Chartered Accountants’ Communiqué

A NEWSLETTER BY PRADIP KAPASI & CO.

TRUST SINCERITY
FEBRUARY, 2011 Vol. No. 99
EFFICIENCY

ACCURACY HONESTY
EDITORS’ DESK
CONTENTS Dear Readers,
A great beginning of a new year? Politics over onions; scams in succession; unprecedented
Corridors of the Court inflation; hot money plunder and to top it all incompetent and selfish leaders tainting the whole
nation with their perversity, failing to lead and as usual trying to mislead the country. A truly
bizarre first month of the Year. Monetary and fiscal policies have been accommodative and the
Query Counter real interest rates have remained low, but, despite some attempts at fiscal consolidation, the fiscal
deficit is alarmingly high. There are other near-time challenges; the all time high inflation being
North Block the most significant one.
The IMF continues to expect India's growth prospects to remain strong over the medium term.
Rapid growth is expected to be supported by high investment and productivity gains. Sustaining
Investments rapid growth over the medium term will depend, among others, on efforts to facilitate
infrastructure investment such as deepening the corporate bond market and lowering the cost of
Tax Beyond Borders doing business. Few will disagree with the IMF's view that improving social outcomes and
strengthening infrastructure are the two key pillars of a strategy to achieve rapid and inclusive
growth in India.
Money Matters The other positive for the first month of the year is that foreign direct investment commitments
totaling $450 billion, equaling nearly one-third of India’s GDP are signed alone in Gujarat. It is the
Around the World time to celebrate something that is fast becoming undeniable: the emergence of Gujarat as the
economic powerhouse of India. The reason Gujarat has registered the highest, double-digit GDP
growth in the past decade owes much to the targeted, business-friendly approach of its
Funny Bone government. Four features stand out; the first is quick decision-making what is dubbed as the “red
carpet, not red tape” approach, the second is the near-absence of political corruption at the top; the
Dates to remember third is social peace and finally, the “minimum government and maximum governance”. The state
government has concentrated on creating the infrastructure for growth and left it to the private
sector to get on with the job of actual wealth creation.
CAC Exclusive Focus on these and India will be ‘Mahan’.

Editorial Board: Nina Kapasi Sonam Sangoi Naju Shah

DISCLAIMER
Every effort has been made to ensure accuracy in the information. The publishers do not hold themselves
responsible for errors that may have arisen. Please take professional advice for further clarification.

STRICTLY FOR PRIVATE CIRCULATION

BY INVITATION
Corridors of the Court
AMOUNT WITHDRAWN FROM REVALUATION RESERVE & CREDITED TO P&L ACCOUNT
CANNOT BE REDUCED FROM BOOK PROFIT EVEN IF IN THE YEAR OF CREATION OF
RESERVE, THE P&L ACCOUNT WAS NOT DEBITED

In AY 2000-01, the assessee revalued its fixed assets by Rs. 288.58 crores and credited the said sum to the
revaluation reserve. In AY 2001-02, the assessee debited Rs.127.57 crores towards depreciation and in
accordance with Accounting Standard AS-10 & AS-6 transferred Rs. 26.11 crores from revaluation reserve &
set it off against the depreciation resulting in a net depreciation charge of Rs.101.45 crores. In computing the
book profits u/s 115JB, the assessee claimed that the amount of Rs. 26.11 crores transferred from the reserves
had to be excluded and the depreciation charge had to be considered at Rs. 127.57 crores. The AO, CIT (A),
Tribunal & High Court rejected the claim of the assessee. On appeal to the Supreme Court it was held
dismissing the appeal that the assessee’s argument that as the creation of the revaluation reserve was not
debited to the P&L A/c, the withdrawal from the reserve should be excluded from the P&L A/c in terms of clause
(i) of the Explanation to s. 115JB(2) read with the Proviso is not acceptable because had the assessee
deducted the full depreciation from the profit before depreciation in AY 2001-02 it would have shown a loss and
could not have paid the dividends. Therefore, the assessee credited the amount to the extent of the additional
depreciation from the revaluation reserve to present a more healthy balance sheet to its shareholders enabling
the assessee possibly to pay out a good dividend. Further, clause (i) of the Explanation to s. 115JB(2) permits
the net profit to be reduced by the amount withdrawn from reserves only if in the year of creation of the
reserves, the book profits had been increased. As in the year of creation of the reserves (AY 2000-01), the
amount of Rs.288.58 crores or Rs.26.11 crores had not gone to increase the book profits there is no question of
reducing the amount transferred from such revaluation reserves to the P & L Account. The argument that
creation of the reserve did not impact the profits of that year is also not acceptable because though the profit
was not impacted, depreciation was impacted and by the inter play of the balance sheet items with P&L A/c the
assessee had projected a loss of Rs.7.38 crores (before transfer from reserves) as profit of Rs.18.73 crores.

Indo Rama Synthetics (I) Ltd. v. CIT, 330 ITR 363 (SC)

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MATTERS REQUIRING EXAMINATION BY TECHNICAL EXPERTS: DEPARTMENT OUGHT TO
EXAMINE TECHNICAL EXPERTS

On the question whether interconnect/access/port charges paid by Bharti Cellular to BSNL are liable for TDS
u/s.194C, the Supreme Court remanded matter back to the AO for examination by technical experts for
determination whether such processes require human intervention or the same is fully automatic. The Supreme
Court said that the Department should not proceed only by the contracts placed before the officers. The
Department should examine technical experts so that the matters could be disposed off expeditiously. Time limit
of four months were granted to the tax department for obtaining technical experts’ report.

CIT vs. Bharti Cellular Ltd, Hutchisson Essar Telecom Ltd., 330 ITR 239 (SC)

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FREIGHT AND INSURANCE TO BE EXCLUDED FROM THE TOTAL TURNOVER FOR
COMPUTING EXEMPTION U/S. 10A

In this case it was held by the Bombay High Court that freight and insurance charges do not have an element of
turnover and are to be excluded from the total turnover for the purpose of computing exemption under section
,
10A. It was also held that gain from fluctuation in foreign currency realized within the stipulated period forms a
part of the sale proceeds and is directly related with the export activities and as such gain should be considered
as income derived from export activities and is eligible for exemption under section 10A, in the year in which
export took place. The assessee is also entitled to exemption u/s. 10A with reference to addition of
disallowance of PF/ESIC payments as the plain consequence of the disallowance and add back made by the
AO is an increase in business profits of the assessee.

CIT v. Gem Plus Jewellery India Ltd 330 ITR 175 (Bom.)

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FINDING OF FACTS CANNOT BE SET ASIDE UNLESS PERVERSE

The assessee had received rental income in respect of two properties which were assessed by the CIT(A) as
business income. It was held dismissing the appeal that the assessee was the owner of one of the properties.
The prominent object of the assessee was to purchase, develop, take in exchange or on lease or otherwise
acquire lands, houses, farm houses, etc and let them out on lease, rent, contract or any other agreement or
construct, improve, sell, exchange mortgage the above mentioned assets. Even after scrutiny carried out for
A.Y. 1997-98 to 2000-01 the receipts were accepted as business income, which was indubitably a plausible
view. Since no fresh facts had been brought to light, the consistency rules had been applied. There was no
error in this conclusion. In respect of the other property, the Tribunal had made an in-depth study of the
agreements as also the use to which the entire building had been put. It noted that the business of the
assessee, apart from dealing in properties, was also running of restaurants; that the assessee’s purpose was to
commercially exploit the business asset, in respect of which it had invested a sum of Rs. 1.3 crores for
renovations; that the premises had been earlier utilized to run a store selling garments. The thinking of the
Tribunal was largely influenced by the manner in which the entire building had been utilized. There was no
reason to dislodge the concurrent findings of fact, as there was no perversity in the conclusion arrived at. The
CIT(A) as well as the Tribunal had taken note of the fact that the assessee had also been in the restaurant
business. The assessee had taken a decision to exploit its business asset by entering into an arrangement
related to the restaurant business. The fact that the minimum guarantee amount was stipulated in the
agreement to ensure the minimum returns of the investment made by the assessee could as well be a business
decision as it could be a lease agreement. These concurrent findings of fact were not perverse and to the
contrary were relevant.

CIT v. D.S. Promoters and Developers Pvt. Ltd. 330 ITR 291 (Del)

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RETRENCHMENT BENEFIT PAID TO WORKERS ON CLOSURE OF UNIT IS ALLOWABLE AS
EXPENSE

The assessee was engaged in the manufacture of pharmaceuticals and animal health products. For the
A.Y. 2000-01 the assessee made a payment to the employees which comprised of retrenchment
compensation under section 25F of the Industrial Disputes Act, 1947 and payments on account of provident
fund, gratuity and leave encashment which was disallowed by the assessing officer. The Tribunal observed
that though the assessee carried out manufacturing activity at various locations, all other support functions
such as purchase, sales, marketing distribution, finance and human resources were centralized with the
head office. The Tribunal entered a finding of fact that there was inter-dependence and a unity of control
between the three units established by the existence of common management, a common business
organization, administration and fund. The closure of one unit did not involve the closure of the business.
The retrenchment compensation paid to the workmen was therefore an allowable deduction within the
meaning of section 37(1) since there was no closure of the business. On appeal it was held that there had
been no closure of the business and the payments which were made to the workers were qualified for a
deduction u/s. 37

CIT v. Pfizer Ltd., 330 ITR 62 (Bom)

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PENALTY U/S. 271(1)(C) CANNOT BE IMPOSED IF ASSESSEE HAS EXPLAINED THE REASON FOR
DISPARITY BETWEEN RETURNED INCOME AND ASSESSED INCOME

The assessee-firm was engaged in milling of grams, pulses and rice and also carried on business of
purchase and sale of bhusi, chuni, etc. During the year under consideration, amongst others, the assessee
had shown purchases of chuni/bhusi of the value of Rs. 89,273 from five parties. On enquiry, the purchases
from three parties were found to be bogus by the assessing officer. The purchases were added in the
declared income, which had been confirmed up till the Tribunal. Penalty was imposed u/s. 271(1)(c) of the
Income Tax Act, 1961. The Tribunal deleted the penalty on the ground that the explanation given by the
assessee was bona fide and all material facts for computing the income were disclosed. The Tribunal held
that the bona fides were further established by the purchase rates in the case of the five parties in question.
It was held that the explanation given by the assessee was bona fide and the Tribunal had given reasons
for deleting the penalty.

CIT v. Ganesh Rice Mills, 330 ITR 173 (All.)


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 Query Counter
PROVISIONS RELATING TO CLUBBING OF INCOME

Question: Jai owns 4000 9% Debentures of Jai-Veeru Ltd of Rs. 100 each which fetches
annual interest is Rs.36,000. On April 1, 2009 he transfers interest income to
his friend, Veeru without transferring the ownership of these debentures. In
whose hands will the interest income be taxable.
Answer: In accordance with the provisions of s. 60, although during 2009-10 interest of Rs.
36,000 will be received by Veeru, it is taxable in the hands of Jai, as he has
transferred income without transferring the ownership of the asset.

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Question: Mrs. Tendulkar is a partner having 25% share in Knelogolf & Co. Mr. Tendulkar
is employed as an officer and paid remuneration for such work. Please let us
know tax implications of remuneration earned by Mr. Tendulkar.

Answer: Under s. 64(1)(ii), an individual is assessable in respect of remuneration of spouse if

the individual has substantial interest in a concern and the spouse of the individual is
employed in the above mentioned concern. Hence, in this case salary income of Mr.
Tendulkar shall be taxable in the hands of Mrs. Tendulkar. However, if Mr. Tendulkar
posses technical skill and knowledge for his performance, such income shall not be
clubbed but will be taxed in his hands.

Question: Mr. AB transfers a film studio to an association of persons subject to the

condition that out of the annual income (i.e. Rs. 3,00,000), a sum of Rs. 50,000
shall be utilized for the benefit of his daughter-in-law. Please discuss the tax
implications of Rs. 50,000?
Answer: As per the provisions of s. 64(1)(viii), an individual is assessable in respect of income
from assets transferred to a person for the benefit of son’s wife. Applying the provisions
in the said case, Rs. 50,000 will be included in the income of Mr. AB.

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Question: Mr. Ambani gifts yatch to Mrs. Ambani on her birthday. She rents the same
when not used by her for her holidays. Who will be liable to tax in respect of
such rental income?
Answer: In accordance with the provisions of s. 64(1)(iv) an individual is assessable in respect
of income from assets transferred to spouse. The income from such asset shall be
deemed to be the income of the taxpayer who has transferred the asset. Hence in
the above case, rental income from such yatch will be included in the income of Mr.
Ambani.

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Question: A made a gift of Rs. 50,000 to the wife of his brother B for the purchase of a
house by her and simultaneously B transferred certain debentures of the value
of Rs. 50,000 owned by him to A’s minor son. During the year ending March 31,
2010, the chargeable income from the house property was Rs. 5,000 while the
amount of interest paid on the debenture was Rs. 3,000. State in whose hands
these two items of income will be taxed.
Answer: In the given case, there is no direct transfer of asset by A to his minor son and by B to
his wife. If the transfer is considered as cross transfer, then income arising to Mrs. B
will be taxed in the hands of B and income arising to son of A will be taxable in the
hands of A or Mrs. A after excluding exempted amount of Rs. 1,500. But, if the above
transfer is not considered as cross transfer, then income arising to Mrs. B will be taxed
in the hands of Mrs. B and income arising to son of A will be taxable in the hands of A
or Mrs. A after excluding exempted amount of Rs. 1,500.

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Question: Baby Aishwarya, a minor earns performance fees for conducting Music concert
at Delhi. She is also having regular interest income from post office. Determine
in whose hands such income shall be taxable?
Answer: As Music concert fees have been received by Aishwarya by exercising her individual
skill and talent, the income will not be clubbed with her parent’s income but will be
taxed as her individual income. As regards, her interest income, the same will be
included in the income of that parent whose total income [excluding such income ] is
greater. Where the marriage of the parents does not subsist, the income of the minor
will be includible in the income of that parent who maintains the minor child in the
relevant previous year.

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 North Block
SECTION 80-IB OF THE INCOME-TAX ACT, 1961 - SCHEME FOR SLUM REDEVELOPMENT.

NOTIFICATION NO. 01/2011 [F. NO. 178/35/2008-IT (A-I)] DATED 5-1-2011

In exercise of the powers conferred by clauses (a) and (b) of sub-section (10) of section 80-IB of the Income-tax
Act, 1961 (43 of 1961), the Board hereby notifies, the Scheme for slum redevelopment prepared by the
Maharashtra Government under sub-section (2) of section 37 of the Maharashtra Regional Town Planning Act,
1966 and published vide notification No. TPS-1893/973/CR-49/93A/UD-13, dated the 26-2-2004, as a scheme
for the purposes of the said section subject to the condition that any amendment to the Scheme hereby notified
shall be required to be re-notified by the Central Board of Direct Taxes.
This notification shall be deemed to apply to projects approved by a local authority under the aforesaid scheme
on or after the 1st day of April, 2004 and before 31st day of March, 2008 thereby making the incomes arising
from such projects eligible for deduction under sub-section (10) of section 80-IB from the assessment year
2005-06 onwards.

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SCIENTIFIC RESEARCH EXPENDITURE u/s. 35(1) (ii)
NOTIFICATION NO. 04/2011 [F.NO.203/27/2010/IT (A-II)], DATED 19-1-2011
The Government of India hereby notifies International Advanced Research, Centre for Power Metallurgy and
New materials, Hyderabad for the purpose of clause (ii) of sub-section (1) of Section 35 of the Income Tax Act,
1961 from Assessment Year 2009-10 onwards in the category of ‘Other Institution’ partly engaged in Research
activities and the sums paid to the said institution shall be utilized for scientific research.

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CHANGES TO PAYPAL USER AGREEMENT FOR INDIA w.e.f. 01.03.2011.
With effect from 01st March, 2011, Paypal Account holders in India are required to comply with requirements
set out in the notification of the Reserve Bank of India governing the processing and settlement of export-related
receipts facilitated by online payment gateways. Any balance in and all future payments into your Paypal
Account may not be used to buy goods or services and must be transferred to your bank account in India within
7 days from the receipt of confirmation from the buyer in respect of the goods or services; and
Export-related payments for goods and services into your PayPal account may not exceed US$500 per
transaction.

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CENTRAL EXCISE DUTY
ENFORCEMENT OF PENAL PROVISIONS FOR NON-SUBMISSIONS OF RETUNS
DEPARTMENTAL INSTRUCTION F NO. 267/117/2010-CX8, DT. 14.01.2011

It has been brought to the notice of the Board, that many assessees are not filing the returns at all and some
others are submitting the same after long delays under the Central Excise Law which enable the department to
verify the duty payment, Cenvat credit taken and other such parameters related to assessment. It is hereby
notified that a Scrutiny of returns is necessary and it includes identifying the assessees who have not submitted
the prescribed returns on time, and taking follow-up action to ensure that these returns are filed at prescribed
periodicity. In this regards, it is also pointed out that penalty under Rule 27 of Central Excise Rules, 2002 and
Rule 15A of CENVAT Credit Rules, 2004 can be invoked against such errant assessees.

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SERVICE TAX
CLARIFICATION REGARDING SERVICE TAX EXEMPTION FOR JANATA PERSONAL
ACCIDENT POLICY (JPAP) – CIRCULAR NO. 133/2/2011-ST DT. 18.01.2011

In the context of customized group insurance policy schemes known as Janta Perasonal Accident Policy (JPAP),
floated by various insurance companies as specified by State Governments, to extend risk cover to certain
specified target populations, under varying terms of insurance. JPAP offers a vehicle to fulfil the ‘rural or social
sector’ obligation prescribed by the Insurance Regulatory Development Authority (IRDA). Since a description
of JPAP Policy is not available in the relevant notification, it is clarified that customized group JPAP insurance
schemes floated by various insurance companies as per the specifications of State Governments concerned, to
extend risk cover to target populations, and to fulfil the prescribed ‘rural or social sector’ obligation, are covered
by the subject service tax exemption.


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 Wonderland of Investments
In this section, we have discussed the basic structure of New Pension Scheme (NPS).
NEW PENSION SCHEME

The NPS was introduced by the government last year to give people a way to get a pension during their
old age. Employees of the government sector already get a pension, so this scheme was introduced as a
social security measure that enables people from the unorganized sector to draw a pension as well.
It is a system where individuals fund, during their work life, their financial security for old age when they
no longer work. All those who join up would get a Permanent Retirement Account (PRA), which can be
accessed online and through so-called points of presence (PoPs). This is the lowest cost self financing
Social Security tool. Annual record keeping as well as fund management charges are lowest than any
other investment options.
WORKING OF NPS

Each individual who joins this new pension system will be allotted a unique personal retirement account
(PRA) number. This pension system will offer two types of sub- accounts created by individual members:

1. a Tier-I non-withdrawable and tax deferred pension account

2. a Tier-II withdrawable savings account with no tax advantages (and subject to certain minimum
contributions per year into the Tier-I account)

Tier-I: Mandatory non-withdrawable Pension Account. Mandatory for the central Government
employees who have joined services on or after 1st January 2004. The Employees will Contribute 10% of
salary & DA and matching 10% will be contributed by the Government to Tier-I Pension account of the
employee. Withdrawals from the Tier-I account will be permitted only at retirement.

Tier–II : Voluntary withdrawable Savings Account. No contribution will be made by the Government
under the Tier-II account for the employees who have joined NPS.

Tax Treatment: Money withdrawn from the scheme will continue to make it liable for tax, although
contributions and returns are tax free. Known as the exempt-exempt-taxed (EET) regime, the amount
would be taxed at the time of withdrawal. NPS will not attract any Security Transaction Tax (STT) and
Dividend Distribution Tax (DDT), With this the yield can be increased to the extent STT and DDT.
In this system, a member will accrete savings towards his retirement into his PRA through his working
life. This PRA will stay with the member regardless of where he stays or works including spells of
unemployment, self-employment, changes in jobs or location.

He will be able to use a nation-wide network of competing pension service providers (POPs) to access
this system or for opening a PRA, accreting new contributions, receiving account or system information
and for obtaining retirement benefits.

A member will have complete control on how his contributions to his PRA are managed. He will be able
to select a professional Pension Fund Manager (PFM) from a pool of competing pension fund managers
registered with the PFRDA. Each PFM in this system will offer a choice of three simple and standard
pension schemes with different risk and return profiles. If a member is unable to select a PFM, his
savings will be directed to a 'Default' scheme. If he desires, the member will be able to allocate his
savings across multiple PFMs and schemes. He will also be able to seamlessly switch his savings
between fund managers and products. Each member will receive periodic, consolidated statements of his
PRA which will reflect his notional wealth in his PRA across various products and PFMs. This will be
the sum total of his contributions at that point in time and the returns that these contributions have earned.

On retirement, the member will be able to use a part of the savings accumulated over the years in his
Tier-I PRA to buy an annuity which will provide him and his spouse a pension for the rest of their lives.

WHERE CAN PEOPLE SIGN UP FOR NPS?

People can subscribe to the scheme from any of 285 PoPs across the country. These are run by 17 banks
— SBI and its associates, ICICI, Axis, Kotak Mahindra, Allahabad Bank, Citibank, IDBI, Oriental Bank
of Commerce, South Indian Bank, Union Bank of India — and four other financial entities, LIC, IL&FS,
UTI Asset Management and Reliance Capital. A subscriber can shift his pension account from one PoP to
another. Subscribers can choose from six fund managers — ICICI Prudential, IDFC, Kotak Mahindra,
Reliance Capital, SBI and UTI.

NPS is available for people aged between 18 years and 55 years. The minimum amount per contribution is Rs
500, to be paid at least four times in a year. The minimum amount to be contributed in a year is Rs 6,000.

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 Tax beyond borders
The whole of India and perhaps a part of the Switzerland is engrossed in discussing the possibility of
bringing the unaccounted money belonging to Indian citizens and stashed in the numbered accounts with
numerous Swizz Banks.

While there is no doubt that this monies are unaccounted and untaxed deposits, there is a lurking doubt
that they may also represent tainted and illicit funds obtained as a result of money laundering, smuggling,
dealing in arms and narcotics. They may also represent terrorist funding.

The issue that is been examined by one and all is about collecting the information about the account
holder and bringing the funds back to the people of India. The present debate is mainly about the information
from Swizz Banks directly or through the Government of Switzerland. Different views are expressed about
possibility gathering such information by the Government of India with different objectives in mind.

This Swedish Banking system has been traditionally shrouded in secrecy and has been riding strongly on
the guarantee of confidentiality. At the same time the Government of Switzerland has agreed with several
countries including India to part with the requested information of account holders in cases involved in evasion
of taxes by the residents of other countries. This is sought to be achieved by executing the Double Tax
Avoidance Agreement (DTAA).

Accordingly, there is no doubt that the Government of India can collect information in places of tax
evasion. This power is obtained by Article 26 of the India Switzerland DTAA which provides for Exchange of
Information. The issue that is unnecessarily being debated in India is about the right of the Government to make
such information available to the public. The ministry of finance appears to be of the view that the information
gathered cannot be made public while the Supreme Court and the other knowledgeable persons seem to be
thinking otherwise.

The real issue of the great National Importance in our opinion is about bringing back these funds to the
Country of India where it really belongs. The issue of bringing it in public domain though important is surely
secondary. All efforts must be made to bring the funds to India without getting embroiled into unnecessary
controversies. Let us not forget and overlook the important aspect of the whole episode; these funds without any
doubt represent hot money involving for sure the money laundering, smuggling, dealing in arms and narcotics.
Let there not be any doubt in the minds of the Ministry of Finance and the other superior functionaries of the
Government of India that there are no agreements or protocols with any Government executed by the
Government of India which prevent them form accessing information about hot money, bringing such money
and making such information public. The confidentiality if any may at the most be restricted to tax evasion.
There is no provision whatsoever in respect of the hot illicit money which can surely be brought in under the UN
Charter and several International conventions.
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 Money Matters
SEBI SLAPS RECORD PENALTY ON ANIL FIRMS

SEBI passed a consent order to settle a probe into alleged violation of regulations for foreign investment and
unfair trade practices by Reliance Infra and RNRL. The settlement came after paying Rs 50 crore as penalty. It
was paid by the directors without any financial burden on the companies involved. According to SEBI order, Anil
Ambani, Reliance Infra Vice Chairman Satish Seth and three board directors Lalit Jalan, SC Gupta and JP
Chalsani, are not allowed to invest in publicly-listed securities till Dec 2011. Also the R-Infra and RNRL cannot
invest in secondary market till 2012.

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RBI HIKES REPO, REVERSE REPO RATES BY 25 BPS

The Reserve Bank of India (RBI) resumed its rate hike cycle at its quarterly monetary policy review as soaring
inflation stalks Asia's third-largest economy. RBI raised repo and reverse repo rates by 25 basis points each. Repo
rate, the one at which RBI lends to banks will now be 6.50%, reverse repo, the rate banks receive for depositing
funds with the central bank will be at 5.50%. Cash reserve ratio, the proportion of deposits that banks have to
keep aside, was left untouched at 6%. RBI also raised March inflation forecast to 7% from 5.5% and warned that
higher food prices could become entrenched if steps to boost output are not taken. The central bank maintained
that India's GDP will grow at 8.5% for FY-2011. The government is being blamed by Opposition for failing to
save the majority from price increases, where wholesale price index (WPI) in December rose to 8.43% and
October gains were raised to 9.12%. Food prices are advancing at more than 15%. Subbarao raised policy rates
six times in 2010 by 25 basis points each, but that turned out to be too little. In contrast, his predecessor YV
Reddy often shocked the markets. It has been the most aggressive major central bank in Asia this year. Industrial
output fell to an 18-month low in November with production growing at a slow 2.7 percent.

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BANKS TO IMPOSE PENALTY ON PREMATURE CLOSURE OF FDS
Next time you wish to cash in your fixed deposits, be ready to pay a penalty of as much as one per cent of the
investment if money is withdrawn before completion of the maturity period. In a bid to discourage premature
withdrawal of money from fixed deposit accounts, banks have decided to impose a penalty on such transactions
to minimize any impact on their liquidity position at a time when rising interest rates are pushing up the cost of
funds for them. RBI has left it to banks to decide whether they want to impose any penalty on premature closure
of fixed deposits. As such, the customers are given a return lower than the promised interest rate in case of early
withdrawals. However, the continuous rise in interest rates over recent months have pushed the cost of funds
much higher for the banks and premature withdrawal from deposit accounts has put unnecessary pressure on the
banks' liquidity position. Interest payable on prematurely withdrawn deposits will be the contracted rate or the
rate applicable for which the deposit remained with the Bank, whichever is lower, less 1 per cent penalty.

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 Around the World
SWISS BANK ACCOUNTS ALSO A PROBLEM FOR EUROPEAN UNION
The secret bank accounts of Switzerland are a problem not only for India but are an issue of dispute for other
European countries. This was made known by the European Union Ambassador to India when the issue was
termed as “bone of contention" between the European Union and Switzerland. In an interaction with
journalists, the Ambassador said that there are elements in the banking sector where there is no convergence
between Switzerland and the EU and discussions have been made but a solution totally so far which could
eliminate the banking secrecy has not been found. Along with Switzerland, she bracketed Iceland and
Liecenstein as other dominions which have such secrecy clauses. The secrecy maintained by Switzerland and
the other two dominions is a matter of concern for India as several people are believed to have stashed
thousands of crores of rupees in bank accounts there to evade taxes. India has been trying to get to these people
but has not been successful so far. The matter has also assumed a political overtone with Opposition BJP
demanding greater efforts to retrieve the money kept in these accounts. The Supreme Court of India also
recently questioned the government over the issue.

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ASIA TO SEE SOARING PRICES IN THE FORTHCOMING YEAR
Asia's rapid economic growth will moderate slightly in 2011 even as policymakers combat rising prices with
higher interest rates and try to keep local currencies from appreciating too sharply. Most of the 13 Asia-Pacific
economies are expected to see growth cool in 2011 as economic recoveries in the United States and Europe
remain uneven and China steps up its efforts to fight inflation and asset bubbles. At the same time, higher
prices for food and fuel mean governments and central banks in the region will have to tighten monetary policy
further or take other measures even if it risks curbing growth. China's economy is expected to expand by 9.3
percent this year, throttling back from double-digit growth in 2010, but inflation is now tipped to quicken to 4.3
percent, a much faster build-up of price pressures. The prospect of further tightening is already spooking some
foreign investors who flocked to the region last year, drawn by its robust growth and higher returns. China will
likely record its slowest annual growth of the year in the first quarter of 2011, but it will still be a hearty 8.7
percent, giving the government more confidence to tighten policy further to rein in racing inflation. The world's
second-largest economy is expected to have grown around 10 percent in 2010.

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NEW GLOBAL RULES AIM TO STRENGTHEN BANKS

Global financial regulators agreed on new rules designed to strengthen bank finances and rein in excessive risk-
taking to help prevent another crisis. Banks will be forced to hold more and safer kinds of capital to offset the
risks they take lending money and trading securities, which should make them more resistant to financial
shocks such as those of the last several years. The chairman of the committee of central bankers and bank
supervisors that worked on the new rules, called the agreement ‘a fundamental strengthening of global capital
standards.’ U.S. Federal Reserve chairman called the new standards a significant step forward in reducing the
incidence and severity of future financial crises. Some banks have protested however that the new rules may
hurt their profitability and cause them to reduce the lending that fuels economic growth, possibly dampening a
global economic recovery. Representatives of major central banks agreed to the deal at a meeting in Basel,

2
Switzerland. The deal still has to be presented to leaders of the G-20 forum of rich and developing countries at a
meeting to be held in the upcoming year and ratified by national governments before it comes into force. The
agreement, known as Basel III, is seen as a cornerstone of the global financial reforms proposed by
governments following the credit crunch and subsequent economic downturn caused by risky banking
practices.

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KRAFT FOODS TAKES OVER CADBURY
US based Kraft Foods clinched a takeover deal for British confectioner Cadbury, after winning support from
shareholders representing 72 percent of the maker of Dairy Milk chocolates. The news came after Cadbury's
board agreed last month to Kraft's improved cash-and-shares bid worth 11.9 billion pounds or 850 pence per
share, ending a bruising takeover battle. The shareholders' backing will allow Kraft, the world's second-biggest
food company, to gobble up Cadbury, whose colourful history as an independent British company dates back to
1824. The US giant also declared its bid "unconditional", meaning all of its takeover conditions have been
met. Kraft added that it would seek to cancel Cadbury's listing on the London Stock Exchange after it reaches
the 75-percent level. When Kraft reaches 90-percent support it will be able to automatically snap up any
remaining stock. The takeover will make Kraft one of the biggest global players in chocolate and
confectionery. Together they have impressive global reach and an unrivalled portfolio of iconic brands, with
tremendous growth potential. Cadbury, which employs 5,600 staff at eight factories in Britain and Ireland
called for "cast-iron guarantees" over the future of Cadbury workers.

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HOME
 Funny Bone
A Chartered Accountant walks into a bank and asks for a $5000 loan. The bank asks for a

security and the accountant hands over the keys and documents of his BMW parked in the street
in front of the bank. After all the necessary checks, the bank agrees to grant him the loan. The
bank president and all the officers enjoy a good laugh at the accountant for using a $100,000
BMW as collateral against a loan of $5000. The car was taken to the bank’s garage safely. Two
weeks later the chartered accountant returns and repays the $5000 and the interest which
comes to $15.41. The loan officer says, “Sir, we are very happy with this transaction but we are a
little puzzled. We checked out and found out that you are a multi-millionaire. Then why did you
bother to borrow $5000?”. The accountant answers, “ Where else in New York can I park my car
for 2 weeks in just $15.41?”

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The difference between the short-term and long-term income is simple. If you earn the short-
term, the government gets your money. If you use the long-term, the tax advisor gets your
money.

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For every tax problem there is a solution which is straightforward, uncomplicated and wrong.

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A Post Office worker at the main sorting office finds an unstamped, poorly hand-written
envelope addressed to God. He opens it and discovers it is from an elderly lady, distressed
because some thief robbed her of 100 dollars. She will be cold and hungry for the rest of the
month if she doesn't receive some divine intervention.
The worker organizes a collection amongst the other postal workers, who dig deep and come up
with 96 dollars. They get it to her by special courier the same morning.

A week later, the same postal worker recognizes the same hand on another envelope. He opens it
and reads: "Dear God, Thank you for the 100 dollars. This month would have been so bleak
otherwise. P.S. It was four dollars short but that was probably those thieving workers at the
Post Office."

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 Don’t Forget

FEBRUARY 2011

MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY SATURDAY SUNDAY

1 2 3 4 5 6

7 8 9 10 11 12 13

14 15 16 17 18 19 20

21 22 23 24 25 26 27

28

5th Service tax payment by Companies for January

7th TDS payment for January

15th P.F. Payment January

21st E.S.I.C. Payment for January.

MVAT Monthly Return for January (Tax>1000000/-).


HOME
 CAC Exclusive
)/$6+

Motor Insurance cover is all set to cost more with the Insurance Regulatory and Development
Authority (IRDA) proposing to increase the premium rates because of growing losses in the
motor pool. According to the proposed price structure, car and bike owners would have to pay
about 10 per cent more on new covers, while truck owners will have to shell out around 80 per
cent extra.

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68**(67,21)257+(0217+

The IDFC Bank issued the second batch of the Long Term Infrastructure Bonds following its
first on 12th November, 2010, namely, Transche 2 Bond, with a maturity period of 10 years in
the nature of secured, redeemable, non-convertible debentures of the Company of face value
of Rs. 5,000 each. The issue opened on 17th January, 2011 and will close on 04th February,
2011. Investment in Infrastructure bonds is recommended if you fall under the highest tax
slab. An investment in these bonds offer a Rebate of upto Rs 20,000 under section 80 CCF
over and above investment limit of 1 lac under section 80C.

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 TIT-BITS

OfficePolicyChange
Steppingintotheboardroommeeting,
Steppedoutofcharactertoo.
Putaredslipperononefoot,
Ontheotherabrightblueshoe.

Stressatworkwasatapeak.
Icouldhardlycontainmygrin,
Attheshockoneachandeveryface

‘ Themomenttheirbosswalkedin.

Eyesmovedslowlyfrommyfeet
Tocapturemyinnocentstare.
EachoneofthemconvincedIthink,
Iwastotallyunaware.

Unabletocontainmyself.
Mylaughterbubbledfree.
Atmyrelease,theyfollowedsuit
Reliefconjoinedwithglee.

Ourmemorablemeetingfollowedwith
Coffeeanddoughnutsforthestaff.
Officepolicynowincludes
Timeeverydaytolaugh!

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