. In that case, the company and the directors must be made accountable to the aggrieved shareholders for the pecuniary and other losses that they might have suffered as a result of being bypassed. This is something which any court of equity would grant. But sooner the law provides for a statutory remedy the better.

50 to 51

IN A company there were two groups each controlling 50 per cent of the voting power. Recently, the one group transferred 1 per cent to the other resulting in the relationship morphing from 50:50 to 51:49. Can the losses of this company be carried forward? -- R. M. Subramaniam, e-mail

Yes, they can be. Assuming this is a closely-held company, losses cannot be carried forward if more than 51 per cent of voting power vests with different shareholders on the last day of the previous year in which the set off is sought vis-à-vis the last day of the previous year in which the loss was sustained. In the question posed by you there is only an inter se transfer with no newcomer coming in.

(ASK! Send in your queries on accounting, auditing, corporate law and taxation to ask@thehindu.co.in)

S. Murlidharan

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