Message

Ever since its inception, the Institute of Chartered Accountants of India (ICAI) has been striving and working towards economic development of our nation. This profession has attained a coveted position as a result of constant pursuit for perfection, integrity, skills and knowledge. To maintain this position, it is essential that the expectations of the society are understood and met. In matters of innovation and knowledge empowerment, we must be with the flow of the current but in matters of values and principles we should stand like a rock as ultimately, it is the image and the reputation of the profession that would enable us to sustain, grow and excel. I am pleased to see that the Central India Regional Council (CIRC) of the Institute of Chartered Accountants of India (ICAI) is bringing out its first issue of e-Newsletter which will surely help the Regional Council to communicate and disseminate information amongst its large number of members and students. I understand that the CIRC is one of our largest Regions in terms of geographical spread and eNewsletter will immensely help the Regional Council to associate, reach and communicate with all members of the Region. This release will also reflect ICAI desire to adopt technology to provide better and more effective services to all stakeholders. I congratulate entire Management Committee team of the CIRC for this e-initiative. The theme of the first issue has been aptly chosen as Bank Audit when most of our members will be in the process of finalizing their Audit Plan for the forthcoming bank audits. I request all of you to make best possible use of this medium to remain connected and informed about the Regional Council activities.

New Delhi March 18, 2014

CA. K. Raghu President, ICAI

Message

In the recent years, the profession of chartered accountancy has witnessed rapid changes in its environment. The major economies that have been broadly controlling the economic dynamics of the world are facing tough challenges. The changes in the business sizes, methods and strategies coupled with the growth of technology has led to changes in the economic scenario. India with robust systems in place is largely able to withstand the external economic challenges. It is quite evident that the Indian economy is highly resilient and growing quite comfortably. For the purpose the role of accounting profession cannot be undermined. Chartered Accountants through their core competence help in maintenance of financial fabric of the nation. Over the last sixty-four years, the Institute of Chartered accountants of India has expanded by leaps and bounds. We have grown from a small family of about 1700 members when we started our journey in the year 1949 to a mammoth organization. In terms of number of members, we are the second largest accounting body of the world. We started the year 2014 with 2,24,772 members and 7,36,460 students and this number is increasing day by day. The Institute has grown slowly and steadily. About 16% of members belong to the Central Region. Reaching such a large number of members and the students who are spread in every nook and corner of the country is not easy. Regions directly or through their branches are doing commendable job to reach members and students, work on our regulatory requirements, disseminate knowledge and provide other services. They are critical for the profession of chartered accountancy which is highly dynamic and challenging. It is really heartening that the Central India Regional Council (CIRC) of ICAI is bringing out an e-newsletter from the month of March, 2014 to disseminate useful information for the members of the region. The Central region is close to my heart. I started my professional journey from Indore and simultaneously started working for the betterment of the profession. I consider myself to be lucky as I was also the Chairman of CIRC in the year 1997-98. I am sure that this Newsletter will act as crucial instrument to disseminate information from the region in a timely and effective manner. I compliment the Chairman and his team for the initiative. I wish them success in all their endeavours. The first e-newsletter on Bank Branch Audit is timely on account of approaching bank branch audit season. Yours sincerely,

New Delhi March 28, 2014

CA. Manoj Fadnis Vice-President, ICAI

Message

It is our great pleasure to have an opportunity to celebrate setting the 1st e-Newsletter of CIRRC afloat Editorial Board of CIRC. CIRC Editorial Board was formed after myself becoming Chairman CIRC and Editorin-Chief of CIRC Newsletter on February 26, 2014 and since then through preparatory meetings and efforts we have brought this epistle in such a short time of only a month. I appreciate very much the efforts of CA. Vinay Mittal Editor-CIRC Newsletter for setting up the association & a team and accomplishing the task. I understand that it is not easy to spread over the large data base, communication to all branches, their all office bearers and collating the data, then selecting and finally compiling the same & also to work in the different & great varieties. Issuing of the e-Newsletter is of vital importance in order to promote the communications among the members. The e-Newsletter will play a prominent role to provide the opportunity to communicate with each other among all the CIRC members. I believe the newsletter will be advantageous to the members and helpful to widen professional horizons, since it can promote interactions among members by developing opportunities to exchange information. It may be useful for studying new interdisciplinary field of the profession to promote new collaborative works among members. In addition, it will cultivate the friendship among all the members. I hope that the newsletter will be successful in getting several creative inputs into future branch activities and activities of CIRC overall. Last of all, I would like to express my sincere thanks to the President ICAI CA. K. Raghu and Vice President ICAI- CA. Manoj Fadnis for providing every support to start the e-Newsletter.

ABU ROAD March 18, 2014

CA. Nitish Agarwal Chairman CIRC & Editor in Chief- CIRC Newsletter
E Mail: canitishagarwal@yahoo.com

Mobile: 9414153796

Message

On this propitious occasion of the 1st issue of CIRC e-Newsletter, I would like to express my sincere gratitude to Chairman CIRC CA. Nitish Agarwal for making this publication possible. The Newsletter Team formed by CIRC New Regional Council in February 2014 and I am pleased to took charge as Editor for the CIRC Newsletter. I have to meet a great responsibility of start drafting the plans for the very First Issue of the CIRC e-Newsletter. Chairman CIRC put a lot of support towards the preparations of the newsletter. He directly encouraged me in this noble cause. Contributions towards Articles has been called for and we met with huge response from many branches. This is my hope that when receiving the e-Newsletter, members will be encouraged to join us and participate actively in the activities. Increase in members in our region goes hand in hand. Thus it has become very vital to have a continuous communication network . The Branch level Representations, which were traditionally at the helm of centre of activities, should now dedicate more of their time and attention to the programmes held and through the way of this e-Newslettercommunication to the fellow members in profession, while also attending to other essential requirements of the members. For the support of the President ICAI- CA. K Raghu and Vice President CA. Manoj Fadnis I would like to quote John F. Kennedy as we express our gratitude, we must never forget that the highest appreciation is not to utter words, but to live by them. If we can be of any assistance, please feel free to contact us. We are looking forward to a close cooperation and surely hope that you and your colleagues will visit one of our activities in the near future.

Ghaziabad March 18, 2014

CA. Vinay Mittal Regional Council Member &

Editor CIRC Newsletter Email:vncgzb@gmail.com Mobile: 9310556351

A few suggestions for conducting Bank Audit for the Year Ending 31-03-2014
CA Pawan K. Goel, Ghaziabad Past Chairman-CIRC pawangoel@sify.com
I) Friends at the outset I convey my sincere thanks to CIRC for giving me this opportunity to share my experience on bank audit with my colleagues and future chartered accountants i.e., the students of our noble profession. Friends this is the time for our examination & to prove our worth. With this theme in my mind, I have jotted down certain points, which need your attention. II) Reports generally demanded by Banks 1) 2) 3) 4) 5) III) Main Audit Report Long Form Audit Report Tax Audit Report Memorandum of Changes Various Certificates Important Provision regarding Advances (with reference to IRAC Norms)

1) Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances, as applicable for the statutory audit of bank branches for the year-ended 31.03.2014 Advances are broadly categorized in two categories: Performing Assets i.e. Standard Assets Non Performing Assets

The NPA classification system was introduced w.e.f. the year ending 31.03.1993. An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A non-performing asset (NPA) was defined as a credit facility in respect of which the interest and/ or installment of principal has remained overdue (past due up to 31.03.2001) for a specified period of time. The specified period was reduced in a phased manner as under: Year ending March 31 Specified period 1993 four quarters 1994 three quarters 1995 onwards two quarters 2001 onwards 180 days 2004 90 days Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shall be a loan or an advance where; Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan, (thus NPA if overdue since /before 31.12.2013) * in respect of derivative transactions, the overdue receivables representing positive mark-to-

market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment. * In case of interest payments, banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter * The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, (thus NPA if overdue since /before 31.12.2013) Overdue Any amount due to the bank under any credit facility is overdue if it is not paid on the due date fixed by the bank. * The account remains out of order in respect of an Overdraft/Cash Credit (OD/CC), (thus NPA if Out of order during 01.01.2014 31.03.2014) Out of Order Status A Cash credit / Overdraft account will be considered as out of order in the following circumstances: If the outstanding balance remains continuously in excess of the Sanctioned limit / drawing power; or Where the outstanding balance in the account is less than the sanctioned limit/ drawing power, but there are no credits continuously for 90 days, as on the date of balance sheet or credits are not enough to cover the interest debited during the same period. Agricultural Advance: (i) With effect from September 30, 2004 the following revised norms are applicable direct agricultural advances a) A loan granted for short duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for two crop seasons. to all

b) A loan granted for long duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for one crop season. (ii) For the purpose of these guidelines, "long duration" crops would be crops with crop season longer than one year and crops, which are not "long duration" crops would be treated as "short duration" crops. (iii) The crop season for each crop, which means the period up to harvesting of the crops raised, would be as determined by the State Level Bankers' Committee in each state. (iv) Depending upon the duration of crops raised by an agriculturist, the above NPA norms would also be made applicable to agricultural term loans availed of by him. In respect of agricultural loans, other than Direct Agriculture Loan and term loans given to non-agriculturists, identification of NPAs would be done on the same basis as non-agricultural advances, which, at present, is the 90 days delinquency norm. Where natural calamities impair the repaying capacity of agricultural borrowers, banks may decide on their own as a relief measure - conversion of the short-term production loan into a term loan or re-schedulement of the repayment period; and the sanctioning of fresh short-term loan, subject to

various guidelines contained in RBI circulars RPCD. No.PLFS.BC.3/05.04.02/2012-13 dated July 2, 2012. In such cases of conversion or re-schedulement, the term loan as well as fresh short-term loan may be treated as current dues and need not be classified as NPA. The asset classification of these loans would thereafter be governed by the revised terms & conditions and would be treated as NPA if interest and/or instalment of principal remains unpaid, for two harvest seasons but for a period not exceeding two half years. In respect of corporate agricultural loans i.e. agricultural loans exceeding Rs. 1 crore granted to Corporate, Partnership Firms and other Institutions, Loan amount will be bifurcated in two parts one third portion will be treated as agriculture advance on which NPA Norms applicable to Direct Agriculture Advances will apply and on balance two third portion 90 days Norms as applicable to general advances will apply. While fixing the repayment schedule in case of rural housing advances granted to agriculturists under Indira Awas Yojana and Golden Jubilee Rural Housing Finance Scheme, banks should ensure that the interest/instalment payable on such advances are linked to crop cycles. Categories of NPAs a) Sub-standard Assets b) Doubtful Assets c) Loss Assets Sub-standard Assets With effect from 31 March 2005, a sub-standard asset would be one, which has remained NPA for a period less than or equal to 12 months. Such an asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. Doubtful Assets With effect from March 31, 2005, an asset would be classified as doubtful if it remained in the substandard category for 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values highly questionable and improbable. Loss Assets A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspectors but the amount has not been written off wholly. Other Points 1) The treatment of an asset as NPA should be based on the record of recovery. Banks should not treat an advance as NPA merely due to existence of some deficiencies which are of temporary in nature such as non-availability of adequate drawing power, balance outstanding exceeding the limit, non-submission of stock statements and the non-renewal of the limits on the due date, etc. Where there is a threat of loss, or the recoverability of the advances is in doubt, the asset should be treated as NPA. In respect of accounts with such deficiencies following guidelines must be taken into consideration: a) An account where the regular/ ad hoc credit limits have not been reviewed/ renewed within 180 days from the due date/ date of ad hoc sanction will be treated as NPA.

b) A working capital borrowal account will become NPA if irregular drawings are permitted in the account for a continuous period of 90 days even though the unit may be working or the borrower's financial position is satisfactory. The outstanding in the account based on drawing power calculated from stock statements older than three months, would be deemed as irregular. If such irregular drawings are permitted in the account for a continuous period of 90 days will become NPA.Thereby if the stock statements have not been submitted for more than 6 months i.e for sept 13 the account can be classified as NPA. 2)Treatment of NPAs Borrower-wise and not Facility-wise In respect of a borrower having more than one facility with a bank, all the facilities granted by the bank will have to be treated as NPA and not the particular facility or part thereof which has become irregular. However the bills discounted Under LC may not be classified as a NPA. 3) Up gradation of NPAs: If arrears of interest and principal are paid by the borrower in the case of NPA account, the account should no longer be treated as non-performing and may be classified as standard accounts. 4)A/c regularized near balance sheet date : The asset classification of borrowal accounts where a solitary or a few credits are recorded before the balance sheet date should be handled with care and without scope for subjectivity. Such credits should be from genuine sources and not from sanction of fresh / enhanced limits. 5) Devolvement of LC / Invocation of BG: If the debits arising out of devolvement of letters of credit or invoked guarantees are parked in a separate account, the balance outstanding in that account also should be treated as a part of the borrowers principal operating account for the purpose of application of prudential norms on income recognition, asset classification and provisioning. 6) Advances under consortium arrangements: Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. Even if the remittances by the borrower under consortium lending arrangements are pooled with one bank and/or where the bank receiving remittances is not parting with the share of other member banks, the account will be treated as not serviced in the books of the other member banks and therefore, be treated as NPA. 7) Accounts where there is erosion in the value of security: A NPA need not go through the various stages of classification in cases of serious credit impairment and such assets should be straightaway classified as doubtful or loss asset as appropriate. Erosion in the value of security can be reckoned as significant when the realisable value of the security is less than 50 per cent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straightaway classified under doubtful category. If the realisable value of the security, as assessed by the bank/ approved valuers/ RBI is less than 10

per cent of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straightaway classified as loss asset. It may be either written off or fully provided for by the bank. 8) Advances against Term Deposits, NSCs, KVP/IVP, LIC etc: Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and Life Policies are exempt from Assets Classification & Provisioning Norms, provided adequate margin is available. However advances against gold ornaments, government securities and all other securities are not covered by this exemption. 9) Loans with moratorium for payment of interest: In the case of bank finance given for industrial projects or for agricultural plantations etc. where moratorium is available for payment of interest, payment of interest becomes 'due' only after the moratorium or gestation period is over. In the case of housing loan or similar advances granted to staff members where interest is payable after recovery of principal, interest need not be considered as overdue from the first quarter onwards and only when there is default in repayment on due dates. 10) Government guaranteed advances : The credit facilities backed by guarantee of the Central Government though overdue may be treated as NPA only when the Government repudiates its guarantee when invoked. Advances sanctioned against State Government guarantees should be classified as NPA in the normal course. 11) Take-out Finance:

Under this arrangement, the institution/the bank financing infrastructure projects will have an arrangement with any financial institution for transferring to the later the outstanding in respect of such financing in their books on a pre-determined basis. In view of the time-lag involved in taking-over, the possibility of a default in the meantime cannot be ruled out. The norms of asset classification, income recognition & provisioning will have to be followed by the concerned bank/financial institution in whose books the account stands as balance sheet item as on the relevant date. Further if at the time of takeover the a/c is NPA in other bank books than the same will be classified as NPA after takeover in the later books. 12) Post-shipment Supplier's Credit :

In respect of post-shipment credit extended by the banks covering export of goods to countries for which the ECGCs cover is available, EXIM Bank has introduced a guarantee-cumrefinance programme whereby, in the event of default, EXIM Bank will pay the guaranteed amount to the bank within a period of 30 days from the day the bank invokes the guarantee after the exporter has filed claim with ECGC. Accordingly, to the extent payment has been received from the EXIM Bank, the advance may not be treated as a non-performing asset for asset classification and provisioning purposes. 13) Export Project Finance:

In respect of export project finance, there could be instances where the actual importer has paid the dues to the bank abroad but that bank in turn is unable to remit the amount due to political developments such as war, strife, UN embargo, etc. In such circumstances, if the lending bank able to establish through documentary evidence that the importer has cleared the dues in full by depositing the amount in the bank abroad before it turned into NPA in the books of the bank, but the importer's country is not allowing the funds to be remitted due to political or other reasons, the asset classification may be made after a period of one year from the date the amount was deposited by the importer in the bank abroad. 14) Advances under rehabilitation approved by BIFR/ TLI:

Banks are not permitted to upgrade the classification of any advance in respect of which the terms have been re-negotiated unless the package of re-negotiated terms has worked satisfactorily for a period of one year. While the existing credit facilities sanctioned to a unit under rehabilitation packages approved by BIFR/term lending institutions will continue to be classified in the same status, in respect of additional facilities sanctioned under the rehabilitation packages, the Income Recognition, Asset Classification norms will become applicable after a period of one year from the date of disbursement. Restructuring/ Rescheduling of Loans Restructuring / rescheduling / renegotiation of principal and /or of interest can be done in following three stages: * before commencement of commercial production; * after commencement of commercial production but before the asset has been classified as sub standard, * after commencement of commercial production and after the asset has been classified as sub standard. Treatment of Restructured Standard Accounts: * A rescheduling of the instalments of principal alone, at any of the aforesaid first two stages would not cause a standard asset to be classified in the sub standard category provided the loan/credit facility is fully secured. * A rescheduling of interest element at any of the foregoing first two stages would not cause an asset to be downgraded to sub standard category subject to the condition that the amount of sacrifice, if any, in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved. Treatment of restructured sub-standard accounts: * A rescheduling of the instalments of principal alone would render a sub-standard asset eligible to be continued in the sub-standard category for the specified period, provided the loan/credit facility is fully secured. * A rescheduling of interest element would render a sub-standard asset eligible to be continued to be classified in sub standard category for the specified period subject to the condition that the amount of sacrifice, if any, in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved. Up- gradation of restructured accounts: The sub-standard accounts which have been subjected to restructuring etc., whether in respect of principal instalment or interest amount, by whatever modality, would be eligible to be upgraded to the standard category only after the specified period i.e., a period of one year after the date when first payment of interest or of principal, whichever is earlier, falls due, subject to satisfactory performance during the period. The amount of provision made earlier, net of the amount provided for the sacrifice in the interest amount in present value terms as aforesaid, could also be reversed after the one year period. During this one-year period, the sub-standard asset will not deteriorate in its classification if satisfactory performance of the account is demonstrated during the period. In case, however, the satisfactory performance during the one15)

year period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule. Provisioning Standard assets: i) a) b) c) d) e) f) Bank should make general provision for standard assets at the following rates: Commercial Real Estate Sector 1.00% Direct Advances to Agricultural and SME Sectors 0.25%. Housing loans extended at teaser rates and restructured advances For all other loans and advances not covered above -2.00% 2.75% 0.40%

Advances to Commercial Real Estate Residential Housing Sector (CRE - RH) at 0.75 %

The above-mentioned higher provision on restructured standard advances (2.75 per cent as prescribed vide circular dated November 26, 2012) would increase to 5 per cent in respect of new restructured standard accounts (flow) with effect from June 1, 2013 and increase in a phased manner for the stock of restructured standard accounts as on May 31, 2013 as under : 3.50 per cent - with effect from March 31, 2014 (spread over the four quarters of 2013-14) 4.25 per cent - with effect from March 31, 2015 (spread over the four quarters of 2014-15) 5.00 per cent - - with effect from March 31, 2016 (spread over the four quarters of 2015-16) The provisions on standard assets should not be reckoned for arriving at net NPAs.

The provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets' under Other Liabilities and Provisions - Others' in Schedule 5 of the balance sheet. Provisioning requirements for derivative exposures Credit exposures computed as per the current marked to market value of the contract, arising on account of the interest rate & foreign exchange derivative transactions, and gold, shall also attract provisioning requirement as applicable to the loan assets in the 'standard' category, of the concerned counterparties. All conditions applicable for treatment of the provisions for standard assets would also apply to the aforesaid provisions for derivative and gold exposures. Sub-standard assets : A general provision of 15 percent on total outstanding should be made without making any allowance for DICGC/ECGC guarantee cover and securities available. The unsecured exposures, which are identified as substandard, would attract additional provision of 10 percent, i.e. a total of 25 per cent on the outstanding balance. However, in view of certain safeguards such as escrow accounts available in respect of

infrastructure lending, infrastructure loan accounts which are classified as substandard will attract a provisioning of 20 per cent instead of the aforesaid prescription of 25 per cent. To avail of this benefit of lower provisioning, the banks should have in place an appropriate mechanism to escrow the cash flows and also have a clear and legal first claim on these cash flows. Unsecured Exposures is where the realizable value of the security as assessed by the bank/ approved valuers/ RBIs Inspecting officers is not more than 10%, ab initio, of outstanding exposure. In order to enhance transparency and ensure correct reflection of the Unsecured Advances in Schedule 9 of Balance sheet, the following would be applicable from FY 2009-10 onwards (i) The rights, Licenses, authorizations etc charged to the bank as collateral in respect of the project (including infrastructure projects) should not be reckoned as tangible security. Hence such advances shall be reckoned as unsecured. (ii) The banks should disclose under a separate head in Notes to Accounts the total amount of such abovementioned advances along with the estimated value of such intangible collateral. Doubtful assets: 100 percent of the unsecured portion. In regard to the secured portion, provision may be made on the following basis. In case the advance covered by CGTSI guarantee becomes nonperforming, no provision need be made towards the guaranteed portion. The amount outstanding in excess of the guaranteed portion should be provided for as per the extant guidelines on provisioning for nonperforming advances. Period Upto one year One year to 3 years More than 3 years Provision 25% 40% 100%

Valuation of Security for provisioning purposes With a view to bringing down divergence arising out of difference in assessment of the value of security, in cases of NPAs with balance of Rs. 5 crore and above stock audit at annual intervals by external agencies appointed as per the guidelines approved by the Board would be mandatory in order to enhance the reliability on stock valuation. Collaterals such as immovable properties charged in favour of the bank should be got valued, once in three years by valuers appointed as per the guidelines approved by the Board of Directors. Loss assets: The entire asset should be written off. If the assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for. Provisioning Norms for Leased Assets i) Substandard assets a) 15 percent of the sum of the net investment in the lease and the unrealized portion of finance income net of finance charge component. The terms net investment in the lease, finance income

and finance charge are as defined in AS 19 Leases issued by the ICAI. b) Unsecured lease exposures which are identified as substandard would attract additional provision of 10 per cent, i.e., a total of 25 per cent. ii) Doubtful assets 100 percent of the extent to which, the finance is not secured by the realizable value of the leased asset. Realizable value is to be estimated on a realistic basis. In addition to the above provision, provision at the following rates should be made on the sum of the net investment in the lease and the unrealized portion of finance income net of finance charge component of the secured portion, depending upon the period for which asset has been doubtful: Period for which the advance has remained in doubtful category (%) Up to one year 25 One to three years 40 More than three years 100 Provision requirement

iii) Loss assets The entire asset should be written off. If for any reason, an asset is allowed to remain in books, 100 percent of the sum of the net investment in the lease and the unrealized portion of finance income net of finance charge component should be provided for. Project Loans for Infrastructure Sector (i) A loan for an infrastructure project will be classified as NPA during any time before commencement of commercial operations as per record of recovery (90 days overdue) (ii) A loan for an infrastructure project will be classified as NPA if it fails to commence commercial operations within two years from the original DCCO, even if it is regular as per record of recovery. (iii) If a project loan classified as 'standard asset' is restructured any time during the period up to two years from the original date of commencement of commercial operations (DCCO), in accordance with the applicable provisions, it can be retained as a standard asset if the fresh DCCO is fixed within the following limits, and further provided the account continues to be serviced as per the restructured terms. Infrastructure Projects involving Court Cases 2 Years Any Other Reason 1 Year Provision Requirements until These are Standard Advances Until two years from the original DCCO 0.40% If the DCCO is extended beyond two years and upto four years or three years from the original DCCO, as the case may be, depending upon the reasons for such . Project loans restructured with effect from June 1, 2013: 5.00 per cent From the date of restructuring for 2 years Stock of Project loans classified as restructured before June 01, 2013: * 3.50 per cent - with effect from March 31, 2014 (spread over the four quarters of 2013-14) * 4.25 per cent - with effect from March 31, 2015 (spread over the four quarters of 2014-15) * 5.00 per cent - with effect from March 31, 2016 (spread over the four quarters of 2015-16) The above provisions will be applicable from the date of restructuring for 2 years. Project Loans for Non-Infrastructure Sector ( Other than Commercial Real Estate Exposure)

(i) A loan for a non-infrastructure project will be classified as NPA during any time before commencement of commercial operations as per record of recovery (90 days overdue. (ii) A loan for a non-infrastructure project will be classified as NPA if it fails to commence commercial operations within one year from the original DCCO. (iii) In case of non-infrastructure projects, if the delay in commencement of commercial operations extends beyond the period of one year from the date of completion as determined at the time of financial closure, banks can prescribe a fresh DCCO, and retain the "standard" classification by undertaking restructuring of accounts in accordance with the provisions contained in this Master Circular, provided the fresh DCCO does not extend beyond a period of two years from the original DCCO. This would among others also imply that the restructuring application is received before the expiry of one year from the original DCCO, and when the account is still "standard" as per the record of recovery. Provision Requirements Until These are Standard Advances If the revised DCCO is with in one year from the original DCCO prescribe at the time of financial closure 0.40% If the revised DCCO is O is extended beyond one year and upto two years from the original DCCO, Project loans restructured with effect from June 1, 2013: 5.00 per cent From the date of restructuring for 2 years Stock of Project loans classified as restructured before June 01, 2013: * 3.50 per cent - with effect from March 31, 2014 (spread over the four quarters of 2013-14) * 4.25 per cent - with effect from March 31, 2015 (spread over the four quarters of 2014-15) * 5.00 per cent - with effect from March 31, 2016 (spread over the four quarters of 2015-16) The above provisions will be applicable from the date of restructuring for 2 years.

Advances covered by ECGC guarantee In the case of advances classified as doubtful and guaranteed by ECGC, provision should be made only for the balance in excess of the amount guaranteed by the Corporation. Further, while arriving at the provision required to be made for doubtful assets, realizable value of the securities should first be deducted from the outstanding balance in respect of the amount guaranteed by the Corporation and then provision made as illustrated hereunder: Example Outstanding Balance Rs. 4 lakhs ECGC Cover 50 percent Period for which the advance has remained doubtful More than 2 years remained doubtful (say as on March 31, 2012) Value of security held Rs. 1.50 lakhs Provision required to be made Outstanding balance Rs. 4.00 lakhs Less: Value of security held Rs. 1.50 lakhs Unrealized balance Rs. 2.50 lakhs Less: ECGC Cover (50% of unrealizable balance) Rs. 1.25 lakhs Net unsecured balance Rs. 1.25 lakhs Provision for unsecured portion of advance Rs. 1.25 lakhs (@ 100 percent of unsecured portion) Provision for secured portion of advance

(as on March 31, 2012) Rs.0.60 lakhs (@ 40 per cent of the secured portion) Total provision to be made Rs.1.85 lakhs (as on March 31, 2012) Advance covered by CGTMSE guarantee In case the advance covered by CGTMSE guarantee becomes nonperforming, no provision need be made towards the guaranteed portion. The amount outstanding in excess of the guaranteed portion should be provided for as per the extant guidelines on provisioning for nonperforming advances. An illustrative example is given below: Example Outstanding Balance Rs. 10 lakhs CGTMSE Cover 75% of the amount outstanding or 75% of the unsecured amount or Rs.37.50 lakh, whichever is the least Period for which the advance has remained doubtful More than 2 years remained doubtful (say as on March 31, 2012) Value of security held Rs. 1.50 lakhs Provision required to be made Balance outstanding Rs.10.00 lakh Less: Value of security Rs. 1.50 lakh Unsecured amount Rs. 8.50 lakh Less: CGTMSE cover (75%) Rs. 6.38 lakh Net unsecured and uncovered portion: Rs. 2.12 lakh Provision for Secured portion @ 40% of Rs.1.50 lakh Rs.0.60 lakh Provision for Unsecured & uncovered portion @ 100% of Rs.2.12 lakh Rs.2.12 lakh Total provision required Rs.2.72 lakh Floating provisions: Some of the banks make a 'floating provision' over and above the specific provisions made in respect of accounts identified as NPAs. Till the year 2008-09, the floating provisions, wherever available, could be set-off against provisions required to be made as per above stated provisioning guidelines. However from 2009-10 the floating provisions cannot be netted off from Gross NPAs to arrive at Net NPAs. The Floating provision can only be reckoned as part of Tier- II Capital subject to the overall ceiling of 1.25% of total Risk Weighted Assets. Considering that higher loan loss provisioning adds to the overall financial strength of the banks and the stability of the financial sector, banks are urged to voluntarily set apart provisions much above the minimum prudential levels as a desirable practice. INCOME RECOGNITION The policy of income recognition has to be objective and based on the record of recovery. Internationally income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA. However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts. - Fees and commissions earned by the banks as a result of re-negotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit.

If Government guaranteed advances become NPA, the interest on such advances should be taken to income account on actual recovery. With effect from 31.03.2005 a State Government guaranteed advance, where interest and/or instalment of principal / or any other amount due to the bank remains overdue for a period more than 90 days shall become a non performing advance. The interest due on such advance should not be taken to income account, unless it has been realized. Reversal of income: If any advance, including bills purchased and discounted, becomes NPA as at the close of any year, interest accrued and credited to income account in the past period, should be reversed or provided for if the same is not realised. This will apply to Government guaranteed accounts also. In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for, if uncollected. Appropriation of recovery in NPAs: Interest realised on NPAs may be taken to income account provided the credits in the accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the borrower concerned. In the absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner.

IV) 1)

Provisions relating to Long Form Audit Report Cash Department

A) Are there frequent excesses or shortages in cash? B) Mention the amount of soiled notes to be exchanged, pending with the branch if accumulated since more than 3 months. C) Is decoy money planted & recorded properly. D) Is the list of token exhibited with the paying cashier? E) State whether the branch has been reporting entries of cash above Rs.10.00 lacs to the Higher Authorities regularly? F) Whether the branch has reported all transaction of suspicious nature to the appropriate law enforcement authorities designated under the relevant law governing such activities. G) Cash in transit. 2) Balances with Banks

A) With which Banks does the branch maintain account/s? B) What is the average balance maintained in these accounts? C) Are the accounts reconciled regularly with the passbook/statement of accounts and with the general ledger? Are balance confirmation certificates being obtained regularly and balances have been reconciled.

D) If there are entries outstanding for more than 3 months give details and reasons as to why they are outstanding? E) What efforts are made to rectify error and to square off old entries? F) See whether any revenue effecting entry is outstanding in the reconciliation statement. If yes, please give the same in your MOC. 3) Books & Records/Balancing of Books

A) Does the branch maintain the accounts in the general ledger only under the heads specified in general ledger balance statement or in HO circular? If not specify which additional accounts are being maintained and under whose authority they are being maintained. B) Verify the correctness of reversal of suspense receipt/payment entries and reports in entries have been incorrectly/unauthorized reversed. C) Are the clearings and transfer register properly maintained and balanced with daybook? D) Is the branch maintaining a register specimen signature and initials of officers working in the branch? Is the register up to date? E) Are initials/signatures on vouchers etc. are as per the specimen records in the above register. F) Check debit entries in income accounts like interest received, commission received etc. and ascertained correctness of such entries. G) All the debits to current/Saving Bank accounts (Except debit by way of interest/commission/incidental/service charge) duly authorized by the account holder? H) Are the appropriate date stamps of receipt/payment/transfer etc. affixed on voucher? I) Whether allocation of work for balancing the ledgers is regularly made weekly/monthly as per HO guidelines? Are records of allocation of work maintained and subsequent follows up is done in the matter? J) Whether allocation for clearing the backlog in balancing of ledger is made and recorded? Comment on whether or not efforts have been made by the Branch Manager/Accountant to clear off old arrears and to prevent arrears from accumulating? K) Whether balancing of books are in arrears? 4) 5) Computer Audit Inter Branch Accounts

A) Does the branch forward on a daily basis to the Head Office a statement of debit/ credit transactions in relation to other branches? B) Does the balance in the Head office account at the end of the year as shown in the said statement is in agreement with the General Ledger. C) Does the branch expeditiously comply with/respond to the communications as regard to unrealised transactions. D) Are there any old/large outstanding transaction/entries at debits as at year-end which are unexplained? 6) Audit/inspections

A) Is the branch covered by the Concurrent Audit/any other audit/inspection during the year. Go through the latest reports of these audits and consider the major adverse comments pointed out in these reports. 7) Frauds

Furnish particulars of frauds discovered during the year under audit at the branch together with suggestions to minimize the possibilities of their occurrence. Also verify the fraud register maintained by the branch. If no register is being maintained at the branch, specifically mention the same in your Long Form Audit Report. 8) Other Assets

Stationery & Stamps Does the system of bank ensure adequate internal control over issue and custody of stationery comprising security items? Whether the system is being followed by the branch. Any deficiency found should be reported. It is also to be seen that whether any obsolete stationery is being maintained at the branch and if yes, the same should be reported through MOC. 9) Suspense Account/Sundry Assets

Items debited to the suspense account are cleared with a reasonable time limit. Details of old outstanding entries together with reasons for delay in adjustment should be reported in Long Form Audit Report. In many of the cases, it has been seen that item of revenue nature are being debited in suspense account just to inflate the audit. If any such instance is noticed, the same should be reported in MOC. 10) Deposits

A) Whether there are unusual large movements in the deposits figure after the balance sheet date and till the date of audit. 11) Bills payable/Sundry Deposits

A) Verify whether any unusual entries are outstanding under above head. B) The number of items, amount and age-wise classification should be given in Long Form Audit Report. 12) Profit & Loss Accounts

A) Whether the branch has a system to compute discrepancies in the interest and for timely adjustment. B) Has the branch complied with the income recognition norms prescribed by the RBI? C) Does the bank have a system of estimating and providing interest accrued on overdue/matured term deposits. 13) I) Other Matters Window Dressing

In many of the cases, it has been seen that window dressing is being done in deposits/ advances/profits by the branches to show a better and rosy picture. The position as on 31st March

should be verified with the next two week position and see the down ward trend in this regard to verify the same. 14) A) B) C) D) Question of LFAR related to specialised branches Branches dealing in foreign exchange transaction. Branches dealing in very large advances. Assets recovery branches. Branches dealing in clearing house operations.

USEFUL LINKS
Note: Master Circulars are a one-point reference of instructions issued by the Reserve Bank of India on a particular subject between July-June. These are issued on July 1 every year and automatically expire on June 30 next year. You can access the Master Circulars issued in previous years by using the Archives. For printing of these circulars please use the PDF version. Link of Master Circular Master Circular Prudential norms for Classification, Valuation and Operation of Investment Portfolio by Banks http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8183 To obtain an aligned printout please download the (1168 kb) version to your machine and then use respective software to print the story. List of all master circular http://www.rbi.org.in/scripts/BS_ViewMasterCirculardetails.aspx

Recent Take aways for Bank Audit

CA. Nipun Singhvi
nipunsinghvi@yahoo.com Though in bank audit season where time is less and miles to cover is more.ICAI has brought out thoroughly revised edition of Guidance note on Audit of Banks, some important issues and recent amendments to master circulars relevant for this season are discussed below. It is also, important to note that recent notification enforcing some sections of Companies Act, 2013 have to be taken into account as corporate are the major borrowers and banks need to be more vigilant in extending credit. Advances constitute the largest item of the banks balance sheet. Since, it constitutes the main source of revenue for banks. To unleash advances, it is important to first understand types of advances and reporting changes to them. The Third Schedule to Banking Regulation Act, 1949 (the Act) requires classification in Schedule 9 to the balance sheet as follows: ? Nature of Advances : CC,OD and Demand loans: Outstandings in credit card operations should be shown as part of advances under the head cash credits, overdrafts and loans repayable on demand. With regard to Credit Card Accounts, the amount spent is billed to card users through a monthly statement with a definite due date for repayment. Banks give an option to the card users to pay either the full amount or a fraction of it, i.e., minimum amount due, on the due date and roll-over the balance amount to the subsequent months billing cycle. RBI has advised banks that a credit card account will be treated as non-performing asset if the minimum amount due, as mentioned in the statement, is not paid fully within 90 days from the next statement date. The gap between two statements should not be more than a month. Term Loans (Long Term Advances) Includes Mortgage Loans : Term loans will be loans not repayable on demand and would include overdue instalments. Bill Purchase and Discounting (Very Short Terms) : All interest bearing loans and advances granted by the bank to its employees should be shown as part of advances. ? Security: Advance Secured By Assets : Advances against book debts may be included under the head Secured by Tangible Assets, and presented in Schedule 9 (Advances) as follows: B Secured by Tangible Assets (includes advances against book debt) Loans to Infrastructure sector in case of BOT projects the rights to collect toll can be treated as tangible securities for the said purpose subject to certain conditions. Hence, this should be taken care while ascertaining the same. Advance Secured by Guarantees: Advances guaranteed by Indian and Foreign governments, banks and DICGC and ECGC to be classified as advances covered by bank/government guarantees. Unsecured Advance: Advances not falling under above two i.e. residuary clause. ? Place : ? Priority Sector Lending: According to RBI instructions advances to certain sectors are treated as Priority Sector Lending. RBI has relaxed the ceiling limits for incremental loans to medium service enterprises extended after November 13, 2013 upto Rs.10 Crores. Similar, limit for micro and small service enterprises has also brought in line with them .

Also, bank credit to MFIs (Micro Finance Institutions) for onlending to MFIs is eligible for categorisation of Priority Sector Lending if aggregate amount of loan extended for income generating activity is not less than 70% of total loans given by MFIs(previously it was 75%) ? Public Sector: Advances to Central and State Governments and other government undertakings including government companies and corporations which are, according to the statutes, to be treated as public sector companies, are to be included in the category Public Sector. ? Banking Sector: Generally banks give advances to other banks including co-operative banks for further lending, these shall be classified under the head Banks. Loan against Gold jewellery RBI has prescribed Loan to Value (LTV) Ratio of not exceeding 75 per cent for banks lending against Gold jewellery (including bullet repayment loans against pledge of gold jewellery). Therefore loans sanctioned by banks after 20th January, 2014 should not exceed 75 per cent of the value of gold ornaments and jewellery. Standardizing the valuation it has been clarified that gold jewellery accepted as security/collateral will have to be valued at the average of the closing price of 22 carat gold for the preceding 30 days as quoted by the India Bullion and Jewellers Association Ltd. [Formerly known as the Bombay Bullion Association Ltd. (BBA)]. In case the gold purity is less than 22 carats, the bank should translate the collateral into 22 carat and value the exact grams. In other words, jewellery of lower purity of gold shall be valued proportionately. Also, branch should adhere to their policy laid down in this regard. Disclosure in respect of ATM transactions It has been clarified by RBI that banks need to include the customer complaints pertaining to Automated Teller Machines (ATM) transactions when another bank is involved in the transaction also. Since, the customer should lodge complain with the card issuing bank even if the transaction was carried out at another banks ATM. Also, RBI has advised banks not to transfer any pending reconciliation representing various cases of excess cash in ATMs on account of failures in retraction of cash, sensor failure and other technical /hardware errors balances to their profit and loss account. Since, these represent unclaimed balances. Innovative Housing Loan Products: Some banks had introduced schemes for housing loan where a tripartite agreement between the bank, the builder and the buyer of the housing unit is executed. These loan products are popularly known by various names like 80:20, 75:25 Schemes. Such housing loans being exposed to a variety of additional risks like disputes between individual borrowers and developers/builders, default/delayed payment of interest/EMI by the developer/builder during the agreed period on behalf of the borrower, non-completion of the project on time, etc. Since, any delay in payment by developers/builders on behalf of individual borrowers to banks may lead to lower credit rating/scoring of such borrowers by credit information companies (CICs) as information about servicing of loans gets passed on to the CICs on a regular basis. Apprehending, risks of diversion of funds due to upfront lump- sum disbursal to builders/developers without any linkage to stage of construction RBI advised banks to link the disbursals to stages of construction in cases of incomplete/under construction or green field projects. Use of Counter-cyclical/Floating Provision In terms of circulars DBOD.BP.BC.89/21.04.048/2005-06 dated June 22, 2006 and DBOD.BP.BC.68/21.04.048/2006-07 dated March 13, 2007 on Prudential Norms on Creation and Utilisation of Floating Provisions, floating provisions should not be used for making specific provisions in respect of nonperforming assets or for making regulatory provisions for standard assets. The same can be used only for contingencies under extraordinary circumstances for making specific provisions in impaired accounts after obtaining board's approval and with prior permission of RBI. Further, in terms of circular DBOD.BP.BC.87/21.04.048/2010-11 dated April 21, 2011, on Provisioning Coverage Ratio (PCR) for Advances, countercyclical provisioning buffer would be allowed to be used by banks for making specific provisions for non-performing assets, inter-alia, during periods of system wide

downturn, with the prior approval of RBI. Accordingly, RBI vide circular on Utilisation of Floating Provisions/Counter Cyclical Provisioning Buffer has allowed banks, as a countercyclical measure, to utilise up to 33 per cent of countercyclical provisioning buffer/floating provisions held by them as on March 31, 2013, for making specific provisions for non-performing assets, as per the policy approved by their Board of Directors. In addition to utilisation of countercyclical / floating provision up to 33 per cent of such provisions held by them as on March 31, 2013 as stated above, also countercyclical/floating provisions can be used for meeting any shortfall on sale of NPA i.e. when the sale is at a price below the net book value (NBV) [i.e., book value less provision held], which presently requires debit to the profit and loss account. Transactions to be registered with CERSAI RBI mandated registering of all mortgage transactions with Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) as currently it was used to register only equitable mortgages. It is to be seen that the branch has adhered to the instructions. Companies Act, 2013 and its impact Notification dated 12th September,2013 have enforced 98 sections of the Companies Act,2013 whereby the loans and advances made to companies have been seriously impacted. Some of the provisions to be taken care are enlisted below: Section 185 of the Act, prohibits advancement of loan or providing any security in connection of any loan or giving of any guarantee by the Company to its directors or any person in whom director is interested. Barring few exclusions this section entails all the related party or putting it loosely bars intra-group transactions except some cases of holding-subsidiary after the said notification. For this purpose, the interested person has been given by way of explanation to the said section. Hence, guarantees given or extended by the Company for interested parties as given shall be invalid and legally unenforceable by the bank. Therefore, the auditor has to cautiously look into any such credit facility extended by bank on premise of Company giving such corporate guarantee. For ready reference the said list of interested person is reproduced below: (a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director; (b) any firm in which any such director or relative is a partner; (c) any private company of which any such director is a director or member; (d) any body corporate at a general meeting of which not less than twenty five per cent of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or (e) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company. Section 180 of the Act, Restriction on power of the Board to borrow and in case of limits being breached no protection to the lender except in good faith and ignorance of limits. Thus, banks need to be more vigilant while extending credit to the corporate borrowers and also in case of renewal of existing facility. This writeup is aimed to briefly run through some important changes to be considered while conducting bank audit. While conducting bank audit reference should be made to respective RBI Circulars and guidelines. It is very important that every care should be taken while preparing audit reports as the same shall be used by Statutory Central Auditors for forming opinion and reporting on the matters to respective authorities.

Analysis of TDS/TCS provisions under Income Tax Act

CA MANISH BORAD Regional Council Member manishborad@hotmail.com

Nowadays TDS/TCS are the main tool for collecting taxes by the Government. It is a way to collect taxes, like a bee which collects honey without causing pain to the flower. It is similar to pay as you earn scheme, known as withholding tax in many countries like USA. Government has made possible fastest issue of refunds through ECS, so now persons from whose income TDS is deducted are now not uncertain over the fate of their refund arising out of TDS . However persons who are deducting TDS has to be much regular so that correct and timely credit is reflected in deductees form 26AS. Some of the TDS/TCS provisions which are of routine use are analyzed as under: 1. TCS ON Bullion & jewellery [Sec.206C(1D)]:- Tax shall be collected at swource @ 1% on sale consideration, by seller, if he receives any amount in cash: (i) on sale of bullions if such sale consideration exceeds Rs.2 Lakh, and (ii) on jewellery (if such sale consideration Exceeds Rs.5 Lakh). e.g. if sale consideration is 6 lakh and only a sum of Rs.100 has been received in cash from customer, then seller will have to collect TCS on whole Rs.6 Lakh @ 1%. Disallowance under section 40a(ia) is not applicable to any TCS provisions because 40a(ia) is not applicable to receipt or revenue items, 40a(ia) is applicable to payments or expenditure items. If an assessee (seller) has committed default u/s.206C(1D) by not collecting TCS on gold and even if the buyer has included this purchase consideration in his return of income, even though the seller will be treated having committed default u/s.206C(6A). 4. Age limit for 15G/15H:- Form no.15G is applicable for the age below 60 years & 15H for the persons who completes the age of 60 years at any time during the financial year. 5. Income limit for furnishing 15G :- A person (other than a senior citizen) including resident individual (other than a company or firm) can furnish form No.15G if :(i) His income from interest does not exceed the maximum amount which is not chargeable to income tax and, (ii) Tax on his estimated total income will be nil for that assessment year 6. Income limit for furnishing 15H:- A senior citizen can furnish form No.15H if tax on his estimated total income will be nil for that assessment year. 7. When & where to submit 15G/H/27C: - Form 15G/H must be obtained before or at the first moment, when the interest crosses the limit of Rs.5000(other than bank)/10000/- (in case of banks) during the financial year, it should not be taken after crediting or paying the interest. After obtaining, one copy of it must be submitted by the payer to the Commissioner/TDS-AO on or before 7th day of next following month in which the form is furnished to him. One copy of form 27C (in case of nil TCS) has to be submitted to the Chief Commissioner/Commissioner/TDS-AO to whom the Assessing Officer having jurisdiction to assess the seller is subordinate. 8. 15G by charitable trusts & institutions:- In view of the rule 28AB a charitable or religious trust or institution who claims exemption u/s.11 or 12 or educational institutions/hospital/university etc required to file return u/s.139(4C) cannot furnish form no.15G if their interest income exceeds the basic exemption limit i.e. Rs.2 Lakh for A.Y. 2013-14, but it will have to apply in form No.13 for nil deduction. 9. No TDS from income of notified institutions: - By insertion of sec.197A(1F) Finance Act 2012 has made a

provision that no deduction of tax shall be made from such specified payment to such institution, association or body or class of institutions, associations or bodies as may be notified by the Central Govt. in the official Gazette in this behalf. 10. Certificate of lower rate : - Assessee can apply in form No.13 for lower rate or nil TDS. Form No.13 has been amended w.e.f. 1st April 2011 in which information relating to 3 years assessed income, 3 years income tax returns alongwith enclosures, existing income tax dues, pending income tax and TDS returns, Gross turnover, gross profit, net profit, copies of P&L A/c, balance sheet, audit report, details of exempt income, has to be given. In case of charitable trusts and institutions it is necessary that all returns upto date have been filed. Lower rate certificate will be issued on a plain paper generated through computer system having serial number, its one copy will be sent directly to the payer and one copy to the payee. Trust and institutions will have to furnish to the assessing officer, half yearly details of income rece4ived without deducting tax on the basis of nil certificate issued to it. 11. Furnish PAN in all TDS/TCS correspondence: - It is necessary to quote PAN of the deductee and the deductor in all correspondence, bills, vouchers exchanged between them. 12. Include Zero TDS items also in TDS return: - If TDS is not deducted on payments because of certificate issued by assessing officer u/s.197, or declaration received in form No.15G or 15 H or 27C, even though amount paid or credited, PAN, name, has to be furnished in quarterly TDS returns. 13. Credit of TDS to other person (Sec.199 & rule 37BA):- When whole or any part of the income on which tax has been deducted at source is assessable in the hands of a person other than the deductee e.g. in view of Sec.64 relating to clubbing of income, then credit of whole or part of that TDS shall be given to that other person and not to the deductee. For this, deductee will have to file a declaration with the deductor specifying name, address, pan of the person to whom credit of TDS is to be given alongwith reasons for giving credit to that other person, then deductor will have to file return accordingly. 14. Credit of TDS to which year (Sec.199 & rule 37BA):- Credit to TDS shall be given for that assessment year for which the income is assessable. Where income is assessable over a number of years, credit for TDS shall be allowed across those years in the same proportion in which the income is assessable to tax. Credit for TDS shall be on the basis of TDS return and claim made by the claimant in his income tax return and subject to verification. 15. Disallowance u/s.40(a)(ia) w.e.f. 1st April, 2012 (A.Y. 2013-14):- Sec. 40a(ia) is applicable in case of payments covered u/s.193, 194A, 194C, 194H, 194I, 194J. Provision of Sec.40a(ia) is applicable when the assessee has failed to deduct or deposit TDS, but if the assessee has deducted TDS at a rate other than specified e.g. 1% in place of 10% then no disallowance u/s.40a(ia) is attracted. The same view has been held in the case of CIT v. S.K. Tekriwal (2013) 260 CTR 73 (Cal) (HC), Cinetek Telefilms P.Ltd. V. ACIT (2013) TIOL 641 (Mum.)(Trib). Presently if specified payments are made without deduction of TDS then whole of the expenses are disallowed u/s.40(a)(ia), now it is proposed that if the payee has discharged tax liability and filed his return of income u/s.139 hence payer will not be deemed to be in default u/s.201(1) then he will also not be deemed to be in default u/s.40(a)(ia) hence such expenses will be allowed and it will be deemed that the payer has dedeucted tax timely. Date of filing of the return of income by the payee will be treated as date of payment of TDS by the payer. If the payee has filed his return of income after 30 Sept. then such expenses will be disallowed u/s.40A(ia) in the hands of payer (deductor)and will be allowed in the following Assessment year. If the receipient had filed his return of income before 31st Oct. 2013 (extended due date for tax audit returns for A.Y. 2013-14), [or if date would not have been extended then, receipient should have filed his return of income till 30th Sept.2013] then as per first proviso to Secd.201(1) and first and second proviso to sec. 40a(ia) of the act, the date of filing of the return by the payee will be treated as date of payment of TDS. First proviso of Sec.40a(ia) says that if TDS has been deposited after the due date specified in Sec.139(1), then such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Second proviso to Secd.40a(ia) says that it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee. The said provisions is procedural and clarificatory in nature hence retrospective and will be applicable to

pending cases also. As held in the case of ACIT V. Pratibha Exim Ltd. (2013) 22 ITJ 285 (Trib. Indore) and ITAT Rajkot Bench in the case of Bharti Auto Products Vs. CIT (2013) 37 Taxmann.com 37 (Rajkot Trib) SB., 27 ITR (Trib.)611 Disallowance u/s.40a(ia) is applicable to payable items only as held in case of Merilyn Shipping and Transport Ltd. Vs. Add. CIT (2012) 136 ITD 23 (Vishakhapatanam) (SB), but it was distinquished in the case of CIT Vs. Crescent Export Syndicate (2013) 33 Taxmann.com 250 (Cal) (HC) and held that view expressed in Merilyn Shipping is not acceptable. Allahabad High Court in the case of CIT V. Vector Shipping Service P.Ltd. (All)(HC) ITA No.122 of 2013 without dealing with the decisions upheld the decision of Merilyn Shipping and in the case of Rishti Stock and shares P.Ltd. V. ACIT ITAQ No.112 of 2012 Mum. Tribunal held that in case of conflicting views of the high courts, view in favour of the assessee should be taken, hence allowed in favour of the assessee. 16. How to calculate interest on late payment of TDS: (a) If a person liable to deduct TDS fails to deduct whole or part of TDS then he will be liable to pay u/s.201(1A) simple interest @ 1% every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted, (b) if TDS is deducted but not paid then @ 1.5% for every month or part of month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid. For example a person has deducted TDS Rs.12500/- on 25 April, 2012 then he is liable to deposit TDS on 7 May 2012 but if he pay TDS on 18 May 2013 then here delay is 13 months so interest will be 19.5%, if TDS is deposited on 24 May 2013 even though delay is 13 months, but if TDS is deposited on 26 May, 2013 then delay is 14 months, i.e. whole month is reckoned from the date of de4duction and to the date of deposit of TDS. In earlier year Income Tax Department was also calculating interest on the aforesaid basis but presently TDSCPC is calculating interest treating month or part of a month as a m,onth, without considering date of deduction or date of deposit. Since the order u/s.201 and 200A are appealable hence appeal can be filed against such excessive and unreasonable interest calculation or a rectification application can be filed u/s.154. 17. Late fees for TDS/TCS returns u/s.234E :- W.e.f. 1st July, 2012 if TDS return is filed late, then u/s.234E late fees of Rs.200/- per day will have to be deposited before filing TDS/TCS return, however it is specified that late fees should not exceed TDS/TCS deductible/correctible for that quarter. In addition to this, if TDS and late fee and interest due thereon as well as TDS return is not deposited within one year from the due date then penalty u/s.271H ranging from 10 thousand to 1 lakh may be imposed. Provisions of sec.234E has been made applicable w.e.f. 1st July, 2012. It states that Amount of late fee @ Rs.200/- per day shall be paid before delivering a TDS statement, It means that any late fee should have been deposited just at the time of delivering TDS statement and not later than this. Once the TDS statement has been accepted without late fee, then such late fee cannot be recovered later on. However this late fee cannot be waived later on even for any reasonable cause, because it is not a penalty but a late fee. As per provisions of sec.234E(4) late fee is applicable for TDS statement which is to be delivered or caused to be delivered for tax deducted at source or tax collected at source, as the case may be, on or after 1st day of July, 2012. Late fee cannot be recovered for TDS statements which were due for F.Y. 2011-12 as well as TDS statement late fee cannot be recovered for F.Y. 2012-13 or till today, if not collected at the time of delivering TDS statement by the NSDL (Income tax department). If a person has filed to deduct TDS or failed to collect TCS then also late fee is not applicable for such period of failure, because late fee under section 234E is imposable only in cases of default where the assessee has failed to deposit TDS return (statement) for tax deducted or collected at source. So it does not cover cases where assessee has failed to deduct TDS or failed to collect TCS. e.g. a person Mr. A has paid interest of Rs.55000/- to Mr. B on 10th May 2013, and deducted TDS of Rs.5500/- on 10th May 2013 then this TDS is deposited on or before 7th June, 2013 and TDS return for this period becomes due on 15th July, 2013. Here, if the TDS return (statement) is filed on 5th Nov., 2013 then there is a delay of 112 days, but if this TDS was failed to be deducted on 10th May 2013 and later on deducted on 12th August, 2013, then this TDS has to be deposited on or before 7th Sept., 2013 and TDS return for this (second) quarter has to be deposited on or before 15th Oct., 2013. So the TDS return has to be filed for the quarter during which TDS was deducted and

not for the quarter during which TDS was deductible i.e. even if Rs.55000 has been paid on 10th May in first quarter (1 April to 30th June), but since TDS was not deducted in the first quarter and tds of Rs.,5500/- was deducted in the second quarter i.e. on 12th August 2013 then this sum will be included in the 2nd quarter and not in the first quarter so that delayed filing of tds return for second quarter will be counted only from 15th Oct.2013 (due date of tds return for second quarter) to 5th Nov., 2013 (date of filing of tds return) i.e. delay of only 20 days. Section 200(3) of the act also says that tds statement shall be filed after paying the tax deducted and rule 31A which talks about filing of tds returns where deduction is made under section 192 to section 196D, so it does not impose liability to file tds statement for tax deductible but not deducted. On the other hand it is also pertinent to note that the law has not made any person responsible, to deposit late fee, in case of default in depositing late fee alongwith tds statement, which can be inferred from the provisions of sec.204 of the act, which states as under: Sec.204 of the act has made persons responsible for sec.190 to sec.203AA and section 285 this phrase does not cover section 234E, it means no one is responsible for default u/s.234E. Therefore if any late fee is due and not deposited alongwith the tds statement none can be held responsible to deposit it. Demand of llate fee cannot be faised also by way of processing of TDS statement, because sec.200A(1) of the act talks about tds returns by a person deducting any tds, so it does not cover cases of tax deductible but not deducted at all, the provisions of sec.,200A of the act also does not permit processing of tds statement for default in payment of late fee, except any arithmetical error, or incorrect claim, or default in payment of interest, any tds payable or refundable ect. section 200A also does not cover processing in cases of tax collection or collectible at source (TCS). An assessee cannot be treated in default also u/s.201(1) or 206C (6A) due to non payment of late fee. And even the TDS return(statement) is also not treated as defective, like non payment of tax and interest treats an income tax return as defective u/s.139(9) of the act. If a person has not paid late fee then, even though it shall not be charge on all assets because sec.201(2) & 206C(8) does not cover late fee. Sec.234E also doesnt say that in case of default in depositing late fee, the defaulting persons will be deeme4d an assessee in default. In view of the above late fee cannot be recovered later on, by way of any notice, neither notice of demand u/s.156 can be issued for this. If any notice is issued by way of processing tds statement u/s.200A, then apply for rectification of mistake u/s.154 of the act or directly file an appeal before Commissioner of Income tax (Appeals). 18. Interest in case of Deemed date of payment of Tax :- As per section 201 if the payee has furnished his return of income and paid tax on such income and payer furnishes a certificate from Chartered Accountant to this effect in Annexure A and submit form No.26A to DGIT(Systems), then date on which return is furnished by the payee will be treated as date of payment of TDS ande not the date of actual date of payment of tax by the payee, i.e. payer will be required to pay interest u/s.201(IA)(i) till date of filing of return u/s.139 by the payee. Similar provisions are made applicable u/s.206C [except in case of sec.206C(1D)] if the buyer has discharged the tax liability and form no.27BA is furnished to DGIT (Systems). In this case no penalty u/s.221 shall be imposed if sufficient reasons are produced. 19. No interest u/s.220(2) :- When interest is charged u/s.201(1A) on the amount specified in the intimation u/s.200A(1), then no interest will be charged for the same amount for the same period u/s.220(2). Benefit of similar provisions are not made applicable to TCS i.e. to Sec.206C(7). 20. Adjust excess or short deduction of TDS on interest u/s.194A or TDS on salary:- The deductor can increase or reduce the amount of TDS u/s.194A arising out of excess or short deduction or failure to deduct during the financial year. In such a case e.g. if the deductor deducts tds later on in any month because of short or non deduction in earlier month then, in my opinion the deductor will not be liable to pay interest on earlier short or no deduction, u/s.201(1A), because sec.201(1A) of the act does not start with the words notwithstanding anything contained in any other provisions of this chapter. In case of TDS on salary same provision are applicable that at the time of deduction, increase or reduce TDS for adjusting any excess or deficiency or failure to deduct during the financial year.

21. TDS on rent U/s.194:(i) TDS on rent is applicable in case of land, building (incl. factory building), machinery, plant, equipment, furniture, fittings. (ii) If there are more than one payee/co-owners, each having definite and ascertainable share then limit of Rs.1.80 Lakh is applicable to each co-owner. 22. TDS ON PURCHASE OF IMMOVABLE PROPERTY U/s.194 IA w.e.f. 1st June, 2013 if any person purchases any immovable property other than rural agricultural land from a resident transferor and the consideration is Rs.50 Lakh or more then he has to deduct tds @ 1% at the time of payment or credit whichever is earlier. TDS has to be deducted on transaction value and not on the stamp duty value e.g. if a property has been purchased for Rs.48 Lakh and its stamp duty value is Rs.52 Lakh, then there is no liability to TDS, because transaction value is less than Rs.50 Lakh. 23. TDS on service tax component :- TDS is deductible on the entire consideration including service tax but in the case of TDS on rent, TDS will not be deducted on service tax component included in rent. 24 TDS on payment to transporter : - In view of Sec.194C(6) no tds is required to be deducted on payment to transport contractor during the course of plying, hiring or leasing goods carriage, if transporter furnishes his PAN, however such information i.e. name of transporter, amount paid or credited, his PAN will have to be submitted in quarterly e-filing of tds return even in case of nil TDS. TDS @ 20% will have to be deducted if the transporter does not furnish his PAN. 25 Due date of depositing TDS:- TDS deducted on income credited or paid on any day in the month of March can be deposited upto 30th April, and in any other month within 7 days from the end of the month. 26. Challan Correction : - If there has been mistake in depositing tax challans, it can be corrected through challans correction mechanism. Or through an application to concerned TDS-AO. 27. Refund of excess TDS deposited : - Upto 31st March, 2010 Excess TDS deposited can be adjusted in next quarter in the same financial year, otherwise application for refund can be made to Assessing Officer (TDS) within 2 years from the end of financial year in which TDS made. However w.e.f. 1st April 2010 Sec.200A itself prescribes that refund should be granted through processing of returns. Sub-rule 3A of rule 31A prescribes that application for refund of excess tds deposited shall be in form No.26B electronically under digital signature. 28. 20% TDS for wrong PAN:- If deductees PAN is not available or invalid then it will be assumed that deductee has not furnished his PAN to the deductor and then 20% TDS will be deductible. 29. TDS on compensation :- U/s.194LA there is TDS of 10% on compensation for compulsory acquisition under any law, of immovable property (other than agricultural land), for payment exceeding 1 lakh now w.e.f. 1st July 2012 this limit is increased to 2 Lakh. 30. Penalty for wrong information: - On furnishing incorrect information (e.g. wrong PAN & amount) in TDS return, w.e.f. 1st July, 2012 penalty ranging from 10 thousand to 1 lakh may be imposed u/s.271H(1)(b). 31. Issue of TDS/TCS Certificate : - Form No.16A/27D are to be issued within 15 days from the due date of filing of quarterly TDS/TCS returns:(i) i.e. in case of all deductors except Govt. deductors:- upto 30 July, 30 Oct. 30 Jan, 30 May, (ii) i.e. in case of Government deductors:- upto 15 Aug., 15 Nov., 15 Feb., 30 May; & form No.16 (Salary) is to be issued on or before 31st May. 32. Due date of Deposit in case of TDS by Govt:(i) without production of income tax challans, TDS/TCS has to be deposited on the same day, (ii) in case of payment through challans within 7 days from the end of the month in which tax is deducted/collected. 33. Form No.24G by Govt. Deptt., - In case of TDS/TCS without production of income tax challans deductor will report TDS to PAO (Pay & A/c officer) or DDO, the PAO/DDO will submit form No.24G to NSDL within 10 days from the end of the month. BIN(Book Id.No.) will be generated for each deductor. 34. Due date of depositing TCS :- All sums collected in accordance with the provisions of Sec.206C(1) or 206C(1C)) by TCS collectors (who collects TCS) other than Govt., shall be paid within one week from the last day of the month in which the collection is made. Due to drafting error Rule 37CA does not prescribe any due date for payment of TCS in case bullion or jewellery Sec. 206C (1D). However it may be assumed that it will

also be deposited within 7 days from the end of the month. 35. Person responsible for paying : - Person responsible for paying was not clear in case of Central or State Govt. Deptt., now it stated w.e.f. 1st July 2012 that Drawing and Disbursing Officer or any other persons (by whatever name called) responsible for making payment shall be responsible for paying U/s.204 for the purpose of Sec.190 to 203AA & sec.285. In case of TCS person responsible for collecting and depositing has not been defined, because sec.204 talks only about TDS, not TCS. 36. Form for TDS returns: - Form 24Q applicable for TDS on salary, 26Q in case of other TDS, 27Q for payment to non-resident, 27EQ for TCS. 37. Rectification and appeal against intimation of TDS:- Earlier intimation of TDS processing (issued U/s.200A) could not be subject of rectification u/s.154 of the act or appeal, only notice u/s.156 could only be rectified or appealed, therefore now w.e.f. 1st July 2012 it is stated that intimation of TDS processing can also be subject to rectification u/s.154, appealable u/s.246A and deemed to be notice of demand u/s.156. 38. Order U/s.201 against TDS statement filed/not filed: - If a person has failed to deduct whole or any part of TDS and filed the TDS statement then order against it can be passed: (i) within 2 years from the end of the financial year in which the TDS statement is filed for tax deducted, and (ii) in six years from the end of the financial year in which the gross payment (without TDS) is made or credited and no TDS statement has been filed. This time limit of 6 years is extended from 4 years w.e.f. from 1st April 2010. 39. Furnishing of form No.16A/27D:- For TDS deducted on or after 1.4.2011 by companies including banking companies and cooperative banks, form No.16A is to be issued dfirectly downloaded from the tin website (www.tin-nsdl.com) and this provision is applicable to all deductors issuing form No.16A for tax deductible on or after 1.4.2012, and all such deductors will have to verify and authenticate the correctness of this form. 40. Sec.195: (a) Any person liable to pay to a non-resident any interest or other sum (other than salary) chargeable under the provisions of this Act shall be liable to TDS (withholding tax rate) or at the rates specified in ADT agreement, whichever is lower. (b) If the payment is not chargeable to tax in India then no TDS is required. (c) if the payer considers that whole of such sum is not chargeable under this act, but any portion of this is only chargeable then he may apply to the assessing officer u/s.195(2) for lower rate [no form is prescribed if the payer applies to ITO(TDS)]. (d) If recipient wants the payment without deduction of tax (not lower rate) u/s.195(3) then he will have to apply in form No.13 and if the recipient is foreign banking company then in form No.15C and if the recipient is a branch and other than foreign bank then in form No.15D. (e) In case of payment to non-resident certificate has to be obtained from a chartered accountant in form No.15CB and information of such proposed remittance has to be uploaded in form no.15CA on www.tinnsdl.com and then it has to be submitted to the bank before remittance. 41. PENALTIES: (i) Sec.271C/271CA: - If a person fails to deduct/collect whole or any part of tax, then such persons shall be liable to penalty equal to the amount of tax, which such person failed to deduct or collect. By insertion of first proviso to Sec.201(1)/206C(6A) of the act if the recipient/buyer except in case of gold 7 jewellery, has included the sum in his return of income then the deductor/person responsible to collect, will not be held defaulter. It does not cover cases where assessee failed to pay tds/tcs. (ii) Sec.271H:- w.e.f. 1st July 2012 penalty ranging from 10000 to Rs.1 Lakh may be imposed on failure to submit tds return or on furnishing incorrect TDS/TCS return. Penalty on failure to submit tds return shall not be levied if the person has after paying tds/tcs along with fee and interest, filed the tds return before the expiry of period of one year from the due date of tds return. (iii) Sec.272A(2): - Penalty of Rs.100/- per day on failure to furnish TDS/TCS returns

[U/s.200(3)/206C(3)/], or failure to furnish any statement referred u/s.206A(1), or failure to deliver in due time form No.15G/15H/27C, or failure to furnish form No.16/16A/12BA/27D. Penalty should not exceed the tax deductible or collectible. Penalty for delay in filing TDS/TCS returns (Sec.200(3)/206C(3) will not be applicable w.e.f. 1.7.2012 because it is replaced by sec.234E. (iv) Sec.272BB(1)/(1A)/BBB:- If a persons fails to apply for TAN or to quote TAN number in returns or certificates then penalty of Rs.10000/- may be imposed. (v) Sec.273B provides that if the assessee proves that there was reasonable cause for delay or default then penalty cannot be imposed under aforesaid sections. 42. Prosecution Sec.276B-TDS/276BB-TCS: If a person fails to deposit TDS/TCS then he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine. Failure to deduct or collect tax is not an offence but failure to deposit TDS/TCS is an offence u/s.276B/BB. In view of Sec.278AA no person shall be punishable for any failure referred to in Sec.276B i.e. default in payment of tds, (this immunity is not available in case Sec.276BB TCS), if he proves that there was reasonabale cause for such failure. Offences u/s.276B/BB can be compounded by the Chief Commissioner or Director General. As per Sec.279A offence u/s.276B (not 276BB) is a non-cognizable (in which no FIR or arrest can be done without specific permission of the court.). In view of the above analysis of tds provisions it can be summarized that an assessee has to take great care in discharging duties towards tds/tcs dues and deductibility, otherwise any person may have to face penal and prosecution consequences in discharge of duties which does have nothing to do with his own business, because in the case of tds/tcs the `a is only acting as an agent of Government without any remuneration or rewards.

Bank Audit March 2014

CA Pooja Gupta, Ghaziabad FCA, DISA
Central Statutory Auditor- UCO Bank vedgoel@yahoo.co.in
A Important NEW RBI Guidelines applicable W.E.F F.Y. 2013-14 (a) In Current year RBI had vide Circular no DBOD.BP.BC.No.99/ 21.04.132/2012-13 dated 30,May 2013 incorporated certain amendments in IRAC norms applicable on the recommendations of the Working Group Chaired by Shri B. Mahapatra:(i) It has beendecided to extend the prescribed period of six months from theoriginal DCCO to one year from the original DCCO within which a non-infrastructureproject will have to commence commercial operation for complying with the provisions ofparagraph 4.2.15.4 (ii) of the MC on IRAC Norms 2012. Further in respect of non-infrastructure project if the delay in commencement of commercial operations extends beyond the period of one year from the date of completion as determined at the time of financial closure, banks can prescribe a fresh DCCO and retain the standard classification by undertaking the restructuring of accounts in accordance with the provisions in this regard provided the fresh DCCO does not extend beyond a period of 2 years from the original DCCO. As such project loans will be treated as standard assets in all respects, and they will attract standard asset provision of 0.4 per cent. (ii) it has been decided that mere extension of DCCO even in the case of CRE projects would not be considered as restructuring, if the revised DCCO falls within the period of one year from the original DCCO and there is no change in other terms and conditions except possible shift of the repayment schedule and servicing of the loan by equal or shorter duration compared to the period by which DCCO has been extended. (iii) Banks have also represented that DCCO of infrastructure projects under the public private partnership (PPP) models may get extended because of shift in Appointed Date (as defined in the concession agreement) due to the inability of the Concession Authority to comply with the requisite conditions, and such extension in DCCO is treated as restructuring, even though borrower may have no control over shift in Appointed Date. In view of this,it has been decided to allow extensions in DCCO due to aforesaid reasons, not to be treated as restructuring, subject to following conditions: a) The project is an infrastructure project under PPP model awarded by a public authority; b) The loan disbursement is yet to begin; c) The revised date of commencement of commercial operations is documentedby way of a supplementary agreement between the borrower and lender; and d) Project viability has been reassessed and sanction from appropriate authorityhas been obtained at the time of supplementary agreement. (iv) The option of notionally computing the amount of diminution in the fair value of small accounts at 5 per cent of the total exposure at small/rural branches in respect of all restructured accounts where the total dues to bank(s) are less than one crore would be available to all branches till a further review in this regard. (v) Specified period:-it has been decided that the specified period should be redefined as a period of one year from the commencement of the first payment of interest or principal, whichever is later, on the credit facility with longest period of moratorium under the terms of restructuring package. (vi) it has been decided that banks should ensure that the unit taken up for restructuring achieves

viability in 8 years, if it is engaged in infrastructure activities, and in 5 years in other cases. (vii) Period for Quick implementationin case of non CDR cases :- it has been decided that the incentive for quick implementation of the restructuring package in non-CDR cases would henceforth be available, if the approved package is implemented by the bank within 120 days from the date of receipt of application. There is no change in the time period as regards CDR mechanism. (viii) It has been decided that promoters sacrifice and additional funds brought by them should be minimum of 20 per cent of banks sacrifice or 2 per cent of the restructured debt, whichever is higher. The promoters sacrifice should invariably be brought upfront while extending the restructuring benefits to the borrowers. (ix) The WG recommended that conversion of debt into preference shares should be done only as a last resort and such conversion of debt into equity/preference shares should, in any case, be restricted to a cap (say 10 per cent of the restructured debt). It also recommended that any conversion of debt into equity should be done only in the case of listed companies. It has been decided to accept the recommendation and banks should be guided accordingly. (x) it has been decided that all restructuring packages must incorporate Right to recompense clause and it should be based on certain performance criteria of the borrower. In any case minimum 75 per cent of the recompense amount should be recovered by the lenders and in cases where some facility under restructuring has been extended below base rate, 100 per cent of the recompense amount should be recovered. (xi) it has been decided that promoters personal guarantee should be obtained in all cases of restructuring and corporate guarantee cannot be accepted as a substitute for personal guarantee. However, corporate guarantee can be accepted in those cases where the promoters of a company are not individuals but other corporate bodies or where the individual promoters cannot be clearly identified. (b) Some important IRAC norms (i) In all NPA cases with balance 5 crores and above stock audit at annual interval by external agencies appointed as per approved guidelines. (ii) Regular and adhoc limit need to be reviewed / regularised with in 180 days from the due date of renewal or date of adhoc sanction otherwise account will be classified as NPA. (iii) The outstanding in an account based on drawing power calculated from stock statement older than three months would be deemed as irregular and in accounts where such irregular drawings are permitted for a continuous period of 90 days the account would be classified as NPA even if the unit is working on borrower financial position. (iv) The IRAC Norms should be applied Borrower wise and not Facility wise i.e if one of the account is classified as NPA then all the accounts of borrower will be classified as NPA except bills discounted under LC. (v) In cases where the realisable value of security is less than 50% of the value assessed by bank or accepted by RBI at the time of last inspection such NPA accounts should be straight away classified as doubtful assets. (vi) In case of NPA accounts where the realisable value of security as assessed by approved valuers / RBI is less than 10% of the outstanding in borrower account, the security should be ignored and the advance should be classified as loss assets and 100% provision should be made. (vii) In case of consortium advances the asset classification should be based on record of recovery of individual member bank, unless the member bank get the share of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer of their share of recovery. (viii) In case of loans with moratorium for payment of interest, the interest does not become overdue on date of debit but becomes overdue on the due date for payment of interest. (ix) In case of credit facilities backed by central government guarantee there is exemption from

classification of advances but no exemption in case of income recognition. In such cases the account will be classified as NPA only when Central Government repudiates its guarantee when invoked. (x) In case of credit facilities backed by state government guarantee there is no exemption, the IRAC norms as applicable in ordinary advance would applied. (xi) Agricultural Advances In case of direct agricultural advances (as referred in annexure-1 annexed herewith) following classification criteria would apply (a) In case of short duration crops (i.e. crops where period upto harvesting is not longer than one year as determined by State Level Bankers Committee) if interest or principal remains overdue for two crop seasons. (b) In case of long duration crops (i.e. other than short duration crops) if interest or principal remains overdue for one crop season. (xii) The availability of security or net worth of borrower or guarantor should not be taken into account for the purpose of treating an advance as NPA or otherwise except in case of advances against term deposit, NSC eligible for surrender, IVP, KVP and Life policy provided adequate margin is available. (xiii) In respect of provisioning with respect to sub standard advances following should be taken into consideration (a) General provision of 15% of total outstanding should be made without making any allowance for ECGC guarantee cover and securities available. (b) In respect of unsecured exposure ab-initio (here the crux is ab-initio) i.e. only those loan are covered where the security since the beginning of loan is not more than 10% of total outstanding exposure. Exposure includes funded and non funded exposures. The security means tangible security properly discharged to the bank. In such cases additional provision of 10% in case of non infrastructure and 5% in case infrastructure loan be made. (xiv) Vide circular dt. 20.11.2012 the definition of infrastructure lending has been harmonised with that of the master list of infrastructure sectors notified by Government of India on 27.03.2012. The exposure of banks to projects under sub-sectors which were included under our previous definition of infrastructure, but not included under the revised definition, will continue to get the benefits under infrastructure lending for such exposures till the completion of the projects. However, any fresh lending to those sub-sectors from the date of this circular will not qualify as infrastructure lending. (xv) With respect to immovable properties valuing Rs. 50 crores and above atleast two valuation from independent bank approved valuers be obtained. Further it should be ensured that in all accounts valuation of property from independent bank approved valuers should not be older than three years. Though there are various other provisions for which you can refer the master circular dt. 1st July, 2013.

ACHIEVEMENT
BREIF ABOUT CA.NEELAM JAIN

Neelam Jain, who is about 43 year old has recently qualified CA course in Nov.2013 examination. She is originally belongs to Modinagar and married with CA Sanjay Kumar Jain at Muzaffarnagar in 1995. She is a Gold Medalist in MSc (Chem) of 1993. Neelam Jain had started this course in Dec. 2008 after 13 year of her marriage life having two sons. Before entering this course, she was only a house wife, but due to her interest in education and interest in husbands profession, her husband inspired her for CA Course. She starts and completed the course successfully with self study in period of 5 years (including CPT). This is big achievement and inspiration for all the students, that never loose their hope.

(To be obtained on branch letter head)

Management Representation Letter
To, M/s ___________________, Chartered Accountants, _______________, _______________,
Dear Sir(s), Sub: Statutory Audit for the year ended March 31, 2014 This representation letter is provided in connection with your audit of the financial statements of _____________ branch of _______________ bank, for the year ended March 31, 2014, for the purpose of expressing an opinion as to whether the financial statements give a true and fair view of the state of affairs of ___________ branch of _______________ bank as of March 31, 2014, and of the results of operations for the year then ended. We acknowledge our responsibility for preparation of financial statements, in accordance with the financial reporting framework applicable to the Bank, including the regulatory requirements of the Reserve Bank of India. We confirm to the best of our knowledge and belief, the following representations: 1. Accounting Policies The accounting policies, as approved by the board of directors of the Bank, have been duly followed. There are no changes in the accounting policies followed by the branch during the current year. 2. Assets 2.1. The All the assets owned by the bank and transferred to the branch and such other asset/s, as has/have been acquired by the branch, has/have been duly accounted for, and none of the assets is encumbered. 2.2. The fixed assets held by Branch have been accounted at the Head Office and have been physically verified at the year end. No discrepancies have been noticed on such verification. Depreciation on these assets has been provided at Head Office as per the policy of the bank. 2.3. In respect of assets other than fixed assets, the same do not have a value lower than realisable value. 2.4. The branch is operating from a leased premise and there is no dispute with respect to the tenancy and lease charges. 3. Capital Commitments At the balance sheet date, there were no outstanding commitments for capital expenditure other than those disclosed in the financial statements. 4. 5. Cash and Bank Balances The cash balances as on March 31, 2014 has been verified by us. Liabilities The branch has recorded all known liabilities in the financial statements.

6. Contingent Liabilities 6.1. The branches has disclosed in the notes to the financial statements all; (a) Guarantees that we have given to third parties; (b) Letter of Credits (Local/Import); (c) Letter of Comfort (Local/Import); (d) Deferred Payment Credits/Guarantees (Local/Import); and (e) All other contingent liabilities. 6.2. Other than for advances, there are no matters involving the branches in any claims in litigation, arbitration or other disputes in which there may be some financial implications, including for staff claim, branch rentals, municipal

taxes, local levies, etc. except for those which have been appropriately included under contingent liabilities. 6.3. Guarantees, if any are disclosed net of margins as at the year-end, and expired guarantee, if any where the claim year has also expired has been correctly removed from the branches return. 6.4. None of the contingent liabilities disclosed in the notes are likely to result in a loss, requiring adjustment of assets or liabilities. 7. Provisions for Claims and Losses Provision has been made in the accounts for all known losses and claims of material accounts. 8. Events after the Balance Sheet Date There have been no events subsequent to the balance sheet date that require adjustments, or disclosure in, the financial statements or notes thereto. 9. Profit And Loss Account Except as disclosed in the financial statements, the result for the year were materially affected by: (a) circumstances of an exceptional or non-recurring nature; (b) changes or credits of prior years; (c) changes in accounting policies. 10. Reports We have made available to you all the following latest reports on the accounts of our branches, and compliance by the branches on the observations contained therein: (a) Previous years branch audit report; (b) Internal inspection reports; (c) Concurrent Audit Reports; (d) Migration Audit Reports; (e) Report on any other Inspection Audit that has been conducted during the course of the year relevant to the financial year 2013-14. Apart from the above, the branches has not received any show cause notice, inspection advice, etc. from Government of India, Reserve Bank of India, or any other monitoring or regulatory authority of India that could have a material effect on the financial statements of the branch during the year. 11. Balancing of Books The books of accounts are computerised and hence the subsidiary records are automatically balanced with the relevant control records. In the case of manual sub-ledgers maintained, we confirm that they duly match with the general ledger balances. 12. Overdue/Matured Term Deposits All overdue/matured term deposits are held as overdue/matured term deposits. No provision of interest on overdue/matured Term Deposits has been made. 13. Advances In respect of the Advances and income thereon, the income recognition and asset classification (IRAC) norms prescribed by the Reserve Bank of India have been complied with. 14. Outstanding in Suspense/ Sundry Account The year-wise/ entry-wise break up of amounts outstanding in Sundry deposits/ sundry assets as on March 31, 2014 has already been submitted to you along with explanation of the nature of the amounts in brief and supporting evidence relating to existence of such amounts in the aforesaid accounts. 15. Interest Provisions 15.1. Interest provision has been made on deposits, etc. except overdue/matured fixed deposits, in accordance with the extant instructions of the Head Office. 15.2. The interest provision for Head Office Interest shall be made at the Head Office. 16. Stationery Stock of unused stationery like security papers, demand draft book, etc. have been produced for your physical verification and are in order. 17. Long Form Audit Report-Branch Response to the Questionnaire In connection with the LFAR, complete information as regards each item in the questionnaire has been made available to you in order to enable you to

verify the same for the purpose of your audit. 18. Other Certification Duly authenticated, information as regards other matters which, as per the banks letter of appointment, require certification has been made available to you. 19. General There is no enquiry going on or concluded during the year by CBI or any other vigilance or investigating agency on the branch or on its employees and no cases of frauds or of misappropriation of assets of the branches have come to the notice of the Management during the year other than for amounts for which provisions have already been made in the books of accounts. 20. Provision for non-performing assets, depreciation, provision for income tax, provision for bonus, gratuity, service tax, etc., is made at Head Office. Therefore, the same has not been provided in the branch accounts. 21. The financial statements are free of material misstatements, including omissions.

22. The branch has complied with all aspects of contractual agreements that could compliance. There has been no non-compliance with requirements of regulating authorities that could have a material effect on the financial statements in the event of non-compliance. 23. We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities reflected in the financial statements. 24. The other particulars required have already been given to you and particulars and other representations made to you from time to time are true and correct in all respects. 25. Tax Audit for the year ended March 31, 2014 (Tax Audit in terms of Section 44AB of the Income Tax Act, 1961) The information required for the tax audit under section 44AB of the Income Tax Act, 1961 for the year ended March 31, 2014 has been made available to you in order to enable you to verify the same for the purpose of your report thereon. We certify the following: PART A 25.1. Permanent Account No. of the bank is given in Form 3CD. 25.2. The address as per the jurisdiction of the assessee falls under section 124 of the Income Tax Act, 1961 and given in Form 3CD. 25.3. The status as defined under the Income tax Act, 1961 is Banking Company. PART B 25.4. There is no change in nature of business in current year as compared to preceding previous year. 25.5. The books of accounts maintained by us have been correctly disclosed in clause 9(b) of Form 3CD. 25.6. Our Profit & Loss account does not include profits and gains assessable on presumptive basis under section 44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB, 172 of the Income Tax Act, 1961. 25.7. The method of accounting followed is as per clause 11(a) which has been consistently followed in the immediately preceding previous year. There was no change in the method of accounting employed vis--vis the method employed in the immediately preceding previous year. 25.8. Sum received from employee towards contributions to any provident fund or superannuation fund or any other fund mentioned in section 2(24)(x) which is paid/ not paid with due dates to concerned authorities under section 36(1)(va) are mentioned in Clause 16(b) of our Form 3CD and the same are correct. 25.9. In clause 17 of Form 3CD, there are no other amounts of such items debited to Profit & Loss Account. 25.10. No payments are made to persons specified under section 40A(2)(b). 25.11. There is no amount of profit chargeable to tax under section 41 as disclosed under clause 20 of Form 3CD. 25.12. Except for the items shown under clause 21(ii)(B), no tax, duty or other sum as referred to under section 43B has been provided as at the year end. 25.13. No expenditure/ income of an earlier year has been debited/ credited to the Profit & Loss Account except to the extant disclosed under clause 22(b) of Form 3CD.

25.14. No loans or deposits of Rs.20000/- or more have been repaid in cash other than those specified in the statement of particulars as given in the respective clause of Form 3CD. The details of loans or deposits of Rs.20000/- or more given in the said statement of particulars is true and correct. 25.15. Section-wise details of deduction admissible under chapter VI-A No other deduction other than those mentioned in clause 26 of Form 3CD is available to the branch. 25.16. Details of delay in payment of tax deducted at source to the credit of the Central Government are given in the statement of particulars. Apart from that, there are no other delays in payment of Tax Deducted at Source. 25.17. The other particulars required have already been given to you and particulars and other representations made to you from time to time are true and correct in all respects. Thanking you. Yours faithfully, For & on behalf of ________________ Bank

(Branch Manager) Place: Dated:

KINDLY CLICK THE FOLLOWING LINK

www.docs.google.com/file/d/0B1LjMQHFH8VNXzBvWUNPWkk1dkE/edit

TO DOWNLOAD COMPLETE PDF OF HAND BOOK ON CBS for CAs

Compiled by: CA. Mukesh Saran, Lucknow M.Com., FCA, DISA(ICAI) E Mail: saranfca@gmail.com

FALICITATION OF CHAIRMAN CIRC CA. NITISH AGARWAL

UDAIPUR

BALOTRA

NOIDA

ALLAHABAD

GLIMPSES OF SEMINAR ON BANK AUDIT

GWALIOR

BHOPAL

EDITORIAL BOARD
CA. Nitish Agarwal CA. Vinay Mittal CA. Anuj Goyal CA. Abhay Kumar Chhajed CA. Avichal SN Kapur CA. Piyush Agrawal CA. Vikas Jain CA. Rajesh Kumar Mangal, Jaipur CA. Satish Chandra Jain, Udaipur CA. Dilip Goyal, Jodhpur CA. Pawan Mittal, Sri-ganganagar Editor in Chief Editor Council Member Member Member Member Member Co-opted Member Co-opted Member Co-opted Member Co-opted Member

Disclaimer: The views and opinions expressed or implied in this e-Newsetter are those of the authors and do not necessarily reflect those of CIRC of ICAI

Address: CIRC of ICAI, ICAI BHAWAN, 16/77 B, Civil Lines, Kanpur-208001 Phones: 3011151*3011153*3011182 EPABX: 3989398. Fax: 3011193* e-mail: circ@icai.in* Website: www.circ-icai.org