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    What is Credit Rating?

     

    Credit Rating is an opinion of the credit rating agency on the relative ability of person upon fulfilling the financial commitments or debt service obligations when they arise on the basis of the available information at the particular point of time. Credit rating establishes a link between the return & risk.

     

    Credit rating is usually expressed by alphabetical or symbols which are simple and easily understandable. Normally, the credit rating agencies publish the explanations for the symbols mentioned as well as rationale for the ratings assigned.

     

    Why Credit Rating?

     

    With the increasing market changes in the Indian Economy, investors value systematic assessment of two types of risk namely “Business Risk”&“Payment Risk” arising out of linkages between money, capital, and foreign exchange markets.

     

    With a view to protect small investors, who are the main targets for the unlisted corporate debt in the form of fixed deposits credit ratings are made mandatory.

     

    India was perhaps the first amongst developing countries to setup a credit rating agency in 1988. The function of credit rating was institutionalised when RBI made it mandatory for the issue of Commercial Paper (CP) and subsequently by SEBI, when it made credit rating compulsory for certain categories of debentures and debt instruments.

     

    Objective of Credit Rating:

     

    By definition, the main objective of credit rating is an opinion on issuer’s capacity in servicing the debt.

     

    So, therefore, the credit rating agencies conventionally does not rate equity as the servicing period is not known.

     

    Credit Rating Agencies:

     

    Credit rating Agencies are the companies that assign credit ratings on the ability of the debtor on fulfilling the financial commitments. An agency may rate the instruments, debt repaying obligations for short term & long term of the individuals/ company/ firm, etc.

     

    The Credit Rating Agency in India must be a company and is regulated by SEBI and registration with SEBI is mandatory for rating the business.

     

     

     

     

     

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    Types of Credit Rating Agencies in India:

     

    There are four standardised credit rating agencies in India:

     

    1. CRISIL (Credit Rating Information Services of India Limited)

     

    1. ICRA (Formerly called Investment Information Credit Rating Agency of India Limited)
    2. CARE
    3. ONICRA Credit Rating Agency Pvt. Ltd

     

    Process of Credit Rating by the Credit Rating Agencies:

     

    1. Pre-Analysis and document collection

     

    1. Finalization of assignment and detailed questionnaire is prepared
    2. Customer and referral feedback is collected
    3. In-depth analysis of the business unit
    4. Site visit scheduled and data collected
    5. Draft Report and rating proposal
    6. Report evaluation by rating committee
    7. Final evaluation is made and rating is given to the business unit

     

     

    How the ratings are given?

     

    ITEM

    RATIO-RANGE

    PARAMETERS

     

     

     

    Current Ratio

    Over 1.50

    20

     

    1.33 to 1.50

    16

     

    1.20 to 1.33

    12

     

    1.10 to 1.20

    8

     

    1.00 to 1.20

    4

     

    Below 1.00

    0

     

     

     

    TOL/TNW

    Above 4.5

    40

     

    4.25 to 4.50

    8

     

    4.00 to 4.25

    12

     

    3.50 to 4.00

    16

     

    1 to 3.50

    20

     

    Below 3.00

    0

     

     

     

     

     

     

     

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    Credit Ratings

     

     

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    PBIT/Interest

     

    Over 3.00

     

     

     

     

     

     

     

     

    2.50 to 3.00

     

    10

     

     

     

     

     

    2.00 to 2.50

     

    8

     

     

     

     

     

     

    1.75 to 2.00

     

    6

     

     

     

     

     

     

    1.50 to 1.75

     

    4

     

     

     

     

     

     

    Below 1.50

     

    20

     

     

     

     

     

     

     

     

     

     

     

     

    PAT/ Net sales

     

    Above 15%

     

    10

     

     

     

     

     

    13-15%

     

    8

     

     

     

     

     

     

    11-12%

     

    6

     

     

     

     

     

     

    9-10%

     

     

    4

     

     

     

     

     

     

    7-8%

     

     

    2

     

     

     

     

     

     

    Less than 6%

     

    0

     

     

     

     

     

     

     

     

     

     

     

     

     

    ROCE

     

    20%

     

     

    10

     

     

     

     

     

    Below 10%

     

    0

     

     

     

     

     

     

     

     

     

     

     

     

    Current Asset Holding

    120 days

     

    15

     

     

     

     

     

    Above 185 days

    0

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    S.NO.

     

    RATING

     

    SYMBOL

     

    COMPANY SCORE

     

     

     

     

     

     

     

     

     

     

    1

     

     

    Highest Safety

     

    A+

     

    Above 90

     

     

     

     

     

     

     

     

     

     

    2

     

     

    High Safety

     

    A

     

    Between 80 & 90

     

     

     

     

     

     

     

     

     

     

    3

     

     

    Fairly High Safety

     

    A-

     

    Between 70 & 80

     

     

     

     

     

     

     

     

     

     

    4

     

     

    Moderate Safety

     

    B

     

    Between 60 & 70

     

     

     

     

     

     

     

     

     

     

    5

     

     

    Low Safety

     

    C

     

    Between 50 & 60

     

     

     

     

     

     

     

     

     

     

    6

     

     

    Very Poor

     

    D

     

    Below 50

     

     

     

     

     

     

     

     

     

     

     

     

     

     

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    Credit Ratings

     

     

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    Credit Rating Agencies globally:

     

    The “Big Three” credit rating agencies controlling around 95% of the rating business are as follows;

     

    • Moody’s Investor Service

     

    • Standard & Poor (S&P)
    • Fitch Ratings

     

    Credit Ratings:

     

     

    MOODY’S

    S&P

    FITCH

     

    MEANING

     

    Aaa

    AAA

    AAA

     

    High Quality, Extremely strong capacity to meet its financial

     

     

    commitments.

     

     

     

     

     

     

    Aa1

    AA+

    AA+

     

    High  Quality,  Very  Strong  Capacity  to  meet  financial

     

    Aa2

    AA

    AA

     

    obligations with very low credit risk, but susceptibility to long-

     

    Aa3

    AA-

    AA-

     

    term risks appears somewhat greater.

     

    A1

    A+

    A+

     

    High Quality, Strong Capacity to meet financial obligations but

     

    A2

    A

    A

     

    is somewhat susceptible to the adverse effects/ economic

     

    A3

    A-

    A-

     

    conditions are likely to weaken the obligor's capacity.

     

    Baa1

    BBB+

    BBB+

     

    Medium grade, Adequate capacity to meet the financial

     

     

    obligations

     

     

     

     

     

     

    Baa2

    BBB

    BBB

     

    Adverse conditions on changing the circumstances.

     

    Baa3

    BBB-

    BBB-

     

    Likely to lead weekend the obligor’s capacity on adverse

     

     

    conditions.

     

     

     

     

     

     

    Ba1

    BB+

    BB+

     

    Lower medium grade, Less vulnerable but faces major

     

    Ba2

    BB

    BB

     

    ongoing  uncertainties  exposure  which  would  lead  to

     

    Ba3

    BB-

    BB-

     

    inadequate capacity to meet financial commitments.

     

    B1

    B+

    B+

     

    Lower medium grade, More vulnerable but faces major

     

    B2

    B

    B

     

    ongoing uncertainties exposure will likely weaken to meet

     

    B3

    B-

    B-

     

    financial commitments.

     

    Caa

    CCC

    CCC

     

    Poor  Quality,  Currently  vulnerable  depending  on  the

     

     

    favorable conditions

     

     

     

     

     

     

    Ca

    CC

    CC

     

    Poor Quality, Currently highly vulnerable

     

     

    C

    C

     

    Currently highly vulnerable for non-payment

     

    C

    D

    D

     

    Failed to pay or more of its financial obligations

     

     

     

     

     

     

     

    Types of Credit Rating:

     

    • Corporate Ratings

     

    • Sovereign Ratings
    • Instrument Ratings

     

    Corporate Credit Ratings:The opinion of an independent agency regarding the likelihood that a corporation will fully meet its financial obligations as they come due is known as corporate credit rating.

     

     

     

     

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    Credit Ratings

     

     

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    Sovereign Credit Rating:The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors looking to invest abroad.

     

    Instrument Credit Rating: The Credit Rating done on the credit worthiness of corporate or government bonds are called instrument credit rating.

     

    Users of The Credit Rating:

     

    • Investors

     

    • Borrowers
    • Lenders

     

    Benefits of Credit Rating:

     

    To Company:

     

    1. Motivation for Growth in their own efforts

     

    1. Lower Cost of Borrowings from Banks & Financial Institutions
    2. A company with the higher credit rating can attract the investors of different strata of the society and the degree of the timely payment of principal and interest.

     

    1. Reduction in costof public issue and debt t.

     

    To Investors:

     

    1. Assurance of Safety

     

    1. Helps in Investment decisions
    2. Regular review of the ratings of a particular instrument
    3. Easy understandability of the investment proposal

     

    Demerits of Credit Rating:

     

    1. Possibility of Biased Rating and Misrepresentations by the rating committee

     

    1. Highly rated instruments may not disclose the material facts
    2. Ratings are given depending on the given past and present known facts of the company but it is difficult to predict the future in case of changes in the environment in the business by way of political, government, legal, social, technology, etc.

     

    1. Problems for new companies as there is no existing data available for rating the company.

    Downgrading of credit ratings of a particular instrument in case the expectations set is not reached by the company.

    Tags:

    • Maintenance of cost accounting records and cost audit as per sec-148 of the Companies Act, 2013 governed by the Companies (Cost Records and Audit) Rules, 2014 along with Amendment Rules, 2014

     

    • The Rules classified the Sectors / Industries into Regulated and Non Regulated

     

     

    Sectors / Industries

     

     

     

     

     

     

     

     

    Non

    Regulated

    Regulated

     

     

     

     

    • Applicability of maintenance of Cost Records:

     

    1. Cost Records means ‘books of account relating to utilization of materials, labour and other items of cost as applicable to the production of goods or provision of services as provided in section 148 of the Act and these Rules’.
    2. There cannot be any exhaustive list of cost records.
    3. Any transaction that has a effect on the cost of product / service shall forms part of the cost accounting records

     

    1. Cost records shall be maintained in such a manner to make it possible to calculate cost of production / operations per unit, cost of sales per unit and margin for each of its product.

     

    1. Every Company, including foreign company, whose turnover from all of its products and services having 35 crores or more during the previous financial year engaged in the production of goods or rendering the services shall maintain cost records

     

    vException: The following companies are exempted from maintaining cost records:

     

    üForeignCompanies having only one liaison office in India and engaged in the production, import

    and supply or trading of medical are exempted

    üCompanies classified as micro enterprise or medium enterprise as per Micro, Small and Medium Development Act, 2006 are exempted

     

     

     

     

     

     

     

     

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    vMeaning of Liaison

     

    üForeign companies can also start their Indian operations by setting up a liaison (representative) office in India. The role of liaison office is limited to collecting information about possible market opportunities in India and providing information about the parent company and its products to the prospective Indian customers. It acts as a communication channel between the parent company and Indian companies. Such Liaison office can be opened only with the prior approval of RBI.

     

    vDefinition of Turnover

     

    üForthepurposes of these Rules, “Turnover” means gross turnover made by the company from the sale or supply of all products or services during the financial year. It includes any turnover from job work or loan license operations but exclude duties and taxes. Export benefit received should be treated as a part of sales.

     

    • Applicability of Cost Audit

     

    1. Every Company specified under Regulated Sector / Industry whose overall annual turnover during the immediately previous financial year exceeds 50 crores and turnover of each individual product /service exceeds 25 crores

     

    1. Every company specified under Non Regulated Sector / Industry whose overall annual turnover during the immediately previous financial year exceeds 100 crores and turnover of each individual product /service exceeds 35 crores

     

    vException

     

    Cost Audit shall not be applicable in following cases

     

    üIncasethe company earns revenue from exports in foreign currency exceeds 75% of its total revenue; or

     

    üThecompany is operating from Special Economic Zone(SEZ)

     

    • Maintenance of Cost Records

     

    1. Cost Records to be maintained in Form CRA-1

     

    1. There is no prescribed format but provides the principles to be followed at the time of considering different cost elements.

     

    1. Maintenance of cost records are left open for the sectors / Industries, but they shall be in a manner to ascertain true and fair view of cost of production, cost of sales and margin of products / services

     

    1. In case of Multi Product Company, where all the products not covered under the rules, and even if the Turnover of the individual product/s that are covered under the Rules is less than threshold limit, but if the overall turnover of all the products exceeds the threshold limits, then maintenance of records shall be mandatory.

     

    1. Once the maintenance of Cost records becomes applicable, it shall be maintained on continuous basis in the subsequent years also

     

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    Maintenance of Cost Records

     

     

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    • Appointment of Cost Auditor

     

    1. Every Company to which cost audit applicable shall appoint the Cost Auditor within 180 days from the date of commencement of every financial year

     

    1. Company shall file a Notice of appointment of Cost Auditor

    üwithin30 days from the date of board meeting in which the Cost Auditor appointed; or üwithin180 days from the commencement of financial year; whichever is earlier

     

    1. Notice shall be filed in an electronic mode in Form CRA-2
    2. Appointed Cost Auditor shall continue till

    ütheexpiry of 180 days from the closure of financial year; or ühesubmits the cost audit report; whichever is earlier

     

    • Cost Audit Report

     

    1. Cost Audit Report shall be submitted by the Cost Auditor along with his/ her observations, recommendations, qualifications, if any, in Form CRA-3
    2. Submission of Report shall be done to the Board of Directors within 180 days from the closure of financial year to which the report relates

     

    Cost Audit Report shall be furnished to the Central Government within 30 days from the date of receipt of such report from the Cost Auditor, along with the explanation on every reservation / qualification reported by the Cost Auditor in Form CRA-4

    Tags:

    Introduction:

     

    CENVAT Credit Rules 2004 (for brevity ‘CCR 2004’) have replaced the erstwhile CENVAT Credit rules 2002 and Service Tax credit rules 2002, integrating the credit of goods and services, allowing adjustment against a manufacturer’s excise duty liability or a service provider’s service tax liability.

     

    However, credit for all services used by Manufacturer or service provider is not given. There are inclusions and specific exclusions to the ‘means part’definition of input services as per CCR, 2004. Also, CCR 2004 prescribes certain conditions for availing the credit on eligible input services. Let us have a brief look into the kind of services that are eligible for credit under CCR, 2004 and the procedure for availing the same.

     

    Constitution of ‘Input Service’ Definition:

     

    Rule 2(l) defines Input services. As said earlier, the definition has been broadly divided in to the following categories.

     

    • ‘Means’ part,

     

    • ‘Inclusion’ part,
    • ‘Exclusion’ part.

     

    In order to be eligible for credit as input service, the service should fall either under means part or inclusion part of the definition and the same should not be specifically excluded by the exclusion part.

     

    Let us look into each part and understand what is intended to be conveyed through them.

     

    Part 1: Input service means:

     

    1. Any service used by the service provider for providing an output service;

     

    1. Any service used by a manufacturer, whether directly or indirectly, ‘in or in relation to’ the manufacture of final products and clearance of final products upto place of removal.

     

    In other words, services, having direct or indirect nexus with the provision of output service or manufacture/clearance of excisable goods, are eligible as input service (subject to specific exclusions given in the definition).

     

    Part 2: Input service includes:

     

    • Services used in relation to modernisation, renovation or repairs of a factory, premises of service provider or an office relating to such factory or premises;
    • Advertisement or sales promotion, market research; storage upto place of removal, procurement of inputs;

     

     

     

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    • Accounting, auditing, financing;

     

    • Recruitment and quality control, coaching and training,computer networking;
    • Credit rating, share registry, business exhibition;
    • Security, legal services;
    • Inward transportation of inputs or capital goods and outward transportation upto place of removal.

     

    As one can observe, this part list outs two types of services. They are as follows:

     

    ØServices having direct nexus with the output service/goods. They are even covered under the ‘means part’ of the definition; But the same are specifically included under the ‘Inclusion part’ in order clarify the legislative intent and to put an end to certain vexatious litigation that took place over a period of time. Examples for such services are as follows;

     

    Ex- Services of Sales promotion, market research, storage upto place of removal,Inward transportation of inputs or capital goods and outward transportation upto place of removal.

     

    ØServices which do not have direct nexus, but are indirectly related/required for undertaking the business of providing output services or manufacture of excisable goods. Examples for such services are as follows;

     

    Ex-Accounting, auditing, financing,security etc.

     

    These are also specifically included, so as to make it clear that services which are used/required for the business, though not having direct/immediate nexus with provision of output service or manufacture/clearance of output good, are eligible as input services.

     

    Thus, one has to understand that these inclusions are not to be treated as exhaustive list, but as illustrative so as to explain the scope of the definition.

     

    Part 3: Input service excludes:

     

    1. Construction related services

     

    Works contract service and construction services including builder related services listed under clause (b) of section 66E of the Finance Act(hereinafter referred as ‘specified services’) used in construction of a building, civil structure or laying of foundation or making structures for support of capital goods are ineligible for CENVAT Credit as they are specifically excluded under the ‘Exclusion Part’ of the definition.

     

    However, the only exception is when the above specified services are used for the provision of one or more of similar specified services.

     

    By this, it can be said/understood that Credit of services (construction/works contract) relating to setting up of a manufacturing unit or office of service provider are not allowed;

     

     

     

     

     

     

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    CENVAT Credit of Input Services – A Detailed Study:

     

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    However, the said specified services are eligible for credit when they are used to provide similar services. Say for example, Mr.X has entered into a Contract with Mr. Y to construct an office building to him. In order to execute this contract, Mr. X has sub-contracted a portion of work to Mr. Z. As Mr. Z is providing works contract services to Mr. X, he will charge service tax. Mr. X is allowed to take Credit of this service tax as Mr. X is also engaged in providing similar service (construction / works contract) as that provided by Mr. Z.

     

    1. Motor vehicle related services:

     

    1. Services related to renting of a motor vehicle if they are related to a motor vehicle which is not a capital good (as per CCR 2004);
    2. Service of general insurance, servicing, repair and maintenance of a motor vehicle which is not a capital good (as per definition given in CCR 2004) except when used by:

     

    1. A manufacturer of motor vehicle in respect of a motor vehicle manufactured by such person,
    2. An insurance company in respect of a motor vehicle insured or reinsured by such person.

     

    In terms of the definition given for ‘Capital goods’, credit of excise duty paid on motor vehicles is allowed only for those service providers engaged in renting of motor vehicles, courier agency services and for transport of inputs and capital goods for any service provision. Thus, only for these service providers, the service tax paid on insurance, repair services, renting etc. in respect of motor vehicle are eligible for CENVAT credit. In all other cases, service providers are ineligible for CENVAT Credit.

     

    The above discussed analogy can be better understood by an example. A Chartered Accountant is engaged in providing services of a Chartered Accountant. He purchases a motor vehicle for use in his profession. As the motor vehicle purchased is neither used for renting, business of courier agency or transport of inputs, capital goods, credit of the excise duty paid on motor vehicle at the time of its purchase cannot be taken. Similarly, service tax paid any services procured by such Chartered Accountant in respect of such motor vehicle namely repairing, servicing, insurance shall not be allowed as Credit.

     

    However credit is allowed for service tax paid on re-insurance, repair services only to a manufacturer of motor vehicles or an insurance company engaged in the business of insurance and reinsurance of such motor vehicle.

     

    1. Services for personal use or consumption of employees:

     

    Services such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee.

     

    The above mentioned list of services is just an illustrative and is not exhaustive. Thus service tax paid on any service procured by manufacturer or service provider for personal consumption of employees is ineligible for Credit

     

    However, this exclusion is only when such services are used primarily for personal use or consumption of any employee. Thus, service to employees for business purpose is allowed as input service.

     

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    CENVAT Credit of Input Services – A Detailed Study:

     

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    Ex: Telephone service for business purpose,

     

    Outdoor catering service for a promotional event of a company where apart from business delegates, employees also participate in the event.

     

    Procedure and conditions for availing CENVAT Credit on input services:

     

    1. Eligibility:

     

    Service used should be input service as per CCR 2004 by falling under the definition, and is consumed for providing taxable service or manufacture/clearance of excisable goods.

     

    1. Earliest point of time at which credit can be taken: Credit on input services can be availed at any time after the receipt of invoice from vendor.

     

    Even if the service is not yet received, you will be entitled to take credit upon receipt of invoice. However, the service should eventually be received and used for providing output service/manufacture of excisable goods. Thus credit is available even for advance payments alsofor which invoice is received, except in case where the services are not received at a later point of time.

     

    In case of services covered under reverse charge mechanism, where service receiver is required to pay service tax, credit cannot be availed upon receipt of invoice. Credit can be taken at any time after payment of the applicable service tax under reverse charge mechanism

     

    However, the credit availed in the above manner shall be required to be reversed in the following scenario:

     

    1. Credit availment should be within one year from invoice date. Thefact of availment should be established through ER1/ST-3 returns.

    In case of services not covered under reverse mechanism, the payment should within 3 months from invoice date. If not done, credit should be reversed. However, when payment made to vendor is made subsequently, credit can be availed again in the month of such payment.

    Tags:
    Remission Or Cessation Of Future Liability - Tax Impact

    Income Tax Act, 1961("Act") provides for deduction of allowance or expenditure while computing business income chargeable to tax . However if after claiming the amount as expenditure earlier, any benefit is derived in subsequent year, such amount will be brought to tax by virtue of provisions of section 41 of the Act.

    The benefit obtained may be in the form of cash or any other manner. In order to attract the provisions of section 41(1) the benefit is with reference to loss or expenditure or some benefit in respect of trading liability by way of remission or cessation thereof.

    1

    In case of succession of business the taxability, of any benefit with reference to loss or expenditure or cessation or remission of trading liability, is on the successor.

    The Loss or expenditure or remission or cessation of trading liability may be by way of writing off such liability unilaterally by the assessee or successor in business. [Explanation 1 to Section 41(1)].

    The remission or cessation is of trading liability in order to attract the provisions of section 41(1) -Nectar Beverages (P.) Ltd. v. Dy. CIT [2004] 139 Taxman 70/267 ITR 385 (Bom.).

    Creation of Provision and it's impact:‑

    Issue1:- If assessee creates a provision towards the liability to be incurred in future and such liability ceases to exist in the next year, will it attract the provisions of section 41(1)?

    Issue2:- Whether cessation of future liability will attract the provisions of section 41(1)?

    These issues came up before Bombay High Court in CIT Vs Jet Airways (India)Ltd(High Court Bombay- 66 taxmann.com 166)

    Issue1:‑

    Brief Facts of the case:- Assessee had made a provision of Rs. 3.28 Crores up to 31st March, 2005 in respect of expenses likely to be incurred on redelivery of the four air craft's taken on lease.

    During the relevant assessment year, the lease period in respect of the four aircrafts was to expire. However, the lease of the four air crafts was extended/renewed for a further period. As a result, the Respondent was not required to redeliver the four aircrafts to the lessor during the subject assessment year.

    1[Explanation 2].—For the purposes of this sub-section, “successor in business” means,—

    • where there has been an amalgamation of a company with another company, the amalgamated company;
    • where the first-mentioned person is succeeded by any other person in that business or profession, the other person;
    • where a firm carrying on a business or profession is succeeded by another firm, the other firm;
    • where there has been a demerger, the resulting company

     

    On the basis of the above, the Assessing Officer invoked Section 41(1) of the Act and held that there was cessation of liability and sought to bring the entire amount which was provided for on the above account of Rs. 3.28 Crores to tax.

    Assessee has filed appeal before CIT(Appeals) against the order of the assessing officer. The CIT(Appeals) held that there was no cessation of liability as the lease has been extended for a further period. Thus, expenses which are likely to be incurred at the time of redelivery of the four air crafts continue and the provision made continue. Thus, there was no occasion to invoke Section 41(1) of the Act and the addition was deleted.

    Department has filed an appeal against the order of CIT(Appeals) to the Tribunal. Tribunal upheld the findings of the CIT(Appeals). Further, the department has filed an appeal against the order of Tribunal to the High Court.

    The Bombay High Court held that the lease for the air crafts has been extended for further period and liability of expenses at the time of redelivery of the aircrafts has not ceased. Thus, the same would have to be provided for, as it is likely to be incurred when the lease expires and said four air crafts are redelivered.

    "Section 41(1) of the Act has application only when there is cessation and/or remission of liability incurred (which has been duly paid and/or pro vided for) in the subsequent years, consequent of which some benefit in cash or in any other manner were obtained by the party whose liability has ceased. In this case, in fact, there is no cessation or remission of liability nor any benefit obtained by the Respondent-Assessee for the purposes of Section 41(1) of the Act to be invocable.”

    Issue2:‑

    Brief Facts of the case:‑

    Assessee purchased five aircrafts under hire purchase agreement and claimed depreciation on them. Later Assessee sold five aircrafts which had been taken on hire purchase basis and in view of the fact that the air crafts have been sold the balance amount of instalments payable in future would not now be payable.

    The Assessing Officer held that non-payment of balance instalments resulted in benefit referred to in section 41(1) and hence taxable. Thus, made an addition of the benefit of Rs. 100.52 Crores a result of the difference between sale consideration received and instalment payable which is now not payable. This benefit of Rs. 100.52 Crores being chargeable to tax under Section 41(1) of the Act.

    Assessee filed an appeal before CIT (Appeals) challenging the order of the assessing officer. CIT (Appeals) held that "Assessee was the owner of the said aircrafts as held in the earlier assessment years and the claim of depreciation on this aircraft has also been allowed. However, on the sale of the five aircrafts, their value was also reduced from the block of assets. Thus, there was no question of any cessation or remission of liability for the purpose of Section 41(1) of the Act to apply".

    Department filed an appeal against the order of CIT (Appeals) before Tribunal. Tribunal upheld the order of CIT (Appeals).

     

    On further appeal to High Court the court held that the amount of Rs. 361.72 Crores being instalment payable in the future was never claimed as a deduction/expenditure/loss or trading liability by the Respondent-Assessee.

     

    Thus, no occasion arises for the purposes of Section 41(1) of the Act being invoked. Accordingly, the findings of the CIT(Appeals) and Tribunal that Section 41(1) of the Act is not applicable in the facts of the present case is self-evident. Therefore, the proposed of question of law as formulated does not give rise to any substantial question of law and not entertained.

    Conclusion:‑

     

    Cessation of future liability is not a benefit within the meaning of provisions of section 41(1) as no deduction or allowance was claimed. Though the expenditure under section 41(1) covers capital

    2

    expenditure also mere cessation of future liability towards it will not warrant applicability of provisions of section 41(1).

     

    This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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    Frequently Asked Questions- Payment Of Bonus Act,1936

    1. To which companies / establishments, the payment of bonus act shall be applicable?

    The Act is applicable to Factories employing 10 or more persons and other establishments employing 20 more persons on any day during the financial year.

    When once applicable, the Act will continue to be applicable even when the numbers of persons employed have reduced in the subsequent financial year.

    1. Is Payment of Bonus Act is applicable to newly established factories and establishments?

    Yes. The Act is applicable to newly established factories and establishments from the date of profits being derived as stipulated under the Act irrespective of completing 5 years or not.

    For Clarity, the financial year in which the first invoice is raised is taken as the year of commencement of business. After the said year, during the first five years, bonus will become payable only for the financial years in which the new factory or establishment derives profit. If the company has not derived profit during the first 5 years of its existence after completion of the financial year in which first invoice has been raised, the company is not required to pay bonus under the Act.

    1. One company may have different units established at different times. Some unit may be profitable and some other units may be incurring losses. Whether all the units are entitled for bonus or not?

    As long as separate accounts and individual balance sheets are maintained for distinct units, bonus is payable in accordance with profit derived by the respective units.

    In the matter of workmen of Modern Mills Vs General Manager [1986 (2) LLJ 329] it has been held that where a separate profit and loss account and balance sheet has been maintained by the employer as regards any unit or branch thereof, employees of that unit would be entitled to bonus on the basis of the financial statements of that unit but the requirement being that he has done so in the previous year also.

    The Supreme Court in the matter of workmen of HMT Vs National Tribunal [AIR 1973 SC 2300] held that in case where the different units have been treated separately for the purpose of computation of bonus and separate balance sheet, profit and loss accounts have been prepared in respect thereof the unit would not lose their separate identity as establishment.

    1. Is employer liable to pay bonus even when the company has not made any profits?

    After completion of first 5 years from the financial year in which first invoice is raised, the company is liable to make payment of bonus to its eligible employees at a rate of 8.33 percent of the wages or salary earned during the financial year subject to other conditions stipulated in this regard even though the company does not have allocable surplus in the accounting year.

     

    This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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