About Revised Schedule VI

By Naveen Chand Khulve

Ministry of Corporate Affairs has amended the schedule VI which is required to be implemented by the companies from Financial Year 2011-12 along with regrouping last year figures. Following are the changes in Revised Schedule VI.

1. Source of fund shall be replaced by Equity and Liabilities.

2. Application of funds shall be replaced by Assets.

3. Shareholding of more than 5% shares in the company as on balance sheet date need to be disclosed separately.

4. Profit and Loss account shall be replaced by Statement of Profit and Loss.

5. Statement of Profit and Loss (Dr. Balance) shall be disclosed under head Reserves and Surplus.

6. Share Application money pending allotment is not a part of Shareholders Fund now.

7. Sundry Debtors shall be replaced by Trade Receivables.

8. In case trade receivables outstanding for a period exceeding 6 months from the date they become due for payment then separate disclosure required.

9. Tangible assets under lease are required to be separately specified under each class of assets.

10. Current liabilities will not be shown as deduction from Current Assets.

11. Assets and liabilities shall be bifurcated into Current and Non Current portion.

12. Miscellaneous Expenditure as a separate head does not exists now.

Format of Balance Sheet in Revised Schedule VI

Equity and Liabilities	Note No.	Figures at end of current reporting period	Figures at end of previous reporting period
Shareholder’s Fund Capital Reserve and Surplus Money Reserved against share warrants
Share Application money pending allotment
Non Current Liabilities Long Term Borrowings Deferred Tax Liabilities (Net) Other long Term Liabilities Long Term Provisions
Current Liabilities Short Term Borrowings Trade Payables Other Current Liabilities Short Term Provisions

Format of Balance Sheet in Revised Schedule VI

Assets	Note No.	Figures at end of current reporting period	Figures at end of previous reporting period
Non Current Assets Fixed Assets · Tangible Assets · Intangible Assets · CWIP · Intangible Assets under development Non Current Investment Deferred Tax Assets (Net) Long terms loans and advances Other Non-Current Assets
Current Assets Current Investment Inventories Trade Receivables Cash and Cash Equivalents Short Term loans and advances Other Current Assets

Format of Statement of Profit and Loss

Particulars	Note No.	Figures at end of current reporting period	Figures at end of previous reporting period
Revenue from Operations Other Income Total Revenue
Expenses Cost of Material Consumed Purchases of Stock in Trade Changes in inventories of finished goods WIP and SIT
Employee Benefit expenses Finance Costs Depreciation and Amortization expenses Other expenses
Profit before exceptional and extraordinary items and tax
Extraordinary items
PBT
Tax Expenses Current Tax Deferred Tax
Profit (Loss) for the period from continuing operations
Profit (Loss) for the period from discontinuing operations
Tax expenses of discontinuing operations
Profit (Loss)  from discontinuing operations (after tax)
Profit (Loss) for the period
EPS Basic Diluted

Distinction between term Current and Non Current:-

An item is classified as current

1. If it is involved in the entity’s operating cycle

2. Is expected to be realized / settled within 12 months.

3. If it is held primary for trading

4. Is cash or cash equivalents

5. If entity does not have unconditional right to defer settlement of liability for at least 12 months after reporting period.

All other items are non current.

Must Read : Exemption from Filing ITR

Shares held as investment & Shares held as Stock-in-Trade

By: Anooj

Distinction between shares held as stock-in-trade and shares held as investment - tests for such a distinction

1.The Income Tax Act, 1961 makes a distinction between a “capital asset” and a “trading asset”.

2. Capital asset is defined in Section 2(14) of the Act. Long-term capital assets and gains are dealt with under Section 2(29A) and Section 2(29B). Short-term capital assets and gains are dealt with under Section 2(42A) and Section 2(42B).

3. Trading asset is dealt with under Section 28 of the Act.

4. The Central Board of Direct Taxes (CBDT) through Instruction No.1827 dated August 31, 1989 had brought to the notice of the assessing officers that there is a distinction between shares held as investment (capital asset) and shares held as stock-in-trade (trading asset). In the light of a number of judicial decisions pronounced after the issue of the above instructions, it is proposed to update the above instructions for the information of assessees as well as for guidance of the assessing officers.

5. In the case of Commissioner of Income Tax (Central), Calcutta Vs Associated Industrial Development Company (P) Ltd (82 ITR 586), the Supreme Court observed that:

“Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment.”

6. In the case of Commissioner of Income Tax, Bombay Vs H. Holck Larsen (160 ITR 67), the Supreme Court observed:

“The High Court, in our opinion, made a mistake in observing whether transactions of sale and purchase of shares were trading transactions or whether these were in the nature of investment was a question of law. This was a mixed question of law and fact.”

7. The principles laid down by the Supreme Court in the above two cases afford adequate guidance to the assessing officers.

8. The Authority for Advance Rulings (AAR) (288 ITR 641), referring to the decisions of the Supreme Court in several cases, has culled out the following principles:-

“(i) Where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction;

(ii) the substantial nature of transactions, the manner of maintaining books of accounts, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions;

(iii) ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade; but where the object of the investment in shares of a company is to derive income by way of dividend etc. then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt”.

9. Dealing with the above three principles, the AAR has observed in the case of Fidelity group as under:-

“We shall revert to the aforementioned principles. The first principle requires us to ascertain whether the purchase of shares by a FII in exercise of the power in the memorandum of association/trust deed was as stockin-trade as the mere existence of the power to purchase and sell shares will not by itself be decisive of the nature of transaction. We have to verify as to how the shares were valued/held in the books of account i.e. whether they were valued as stock-in-trade at the end of the financial year for the purpose of arriving at business income or held as investment in capital assets. The second principle furnishes a guide for determining the nature of transaction by verifying whether there are substantial transactions, their magnitude, etc., maintenance of books of account and finding the ratio between purchases and sales. It will not be out of place to mention that regulation 18 of the SEBI Regulations enjoins upon every FII to keep and maintain books of account containing true and fair accounts relating to remittance of initial corpus of buying and selling and realizing capital gains on investments and accounts of remittance to India for investment in India and realizing capital gains on investment from such remittances. The third principle suggests that ordinarily purchases and sales of shares with the motive of realizing profit would lead to inference of trade/adventure in the nature of trade; where the object of the investment in shares of companies is to derive income by way of dividends etc., the transactions of purchases and sales of shares would yield capital gains and not business profits.”

10. CBDT also wishes to emphasise that it is possible for a tax payer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads i.e., capital gains as well as business income.

11. Assessing officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment (and therefore giving rise to capital gains) or as stock-in-trade (and therefore giving rise to business profits). The assessing officers are further advised that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade.

12. These instructions shall supplement the earlier Instruction no. 1827 dated August 31, 1989.

Must Read : Exemption from Filing ITR

Free Download Tax Calculator

Old Schedule VI vs Revised Schedule VI - Related issues

By: G S Rao

Introduction:

Section 211 provides that every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit or in such other form as may be approved by the Central Government either generally or in any particular case. Section 211(2)  provides that “every profit and loss account” of a company shall give a true and fair view of the profit or loss for the financial year and comply with the requirements of Part-II of Schedule VI. Thus Schedule VI assumes significance in preparation of not only of balance sheet but also in preparation of profit and loss account. This article focuses on the history of Schedule VI, newly introduced format of Schedule VI and its comparison with the old format.

History of Schedule VI: The companies (Amendment) Act,1960 substituted Part-I, i.e., horizontal form of balance sheet  of Schedule VI. It also amended Part-II and Part-II by making certain insertions or substitutions in Paras 3 and 4.  Subsequently some amendments were made in sixties and mid seventies. The significant amendment is through notification dated 12.03.1979 which permitted companies to prepare balance sheets either in horizontal form or vertical form. Schedule VI thus remained unchanged for a longer time excepting for minor changes with regard to disclosure of unutilized moneys out of new issues and amounts due to micro small medium enterprises.

Background to introduction of revised Schedule VI:

The converged accounting standards and revised Schedule VI and Schedule XIV have been finalized by National Advisory Committee on Accounting Standards (NACAS)and recommended to the Government for notification. MCA has already laid a road map for such convergence in a phased manner with effect 1^st April, 2011.Amended Schedule VI is a step in that direction and certainly facilitate convergence of Indian Accounting Standards with International Financial reporting standards as  the revised Schedule VI format attempts to align itself  with the existing Accounting standards.

Applicability of Revised Schedule VI:

Ministry of Corporate Affairs(MCA) initially  announced on its website that the revised Schedule VI will be  applicable from the financial year 2010-11 onwards which created some confusion. However on 25^th March 2011, MCA has changed this note on its website to state that the revised Schedule VI will be applicable to all companies for preparation of Financial statements beginning on or from 1^st April 2011 and Notification no. F.No.2/6/2008-C.L-V dated 30-3-2011 has been issued to that effect. The requirements of the Revised Schedule VI however, do not apply to insurance or banking company, or any company engaged in the generation or supply of electricity or to any other class of company.

As per the Roadmaps, the first phase of convergence is applicable for following companies:-

i. Companies which are part of NSE – Nifty 50.

ii. Companies which are part of BSE - Sensex 30.

iii. Companies whose shares or other securities are listed on stock exchanges outside India.

iv. Companies, whether listed or not, which have a net worth in excess of  Rs.1,000 crores.

Why new format is  welcome?

Revised schedule VI notes itself indicate that the disclosure requirements specified in Schedule VI are in addition to the disclosure requirements of the companies Act as well as the Accounting standards. Hence it gives little room for divergent practices unlike in the past. Schedule VI establishes direct communication with stake holders and  elimination of   conflict between Indian Accounting Standards and Schedule VI gives a true and fair view of the Balance sheet and Profit and Loss  to the stakeholders.

Structure of Revised Schedule VI: The Revised Schedule VI is structured  as shown below:

i. General Instructions.

ii. Part I – Form of Balance Sheet.

iii. General Instructions for Preparation of Balance Sheet.

iv. Part II – Form of Statement of Profit and Loss.

v. General Instructions for Preparation of Statement of Profit and Loss.

What changes are in ?

Key changes made in Revised Schedule VI

1. Introduction of new heads/classification: New format brought in new classification heads in the balance sheet. All items of assets and liabilities are to be bifurcated between current and non-current portions and presented separately on the face of the Balance Sheet. Such classification was not required by the Old Schedule VI.

2. Format for P& L a/c: In the old format there is no format for P& L account although Part II specifies the manner of disclosure of items. Revised Schedule VI provides a specific format and it is titled as “Statement of Profit and loss for the year ended ______”

3. Notes replace schedules: In the Old Schedule VI, break-up of amounts disclosed in the main Balance Sheet and Profit and Loss Account were given in the Schedules. Additional information was furnished in the Notes to Account. The Revised Schedule VI has eliminated the concept of ‘Schedule’ and such information is now  required to be furnished in the Notes to Accounts.

4. Primacy to Accounting Standards and ACT: The terms used in the Revised Schedule VI will carry the meaning as defined by the applicable Accounting Standards. Thus primacy is given to Accounting standards and the provisions in case of conflict.

5. No option for Horizontal presentation: The Revised Schedule VI prescribes only the vertical format for presentation of Financial Statements. Thus, a company will no longer have an option to use horizontal format for the presentation of Financial Statements.

6. Opening balances: The Financial Statements prepared for the year 2011-12 (1st April 2011 to 31^st  March 2012), corresponding amounts need to be given for the financial year 2010-11.

7. Uniformity in figure reporting: once a unit of measurement is used, it should be uniformly followed  through out in the financial statements and notes thereon. Moreover, rounding off requirements is limited to the nearest lakhs, millions or crores, if turnover exceeds 100 crores.

8. Classification of assets into Current & Non current: Assets and liabilities are to be segregated into their current and non-current portions. This classification helps in ascertaining the liquidity.  For eg. current maturities of a long term borrowings will have to be classified under the head “Other current liabilities.”

9. Share capital related changes:

i. Share application money pending allotment details have to be disclosed. The amount in excess of subscription or if the requirements of minimum subscription are not met will be shown under “Other current liabilities.”

ii. Reconciliation of number of shares at the beginning and at the end of reporting period has to be made.

iii. Names of each shareholder holding more than 5% shareholding as on the balance sheet have to be disclosed.

a. Details of aggregate number and class of shares allotted for consideration other than cash, bonus shares and shares bought back will now are required to be disclosed only for a period of five years immediately preceding the Balance Sheet date including the current year.

b. Rights and restriction attached each class of shares as to repayment of capital or dividend  have to be disclosed separately.

c. Under the head shareholders Funds money received against share warrants has to be shown separately.

10. Reserves and Surplus: Any debit balance in the Statement of Profit and Loss will have to be disclosed under the head “Reserves and surplus.” Earlier, any debit balance in Profit and Loss Account carried forward after deduction from uncommitted reserves was shown as the last item on the Assets side of the Balance Sheet. Share option account has to be shown under reserves and surplus

11. Borrowings related: Borrowings have to be bifurcated into interim and short term borrowings. Long term borrowings have to be shown under non current liabilities. Short term borrowings have to be shown as current liabilities with further sub classification of secured and unsecured. Current maturing long term debts, interest accrued and due on borrowings have to be shown under current liabilities. The details such as terms of repayments, interest and any defaults as on the balance sheet date shall be given. Any related party transactions in loans and advance should be shown separately

12. Fixed assets: Fixed assets shall be shown under  non current assets and they are further bifurcated into tangible, intangible and intangible assets under developments. Further the assets under lease shall be shown separately under each head.

13. Current /non current assets

a. Investments : Investments shall be classified into current and non current investments. A separate disclosure  has to made indicating aggregate provision for diminution in value of investments separately for current and long-term investments;

b. Trade receivables: they are defined as dues arising  only from goods sold or services rendered in the normal course of business. Aggregate of trade receivables outstanding for more than 6 months from the date they became due have to be shown separately as against old disclosure of  Sundry debtors due for more than 6 months form the invoice date

c. Non current assets: Long term trade receivables are to be shown under other non current assets.

d. Short term Loans and advances: Loans and advances given to Related parties have to be disclosed under this head.

e. Secured deposits : These have to be disclosed under non current assets under the head long term loans and advances

14. Capital advances : “Capital advances” are specifically required to be presented separately under the head “Loans & advances” rather than including elsewhere.

15. Capital commitments: In the Old Schedule VI, details of only capital commitments were required to be disclosed. Under the Revised Schedule VI, other commitments also need to be disclosed.

16. Stock in Trade:  Stock-in-trade held for trading purposes has to be disclosed separately from other finished goods. Goods in transit to be shown under the relevant subhead of inventories

17. Materiality criteria for separate head: Any item of income or expense which exceeds 1% of the revenue from operations or Rs. 100,000.Previously 1% of total revenue or Rs.5,000 whichever is higher was the criteria for separate disclosure of income/expenses.

18. Revenue recognition: Dividends declared after the balance sheet date( even if they relate to period prior to the balance sheet date) need not be considered in the revised format. Revenue recognition is to be as per AS 9 .

19. Defaults in payments of loans and interest: The Revised Schedule VI requires disclosure of all defaults in repayment of loans and interest to be specified in each case. Earlier, no such disclosure was required in the Financial Statements. However, disclosures pertaining to defaults in repayment of dues to a financial institution, bank and debenture holders continue to be required in the report under Companies

What is out?

It may be noted that the Revised Schedule VI has removed a number of disclosure requirements. These are :-

i. Disclosure as required under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 is dropped. However it is desirable to show this disclosure as MSMED act mandates buyers of goods to give such information.

ii. Disclosure relating to managerial remuneration is also omitted. However the exercise for ascertaining the managerial remuneration will continue.

iii. Disclosures of information relating to licensed capacity, installed capacity and actual production  as per old Schedule VI are not required now. This is a welcome omission as companies can block this information keeping their rivals in dark.

iv. Disclosure of Information on investments purchased and sold during the year is not required as per new Schedule VI.

v. Disclosure under heads Investments, sundry debtors and loans & advances pertaining to companies under the same management.

vi. Maximum amounts due on account of loans and advances from directors or officers of the company.

vii. Commission, brokerage and non-trade discounts, tax deducted at source on interest, Royalty received etc.

What is not changed?

Other than the new additional disclosures or specific omissions, rest of information as per old format will continue to be disclosed. Information such as value of imports calculated on CIF basis, earnings/expenditure in foreign currency, etc have to disclosed as per previous disclosure pattern

Conclusion: Financial year 2011-12 will be the first year for implementation of new revised Schedule VI and a lot of practical difficulties will surface only at the time of preparation of financial statements. Companies and Auditors will have to be guided by the Guidance note issued by the Institute of Charted Accountant of India for any ambiguity faced while preparing the financial statements.

Foreign Contribution Regulation Act 2010 - Critical Issues

By: CA Yogesh Agarwal

The Foreign Contribution Regulation Act 1976 is repealed with the enactment of Foreign Contribution Regulation Act 2010 (FCRA 2010). The new FCRA 2010 imposes restrictions on investment in Mutual Funds. The restriction is imposed by virtue of section 8. Section 8 of the act basically deals with the manner of utilization of foreign contribution received. (Please refer act for definition of foreign contribution). Section 8 is reproduced below as:

“(1) Every person, who is registered and granted a certificate or given prior permission under this Act and receives any foreign contribution,—

(a) shall utilize such contribution for the purposes for which the contribution has been received:

Provided that any foreign contribution or any income arising out of it shall not be used for speculative business:

Provided further that the Central Government shall, by rules, specify the activities or business which shall be construed as speculative business for the purpose of this section;

(b) shall not defray as far as possible such sum, not exceeding fifty per cent of such contribution, received in a financial year, to meet administrative expenses:

Provided that administrative expenses exceeding fifty per cent of such contribution may be defrayed with prior approval of the Central Government.

(2) The Central Government may prescribe the elements which shall be included in administrative expenses and the manner in which administrative expenses referred to in sub-section (1) shall be calculated.”

From the first proviso to clause (a) of sub-section (1) of section 8 it is clear that the foreign contribution shall not be utilized for speculative business. Interestingly the definition of the term Speculative Business is different from what is defined in Income Tax Act 1961 and also from the proposed Direct Tax Code.

For the purpose of this section Speculative Business is defined under rule 4 of the Foreign Contribution Regulation Rules 2011. The rule 4 is reproduced below:

“Speculative activities. - (1) The following activities shall be treated as speculative activities:-

(a) any activity or investment that has an element of risk of appreciation or depreciation of the original investment, linked to market forces, including investment in mutual funds or in shares;

(b) participation in any scheme that promises high returns like investment in chits or land or similar assets not directly linked to the declared aims and objectives of the organization or association.

(2) A debt-based secure investment shall not be treated as speculative investment.

(3) ……………

(4)…………….”

Now also there is a difference in the definition of Speculative Business as defined in I T Act and FCRA 2010 and DTC 2010.

Section 43(5) of the I T Act covers the definition of the Speculative Business as reproduced below:

“speculative transaction” means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrip:

Provided that for the purposes of this clause—

(a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or

(b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or

(c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member;

[(d) an eligible transaction in respect of trading in derivatives referred to in clause 19 [(ac)] of section 2 20 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange;]

shall not be deemed to be a speculative transaction.

[Explanation.—For the purposes of this clause, the expressions—

(i) “eligible transaction” means any transaction,—

(A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and

(B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act;

(ii) “recognised stock exchange” means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified 23 by the Central Government for this purpose;]

Nowhere restriction is imposed on investment in Mutual Funds and shares. That means Clear distinction from the definition given in FCRA 2010.

Section 314 the Direct Tax Code 2010 is in line with the definition of section 43(5) of I T Act. I am not reproducing the content of the section.

If we talk specifically about a charitable society or trust this provision is in contradiction with section 11(5) of Income Tax Act 1961. This very section of Income Tax Act allows Society or Trust to invest in Mutual Fund but now this will jeopardize the activity of the society with the enactment of FCRA 2010 as it does not allow to do so. The investment in mutual fund is very much famous amongst the societies as the same is treated safe (up to great extent), beneficial under taxation law, good return.

There are some other provisions also enacted which may be considered for rethinking by the legislature. Such as

a) Rule 3(iii) provides that “an organization can be declared of political nature if it has objectives of political nature or comments upon or participates in political activity.”

My observation is restriction on speech interferes with the fundamental right of Indians given under the constitution.

b) Rule 6 provides that foreign contribution, received from relatives, in excess of 1,00,000/- in one financial year should be intimated to the Central Government in Form FC-1 within 30days of such receipt.

My observation is it would hamper the speediness of the work of the organizations as it is not feasible every time to intimate. Also it is in contravention of the section 4(e) of FCRA 2010 wherein FC received from relative is exempt in totality.

And many more observations are there which require amendment.

I think ministry of Home Affairs should think once again to bring the amendment in this inclusion. Last but not least it is also doubtful that if the investment is made in debt based mutual fund then it will be in contravention with the provisions of section 8 of FCRA 2010 ? Because as per rule 4(2) exclusion is given based on “Investment in debt based secured fund”.

Hope you will appreciate and suggest some more clarity on the issue.