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Sunday, July 31

Economic Value Added (EVA) - A close look.


Economic Value Added (EVA) - A close look.

In corporate finance, Economic Value Added or EVA, a registered trademark of Stern Stewart & Co., is an estimate of a firm's economic profit - being the value created in excess of the required return of the company's investors (being shareholders and debt holders). Quite simply, EVA is the profit earned by the firm less the cost of financing the firm's capital. The idea is that value is created when the return on the firm's economic capital employed is greater than the cost of that capital; see Corporate finance: working capital management. This amount can be determined by making adjustments to GAAP accounting. There are potentially over 160 adjustments that could be made but in practice only five or seven key ones are made, depending on the company and the industry it competes in.

Contents

  • 1 Calculating EVA
  • 2 Comparison with other approaches
  • 3 Relationship to Market Value Added
  • References
  • 5 Usage of EVA


Calculating EVA

EVA is Net Operating Profit After Taxes (or NOPAT) less a Capital Charge, the latter being the product of the cost of capital and the economic capital. The basic formula is:
 \mathit{EVA} \ = \  ( r - c ) \cdot K   \ = \  \mathit{NOPAT} -  c \cdot K
where:
  •  r = {  \mathit{NOPAT} \over K }  , is the Return on Invested Capital (ROIC);
  •  c \, is the Weighted Average Cost of Capital (WACC);
  •  K \, is the economic capital employed;
  • NOPAT is the Net Operating Profit After Tax, with adjustments and translations, generally for the amortization of goodwill, the capitalization of brand advertising and others non-cash items.
EVA Calculation:
EVA = Net Operating Profit After Taxes – a Capital Charge [the residual income method]
therefore EVA = NOPAT - (c x Capital), or alternatively
EVA = (r x Capital) – (c x Capital) so that
EVA = (r-c) x Capital [the spread method, or excess return method]
where:
r = rate of return, and
             c = cost of capital, or the Weighted Average Cost of Capital (WACC).
NOPAT is profits derived from a company’s operations after cash taxes but before financing costs and non-cash bookkeeping entries. It is the total pool of profits available to provide a cash return to those who provide capital to the firm.
Capital is the amount of cash invested in the business, net of depreciation. It can be calculated as the sum of interest-bearing debt and equity or as the sum of net assets less non-interest-bearing current liabilities (NIBCLs).
The Capital Charge is the cash flow required to compensate investors for the riskiness of the business given the amount of economic capital invested.
The cost of capital is the minimum rate of return on capital required to compensate investors (debt and equity) for bearing risk, their opportunity cost.
Another perspective on EVA can be gained by looking at a firm’s Return on Net Assets (RONA). RONA is a ratio that is calculated by dividing a firm’s NOPAT by the amount of capital it employs (RONA = NOPAT/Capital) after making the necessary adjustments of the data reported by a conventional financial accounting system.
EVA = (RONA – Required minimum return) x Net Investments
If RONA is above the threshold rate, EVA is positive.


Comparison with other approaches

Other approaches along similar lines include Residual Income (RI) and Residual Cash Flow. Although EVA is similar to Residual Income, under some definitions there may be minor technical differences between EVA and RI (for example, adjustments that might be made to NOPAT before it is suitable for the formula below). Residual Cash Flow is another, much older term for economic profit. In all three cases, money cost of capital refers to the amount of money rather than the proportional cost (% cost of capital); at the same time, the adjustments to NOPAT are unique to EVA.
Although in concept, these approaches are in a sense nothing more than the traditional, commonsense idea of "profit", the utility of having a separate and more precisely defined term such as EVA is that it makes a clear separation from dubious accounting adjustments that have enabled businesses such as Enron to report profits while actually approaching insolvency.
Other measures of shareholder value include:
  • Added Value
  • Market value added
  • Total Shareholder Return.


Relationship to Market Value Added

The firm's market value added, or MVA, is the discounted sum (present value) of all future expected Economic Value Added:
MVA = V - K_0 = \sum_{t=1}^{\infty} { EVA_t \over (1+c)^t }
Note that MVA = PV of EVA.
More enlightening is that since MVA = NPV of Free cash flow (FCF) it follows therefore that the
NPV of FCF = PV of EVA;
since after all, EVA is simply the re-arrangement of the FCF formula.

References

  • G. Bennett Stewart III (1991). The Quest for Value. HarperCollins.
  • Erik Stern. The Value Mindset. Wiley.
  • Joel Stern and John Shiely. The EVA Challenge. Wiley.
  • Al Ehrbar. EVA, the Real Key to Creating Wealth. Wiley.

Usage of EVA__________________________________________________________________________________

EVA can be used for the following purposes:
  • setting organizational goals 
  • performance measurement
  • determining bonuses
  • communication with shareholders and investors
  • motivation of managers
  • capital budgeting
  • corporate valuation 
  • analyzing equity securities 





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Thursday, July 28

PROFESSIONAL COMPETENCE COURSE - REVISION TEST PAPERS for November2011


Group - I

Paper - 1 : Advanced Accounting


Paper – 2 : Auditing and Assurance


Paper – 3 : Law, Ethics and Communiacation





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Suggested Answers - May 2011- 


Professional Competence Course [PCC]







GROUP - I




Advanced Accounting


Auditing and Assurance


Law, Ethics and Communication









GROUP - II



Cost Accounting & Financial Management


Taxation


Info Technology & Strategic Management

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Whether construction by way of extension of the old existing house would mean construction of residential house for capital gain exemption of Section 54 of the Income tax act, 1961?

         

Whether construction by way of extension of the old existing house would mean construction of residential house for capital gain exemption of Section 54 of the Income tax act, 1961?



ISSUE:

When assessee transfers a plot of land and Long Term Capital Gain is invested in construction of additional floor in the existing residential house, whether long term capital gain can be claimed as exempt U/s 54 of the Income Tax Act, 1961?



PROPOSITION:

Exemption u/s 54 of the Income Tax Act, 1961 is available only when any long term asset other than a residential house is transferred and long term capital gain is invested in acquiring a residential house either by way of purchase or by way of construction within the prescribed time period. The assessee must acquire a residential house. It is proposed that even addition of a floor of a self contained type to the existing house would qualify for exemption u/s 54F of the Income Tax Act, 1961.



VIEW AGAINST THE PROPOSITION:

Section 54F deals with capital gain on transfer of certain capital assets not to be charged in the case of investment in residential house. The section reads as follows:
           
“54F. Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house- (1) Subject to the provisions of sub-section (4), where, in the case of an assessee being as individual or a Hindu undivided family, the capital gain arises from the transfer of any long term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or {two years} after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,-

(a)                           if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged u/s 45;
(b)                          if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged u/s 45:
Provided that nothing contained in this sub-section shall apply where the assessee owns on the date of the transfer of the original asset, or purchase, within the period of one year after such date, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head ‘Income from house property’, other than the new asset.”  

            Section 54 of the Income Tax Act, 1961 emphasizes on construction of a residential house. The section is very clear about the requirement of the investment of the capital gains in a new residential house. The said construction must be a real one. It should not be a symbolic construction. If the assessee constructs an additional floor in the existing residential house, then there is no investment in a residential house. It is only an extension of the old building. A mere extension of the existing building will not give benefit to the assessee as contemplated u/s 54 of the Income Tax Act, 1961. It is submitted that mere construction by way of extension of the old existing house would not mean constructing a residential house as contemplated u/s 54 of the Act. (181 ITR 101)




VIEW IN FAVOUR OF THE PROPOSITION:

            It is submitted that section 54 is a beneficial provision and the same should be              construed liberally. For the purpose of explanation u/s 54F the assessee must purchase or construct a residential house, when the investment is made in a part of the house, then also it satisfies the conditions of investment in a new residential house. The reliance can be placed on the judgment of Mrs. Meera Jacob v/s ITO. [313 ITR 411(Kerala)].

In the said case the assessee claimed exemption u/s 54 of the Income Tax Act, 1961 in respect of investment in modification or renovation of the existing house. If the investment is made in the existing house in respect of renovation or modification of the house, then exemption u/s 54F is not available. Their lordships of kerala High Court held as under:
                                                           
The question involved is whether the assessee, in the computation of long term capital gains, is entitled to deduction u/s 54F of the Income Tax Act in respect of investment in modification/ expansion of an existing residential house. The tribunal took the stand that exemption is available only when the investment is in the consideration of a house and not for investment in modification or renovation. Admitted facts are that the assessee had a fairly big house to which the assessee made addition of 140 sq. meters of plinth area. However, it is the conceded position that the assessee has not constructed any separate apartment or house. Section 54F does not provide for exemption on investment in renovation or modification of an existing house. On the other hand, construction of a house only qualifies for exemption on the investment. Even addition of a floor of a self contained type to the existing house would have qualified for exemption. However, since the assessee has only made addition to the plinth area, which is in the form of modification of an existing house, she is not entitled to deduction claimed u/s 54F of the Act.      





SUMMATION:

In order to claim exemption u/s 54 of Income Tax Act, 1961, two conditions are required to be satisfied namely, (1) the house property must have been used by the assessee or a parent of his mainly for the purposes of his own or the parents’ residence during the two years immediately preceding the date on which the transfer took place, and (2) the assessee must have, within a period of one year before or after such date, purchased or within a period of two years after such date, constructed a house property for the purposes of his own residence. When section 54 talks of house property, it does not mean an independent and complete house in the sense in which the terms used to be understood once upon a time. House property for the purposes of section 54 has the same meaning as the concept of house property u/s 22 to 27 which makes it clear that the expression “house property” takes into account an independent residential unit. In fact, there can be no doubt that the section takes into account all independent residential units, particularly, in these days, when multi- storeyed flats are becoming the order of the day.

            In CIT v. Tikyomal Jasanmal reported in [1971] 82 ITR 95 (Guj.), though the case went against the assessee on facts, the principle laid down therein, while interpreting the scope of section 54 by Bhagwati C.J., as he then was, speaking for the Bench, was to the effect that for the purpose of claiming exemption u/s 54, two conditions are required to be satisfied, namely, (1) the house property must have been used by the assessee or a parent of his mainly for the purposes of his own or the parents’ residence during the two years immediately preceding the date on which the transfer took place, and (2) the assessee must have, within a period of one year before or after such date, purchased or within a period of two years after such date constructed a house property for the purposes of his own residence. It has also been pointed out in that judgment that the ground floor could be taken as a unit of house property independently for the purpose of section 54.

            Now let me refer to a very important decision of Hon’ble ITAT Delhi bench -in the case of Ashokkumar HUF v AC IT reported in 65 ITD 352. The Hon’ble ITAT has held as under:

The Hon’ble Madras High Court in case of CIT v. P.V. Narasimhan [1990] 181 ITR 101/ [1989] 47 Taxman 89 also considered the exemption u/s 54of the act. In that case the assessee owned two residential houses. He sold one house and with the sale proceeds he put up the first floor of the second house after demolishing the old structure of the first floor. Admittedly he earned capital gains. The ITO disallowed the assessee’s claim for exemption u/s 54 on the ground that the assessee had made only some alterations by adding additional rooms to the existing house and charged tax under capital gains. On appeal the AAC accepted the assessee’s claim holding the construction of the first floor as construction of a unit for house property for the purpose of section 54. The Tribunal concurred the view of the AAC. When the matter came up before the High Court it was held:-
“The view taken by the Tribunal was unexceptionable having regard to the admitted position that the assessee after demolishing completely the first floor had put up a new construction within the period allowed by the statute viz  section 54. It is also common ground that the assessee was in enjoyment of the entire property. Once the principle laid down in the judgements of the Delhi and Gujarat High Courts in Addi. CIT v. Vidya Prakash Talwar [1981] 132 ITR 661, and CIT v. Kodandas Chanchlomal [1985] 155 ITR 273, respectively, that ‘house property’ takes into account an independent residential unit, there was no force in the contention that since the independent residential unit ( first floor in the present case) was put up on an existing old house, exemption u/s 54 was not available. Once it was concluded that the assessee was entitled to the exemption u/s 54, the question whether section 48 read with section 55(b) was applicable or not, would not arise. In the circumstances, the assessee was entitled to exemption u/s 54.”

Having regard to the above decisions and considering the nature of the construction made by the assessee it cannot be said that the assessee had not invested the sale proceeds for the construction of the residential house. The Hon’ble Delhi High Court in the case of Addi. CIT v. Vidya Prakash Talwar [1981] 132 ITR 661 held that the residential house should be interpreted as residential unit as applied in sections 22 to 27. If any independent unit is constructed then that will tantamount to construction of a new residential house.

In the instant case also it was seen that the assessee constructed the mezzanine floor with kitchen and toilet which is an independent unit as such. That the assessee used for his own purposes will not in any case change the fact that a new residential unit has been brought into existence. That the original portion has been occupied by the assessee also will not affect the nature of the newly constructed residential portion as held by the Hon’ble Karnataka High Court in the case of J.R. Subramanyam (supra) (sic). In that case also the assessee sold a building in February, 1977. In March, 1976 he had commenced construction of a new house which was completed in March, 1977. The Assessing Officer did not allow the claim on the ground that the construction of a new building had commenced much earlier to the sale of the old building and the major portion of the building was let out by the assessee. When the matter came up before the Hon’ble High Court it was held that it was immaterial that the construction of the new building was started in 1976. The construction was completed in March, 1977 which was within two years from the sale of the old building. Therefore, the assessee was entitled to exemption u/s 54F of the Act.

Having regard to the ratio of the above decision and also keeping in view the legislative intent as spelt out by the Hon’ble Finance Minister in the Budget speech it cannot be said that the assessee had not invested the capital gains in the construction of a residential house. There is therefore no reason to disallow the claim. We hold accordingly and direct the Assessing Officer to allow the claim for exemption in both the cases.

            In view of the above, it is submitted that when long term capital gain is invested in constructing an additional floor in existing residential house, the exemption u/s 54 cannot be denied.
           


Tuesday, July 26

Manual for Tax Audit in TALLY including ERP version.

Useful Manual to be gothroughed before starting Tax Audit on Tally.


CLICK HERE TO DOWNLOAD "Manual for Tax Audit in TALLY including ERP version."


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Presumptive Taxation including Latest Amendments

This Section is one of the important section for November Exams, having possibilities of Asking.


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Please go through the material given in link for full conceptual clearity.

Thanx for Support.

Automated ITR1 in Excel format for Individual Returns

Its E-Return of ITR1 in excel format. A simplified format brought by CA Helpers Team to remove your difficulties in Return Filing.



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Ask Your friends to join the group and Staying Ahead.....

Saturday, July 23

Download a Handbook on E-return filing published by ICAI


CLICK HERE TO DOWNLOAD A HANDBOOK ON E-RETURN FILING

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Friday, July 22

Download CA Final Nov.11 RTP

ICAI has released RTP for exams to be held in November 2011.

CLICK ON THE SUBJECT TO DOWNLOAD DOWNLOAD CA FINAL RTP



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    Group I

    PAPER - 1 : FINANCIAL REPORTING


    PAPER – 2 : STRATEGIC FINANCIAL MANAGEMENT


    PAPER – 3 : ADVANCED AUDITING AND PROFESSIONAL ETHICS


    PAPER – 4 : CORPORATE AND ALLIED LAWS









    Group II

    PAPER – 5 : ADVANCED MANAGEMENT ACCOUNTING


    PAPER – 6 : INFORMATION SYSTEMS CONTROL AND AUDIT


    PAPER – 7 : DIRECT TAX LAWS


    PAPER – 8 : INDIRECT TAX LAWS




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      Wednesday, July 20

      CA Final result- Passing Percentage and Toppers

      CA FINAL PASSING PERCENTAGE
      GE






      Toppers





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        Tuesday, July 19

        Results are not an end.... (Must Read)

        Hi all,
        Results of CA Final and CPT are now out. We hope you may have cleared it with flying colours.
        People who cleared CPT, welcome to the real world of CA. Now you will learn how to overcome your fear and live with courage and struggle.
        Those who cleared Final, you all deseve a salute from our side. May you rock the professional world.




        Those who could not make it this time, Don't worry about delay in success, because slow but steady wins the race. You will rock it next time. Learn from your failure & mistakes. Don't under-estimate yourself, as only 5-6% people in India are not genius, you are also genius but luck is not with you. Learn from the mistakes you did this time, don't repeat the same next time. Start preparation right now and burn your midnight oil and make it this time, almighty God is with you. Never lose hope. Remember nobody is perfect in this bloody world. Just you need time, luck and hardwork with you.




        BEST OF LUCK for next time or life.
        Never lose hope.
        Hardwork always pays, may be late or early.


        Regards,
        Team CA helpers

        Friday, July 15

        Hero pays Rs.811 Crore tax on Honda stake buy : CBDT

        Hero Group has reportedly paid Rs. 8.11 bn as capital gains tax for buying out partner Honda from their joint venture Hero Honda.

        “Hero has paid the entire tax amount of Rs 8.11 bn in two tranches, Rs 1 bn in March and Rs 7.11 bn in April, at the highest rate of 22%. They have not sought any concession,” reports quoted a spokesperson for Central Board of Direct Taxes as saying.

        He further added that it is capital gains tax, paid by way of withholding it from the payment made by Hero to Honda.

        CBDT allows Mah Satyam to file revised returns for 2003-07

        The Central Board of Direct Taxes (CBDT) is believed to have turned down the request of Mahindra Satyam to fully adjust taxes paid by its erstwhile owner Ramalinga Raju on fictitious income.
        Tech Mahindra had acquired Satyam Computer, after a multi-crore accounting fraud in the company came to light in January 2009. After acquisition, the company was re-branded as Mahindra Satyam.
        The CBDT, sources said, has passed an order on the tax issues raised by Mahindra Satyam and sent it to the company yesterday.
        While CBDT may not fully adjust taxes paid by the company, the Hyderabad-based firm may get some relief with regard to taxes paid by Satyam Computer Services on fictitious income for years 2007-08 and 2008-09, sources said.
        The company would not get tax relief on such income before 2007-08 year as there are no provisions in the Income Tax Act for refund of tax for which revised returns have been filed one year after the assessment year.
        Mahindra Satyam has been seeking return or adjustment of taxes paid on inflated income when disgraced founder Ramalinga Raju was chairman of the IT company. The company has argued that the tax payments were made on account of alleged fudged records shown by the company.
        Efforts to contact Mahindra Satyam proved futile as the spokesperson did not respond to either phone calls or SMSes.
        The Supreme Court had earlier this month said that the CBDT order in the tax dispute case would take effect after two weeks so that the IT company could get time to challenge the ruling on an appropriate forum.
        The order came as a breather for Mahindra Satyam which had furnished a bank guarantee of Rs 617 crore to the government on the apex court's direction for its accounts to become functional.
        The CBDT had earlier frozen the bank accounts of Mahindra Satyam. It had served notice for audit of its accounts for the assessment years 2003-04 to 2008-09 as the company was found guilty of illegally claiming tax credit on fictitious income during the period.

        Courtesy: Moneycontrol

        EPFO appoints new fund managers

        DELHI: SBI, ICICI Securities, Reliance
        Capital and HSBC Asset Management
        Company have been appointed fund managers for the Employee’s
        Provident Fund Organisation or EPFO’s more than Rs 3 lakh crore corpus for the next three years. SBI will manage 35% of the funds,
        ICICI Securities will manage 25% of
        the funds while the other two will
        manage 20% each, Central Provident Fund Commissioner S Chatterjee said. The four asset management companies were chosen by the the Central Board of Trustees--the EPFO’s
        top decision making body--out of five shortlisted by the EPFO’s financial advisory committee. ICICI Prudential, the fifth contender, got dropped. The performance of the fund managers will be reviewed after one year by the CBT and if they do not perform up to expectations, they could be dropped, labour minister Malikarjun Kharge said. Among the five shortlisted companies, ICICI Securities quoted the lowest rate of 3 paise per annum for managing Rs10,000, according to an official. Reliance Capital quoted a rate of 4 paise per annum for managing Rs10,000, HSBC AMC quoed 36 paise and SBI qoted Re 1. The EPFO had appointed multiple fund managers for the first time in July, 2008 for earning better returns on deposits for its 4.72 crore subscribers.
        The term of the four fund managers,
        ICICI Pru, HSBC AMC, Reliance Capital and SBI, appointed in 2008 expired
        on March 31 2011.

        Thursday, July 14

        Click here to download difference between IFRS and IND AS (Conversed version of IFRS for Indian Economy)

        Click here to download DIFFERENCE BETWEEN IFRS AND IND AS.

        or check it here



        As shown on ICAI's website-





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        Saturday, July 2

        Click Here to download July e-journal -Download section

        Click on the topic of this post and Download ICAI e-journal of July. You may download any downloadable files on our website by clicking on 'DOWNLOADS' on the top of the page.

        Admin

        JUST4FUN : Accountant who deducted TDS for alms to beggar nominated for industry award

        ITS JUST A FUN, Don't Take it seriously:
        Himmat Tripathi, who always gave nine rupees to a beggar but entered ten rupees in the account books with one rupee shown as TDS (Tax Deduction at Source), has been nominated for this year’s industry award for Creative and Honorary Excellence in Accounting Practices (CHEAP).

        CHEAP awards, which aren’t supported by any organization as it would cause cash outflows for the sponsors, are given each year to accountants who come up with innovative and path-breaking ways of saving cash for their clients, organizations, or themselves.
        “I am thrilled and deeply indebted to all the accountants of this country who chose me for this honor,” HT, as Himmat Tripathi is fondly called, told Faking News. HT was selected for the award through an online poll that was conducted only during the nights when internet surfing charges are discounted for many.
        HT, working as a consulting accountant with Scrooge Industries Limited, won’t get any cash prize but will receive an email confirming his success and his name would be prominently displayed on the Facebook page, which is the only organizational infrastructure of the CHEAP awards community.
        In an exclusive interview to Faking News, HT said that the idea of applying TDS on alms to beggar came to his mind when he read the news about 2 lakh rupees, a taxable income, found in the pockets of a beggar, who unfortunately was dead before he could hire a CA.
        “Clearly this income was accrued through begging and it was taxable,” HT explained, “I say it was taxable because we never get any tax exemptions under Section 80(G) from the government when we pay alms to beggars, which obviously means that the government doesn’t recognize beggars as any charitable entities.”
        Coin in hand“Therefore, either the government should allow tax exemptions on money we pay to beggars or we should be allowed to apply TDS on that payment,” HT explained why he decided to apply 10% TDS on 10 rupees he used to pay to the beggars, either by paying nine rupees in loose change or by taking back a one-rupee coin from the begging bowl of the beggar.
        HT denied that there was anything illegal or unethical in what he was doing.
        “Begging is a legitimate profession in the eyes of the government as hardly any beggar is arrested for breaking the Prevention of Begging Act. Perhaps the term ‘begging’ in constitution is notional! I hope Kapil Sibal would clarify that. But in absence of any clarification, I’d treat this ‘notional begging’ as a genuine financial transaction,” he argued.
        HT claims that this ‘financial transaction’ i.e. alms to the beggars can be treated as OPEX or ‘operation expense’ in the account books and insists that other individuals or organizations should do the same.
        “It is like ‘adverting expense’ for many of us, where we advertise our persona and promote ourselves as socially responsible entities. That’s how I treated it in my income tax returns that I file as a professional,” HT informed.
        “My juniors and relatives would be so impressed when I’d drop 45 rupees in the bowl of a beggar, but they would never know that it was actually 50 rupees in the books!” the CHEAP award winner said.
        Sources inform that HT was a dark horse who won the CHEAP award, which almost went to the CA of Sachin Tendulkar, who had shown Tendulkar as an artist for tax purposes.

        Source- FAKING NEWS

        Friday, July 1

        Happy Chartered Accountants Day

        Wishing you all fans a very happy CAs Day....

        I never believed in luck but CA taught me to,
        I never tried formal dresses but CA make me to,
        I never studied for 8-16 hrs a day but CA made me to,
        I never attended classes for 14-16 hrs a day but CA made me to.

        Guys CA is not just words, Its our dream, our life.


        CA - The words you trust.

        CA is my aim, my life.

        Wishing you a Happy CAs day