BCAS President CA Mihir Sheth’s Message for the Month of November 2022

As I write this message, rejuvenated after a short break for the Diwali holidays, my mind is looking for some positive feed to look forward to one more festive year to feast on. While I do find some, what completely unsettles me are the two news items that perhaps reflect mindsets of the eco system we live in. Let me share them with you.

First is the Supreme Court landmark judgement explaining General Public Utility vis-a-vis Charitable Institutions. The landmark ruling, in the context of “advancement of general public utility”, holds that anybody involved in “trade or commerce” charges markedly over and above cost would cease to be a Charitable Institution for the purpose of the Income-tax Act. Apart from Trusts, Cricket Associations and Development Authorities, the Supreme Court has held that the same ratio would also apply in the case of educational institutions. The import of section 10(23C) as per the Hon. Supreme Court is that the word “Solely” should be interpreted narrowly to mean only the “Primary” purpose, not allied purposes or activities. The decision would hit various educational institutions, hospitals, trade organisations, maritime boards, sports organisations etc., which are formed to render services in their respective fields to their members for a cess or fee. The Supreme Court decision is mainly in the context of full exemption claimed u/s 10(23C).

With due respect to the Apex Court, I must express my apprehension about the severe consequence and after- effects of this judgement. If this ratio is applied ‘mutatis mutandis’, there is a good probability that it will have a disastrous impact on the institutions in the long run. How? You may ask.
The answer will be obvious to any person with the slightest experience in commerce. If there is an artificial cap on generating revenue that can give adequate surplus, how does one deal with the contingencies? How does one provide for unforeseen challenges?

It is wishful thinking that such contingencies will be taken care of by investment income and further donations. Who determines and justifies the “charges markedly above the costs”? Imagine an educational institution run by a Trust. To maintain a high standard of service, they will have to maintain their infrastructure and continuously upgrade it to keep in tune with the time. They may be compelled to provide for adequate buffer in pricing keeping in mind the uncertainty of membership, related revenue and rising costs. If they are deprived of this freedom, in the long run, they will run bankrupt because they may have the danger of running out of funds paying substantial taxes and spending for contingencies out of reserves. If someone were to interpret the fees they charged as ‘markedly above the costs’, then they would have a danger of losing their exemption u/s 10(23C) of the Income-tax Act. They will most likely also lose exemption u/s 80G, which in turn may impact their ability to receive donations. Consequently, they will be left with little margin for contingencies. They could then completely turn commercial, defeating the very purpose for which they were established.

A more workable option to control the institutions could have been to monitor their spending rather than putting an artificial ceiling on their revenue and pricing. Experience has proved that when one leaves the call of judgement of ‘what is reasonable and what is not’ to the revenue official, the judgement is most likely to be biased. To discuss various ramifications arising from the judgement, BCAS has organised a free webinar on the subject on 7th November, 2022.

The second shocking news I came across is that the MCA has issued an order for a penalty on one company u/s 454, for violation of Section 203 of the Companies Act 2013, for non-appointment of the whole time Company Secretary for 122 days. The penalty amount is a staggering ₹ 11,38,000. It is indeed appalling. Are we heading for a police state where even a technical mistake is punished so severely? Does ‘ease of business’ only remain a fancy term for discussion on television media and conferences? Is it a crime to be in business where the slightest default is feasted by the government with heavy punishment completely disproportionate to the nature of the default? Business and entrepreneurship are crucial pillars of a democratic society and have a great role to play for a healthy society. They need to be encouraged, not punished just because they are a soft target. If the business can be punished for non-appointment of a Company Secretary for a few days, then why should those responsible in the government not be punished with so many crucial appointments of judges, secretaries and chairmen of the public sector companies remaining pending for a long time? Laws cannot have two standards. One for the ruler and the other for the ruled. I hope good sense prevails and the penalty is reconsidered.

The Company Law Committee set up by the MCA published its third report, which has recommended mandatory joint audits for certain classes of companies to strengthen the audit framework. This follows similar guidelines issued by the RBI last year for all banks and NBFCs. While there could be a debate on the concept of joint audits with respect to their utility and benefits, there is no doubt that it has its advantages. The concept is not new in India and internationally and has successfully existed for many years in the case of Public Sector Banks and Companies. One of the greatest advantages of joint audit is that it provides for the coming together of different skill sets, knowledge and pooling of interest, thus improving the quality of service along with the timely completion of audits of large companies having complex operations and structures. It also helps to enhance the independence of the auditor because chances of familiarity threat and complacency due to comfort with the management are higher in the case of a single auditor. It is important to note that a pleasant fallout of this recommendation, if implemented, is that there is a likelihood that many SMP audit firms will have the opportunity to take up audits of large companies, thus increasing their reach and scalability to showcase their capabilities of providing quality services within the timelines. I hope that this recommendation soon becomes a reality and many Indian firms emerge on the global map.

This month, just before Diwali, BCAS lost its past president CA Dilip Lakhani. He was a great leader and multi-faceted person. He led BCAS in the year in which Tax Audit was introduced. He was one of the key persons to help BCAS come out with a comprehensive publication on Tax Audit that became a standard manual for many practitioners. Not only that, but he recognized the opportunity for upcoming Chartered Accountants to get Tax Audit assignments and passionately arranged workshops and seminars to educate the CA fraternity so that they could avail themselves of the new opportunity with profound training. CA Dilip Lakhani was also a national level Table Tennis player and won many trophies. He helped many charitable institutions silently without seeking any publicity. It would not be an exaggeration to state that he was not just a sport person but embodied in him sportsman’s spirit that gave him the zeal and zest to live his life fully and meaningfully. He leaves a great void amongst his colleagues, friends and professional circle. On behalf of all BCAS members, I pray God to rest his soul in peace. I convey our heartfelt condolences to his family members.