CA Journal AUG2026

 

Post-Retirement Medical Benefits (PRMB): Actuarial Valuation and Accounting Challenges

By CA. Sandeep Goel

Background

In many large Indian corporates, particularly public sector undertakings, Post-Retirement Medical Benefits (PRMB) is one of the most complex and judgement-based employee benefit obligations. Unlike other defined benefit plans such as gratuity, PRMB is not formula-based but depends on various factors such as medical inflation and longevity. As medical costs rise and life expectancy improves, these obligations have become material and highly sensitive to actuarial assumptions, where even slight changes in the discount rate or medical inflation can materially affect the defined benefit obligation (DBO).

Under Ind AS 19 – Employee Benefits, PRMB schemes are classified as defined benefit plans because the employer bears both actuarial and investment risks. The obligation represents the present value of expected future medical expenses the company expects to incur for retired employees and their eligible dependents. A practical challenge involves behavioral factors; for example, how beneficiaries utilize fully reimbursable benefits may differ significantly from schemes with spending caps or co-sharing.

Typical PRMB Structure

Generally, PRMB schemes feature the following:

• Coverage: Benefits for retired employees and often their eligible dependents.
• Nature of Benefit: Reimbursement of medical claims and/or cashless facilities.
• Duration: Generally available until the death of the retiree and eligible dependents.
• Funding Arrangement: Can be unfunded (pay-as-you-go) or funded through a separate Trust based on the actuarial gap.
• Employee Contributions: May involve lump-sum contributions at retirement or periodic contributions during active service.

Actuarial Valuation under Ind AS 19

Ind AS 19 requires the use of the Projected Unit Credit (PUC) method to determine the present value of defined benefit obligations. Although benefits are paid after retirement, the liability builds progressively year by year during active service.

The valuation process includes these steps:

1. Identification of eligible beneficiaries.
2. Calculation of medical cost per beneficiary.
3. Projection of future costs by applying the medical inflation rate to current costs.
4. Estimation of the benefit period based on mortality tables.
5. Discounting projected cash flows to present value.
6. Spreading the total expected payout across the service tenure using the PUC method.

Allocation of PRMB Obligation under the PUC Method

The fundamental principle is that the obligation accrues progressively in line with service tenure. For instance, if an employee joins with an expected 30-year service period and 20 years of post-retirement benefits, the total projected cost is allocated proportionately over the 30 years of active service. The portion attributable to service rendered up to the reporting date is recognized as the DBO.

Information Requirements for Valuation

PRMB requires more detailed data than other plans, including:

• Active employee and retiree details (DOB, DOJ, expected retirement).
• Details of eligible dependents.
• Past medical claims data to calculate inflation.
• Fair value of plan assets (if funded) and movement during the year.
• Scheme features like monetary ceilings or co-pay clauses.
• Adjustments for abnormal years, such as the COVID period, which may distort average costs.

Key Actuarial Assumptions

• Discount Rate: Determined with reference to market yields on government bonds. Because PRMB is long-term, cash flows often extend beyond actively traded bond maturities, requiring extrapolation of the yield curve.
• Medical Cost Inflation Rate: The most sensitive assumption, influenced by new technology and advanced treatments. It should ideally be based on a company’s long-term past claims experience.
• Medical Cost per Beneficiary: The basis for projecting future expenses, strengthened by using actual past data.
• Mortality Assumptions: Different tables are used for pre-retirement (e.g., Indian Assured Lives Mortality 2012–14) and post-retirement (e.g., Indian Individual Annuitant’s Mortality 2012–15).
• Employee Turnover: The probability of employees leaving before qualifying for benefits.

Interdependence of Actuarial Assumptions

Assumptions should be reviewed collectively. For example, a simultaneous increase in medical inflation and a decrease in the discount rate can have a cumulative impact, significantly increasing actuarial losses.

Sensitivity Analysis of PRMB Obligation

Sensitivity analysis helps users understand potential volatility. Table 01 provides indicative impacts on the DBO based on isolated changes:

Table 01. Sensitivity Analysis

Assumption	Change	Impact on DBO
Discount rate	Decrease by 1%	Increase by 15-20%
Discount rate	Increase by 1%	Decrease by 12-16%
Medical cost inflation	Increase by 1%	Increase by 10-15%
Medical cost inflation	Decrease by 1%	Decrease by 8-12%

Actuarial Gains and Losses: Drivers and Accounting Treatment

Gains and losses arise from changes in financial or demographic assumptions and experience adjustments (differences between actual experience and previous assumptions).

• Ind AS 19: Remeasurements are recognized in Other Comprehensive Income (OCI), preventing assumption-driven volatility from directly affecting operating performance.
• AS 15: Actuarial gains and losses are recognized immediately in the Statement of Profit and Loss, which can lead to significant variation in reported profit trends.

Case Study: PRMB Actuarial Valuation

Consider Employee A joining on 1st April 2025, expected to retire in 2055 (30 years service) with 20 years of post-retirement survival.

• Year 1 (31.03.2026): With an annual cost of ₹1,00,000 for two beneficiaries, the total projected cost is ₹20,00,000. The Year 1 service cost is ₹66,667 (1/30th). Both Ind AS 19 and AS 15 show a ₹66,667 impact on Profit & Loss.
• Year 2 (31.03.2027): If the annual cost is revised to ₹1,20,000, the total expected cost becomes ₹24,00,000. The closing DBO (2/30th) is ₹1,60,000. Under Ind AS 19, the P&L impact is ₹84,667 (Service + Interest cost) with an ₹8,666 actuarial loss in OCI. Under AS 15, the total P&L impact is ₹93,333 because the actuarial loss is expensed.

Funding and Employee Contributions

In funded schemes, mismatch between investment returns and medical cost escalation may widen the funding gap. Under Ind AS 19, employee contributions linked to service reduce current service cost. Contributions independent of service length are recognized as a reduction of service cost when rendered. Contributions not linked to service (e.g., to reduce a deficit) are part of the remeasurement of the net defined benefit liability.

Tax and Regulatory Framework

PRMB trusts seeking income-tax exemption must comply with Section 10(23AAA) and Rule 16C, which requires regular employee subscriptions. Trusts relying on a single contribution at retirement may risk their tax-exempt status.

Conclusion and Way Forward

PRMB schemes require disciplined actuarial valuations and transparent reporting. With rising healthcare costs, organizations must align assessments with scheme design and funding to ensure benefits remain sustainable for the long-term well-being of retirees. Professional judgement and transparent disclosure of key assumptions are essential for credible financial reporting.

IPR Violations in Cyberspace

By CA. Rashmi Agarwalla

Introduction

The digital revolution has created unprecedented opportunities for the creation and dissemination of intellectual works, while simultaneously generating novel challenges for the protection of Intellectual Property Rights (IPR). Cyberspace, a virtual and borderless realm, enables the effortless duplication and distribution of creative and technical content, posing threats to copyright, trademark, patent, and trade-secret protection.

Brief on IPR Laws in India

India has a robust legal framework for IPR protection, aligned with global commitments under international agreements like the WTO’s TRIPS Agreement and various WIPO treaties. Key laws include:

• The Patents Act, 1970: Governs the protection of inventions.
• The Copyright Act, 1957: Protects original works of authorship, including literary, dramatic, musical, and artistic creations.
• The Trademarks Act, 1999: Deals with symbols, names, or logos identifying goods and services.
• The Designs Act, 2000: Protects the visual appearance or design of products.
• The Information Technology Act, 2000 (IT Act): Instrumental in protecting IPR in cyberspace by providing legal recognition for digital signatures and electronic transactions. Section 66B of the IT Act penalizes the possession of pirated content.

Copyright Infringement in Cyberspace

Copyright infringement occurs when copyrighted work is used unauthorizedly, violating the holder's exclusive rights to display, distribute, or reproduce it. In cyberspace, this takes several forms:

• Unauthorized Streaming/Downloading: Using torrent sites and cyber-lockers.
• Unlicensed Uploads: Posting sound or video clips to social media platforms.
• Derivative Works: Such as remixes or AI-generated content.
• Linking: Diverting traffic from one website to another through hyperlinks, affecting revenue.

Legal Test and Key Cases Indian courts apply the "idea–expression" dichotomy and the "substantial similarity" test.

• R.G. Anand v. Deluxe Films: The Supreme Court held that copyright protection extends only to the expression of ideas, not the ideas themselves.
• Gramophone Co of India Ltd v. Super Cassettes Industries Ltd: Clarified that making a "version recording" without a proper license constitutes infringement.

Intermediary Liability Most digital infringement occurs through platforms like YouTube or Facebook. Under Section 79 of the IT Act, intermediaries are granted "safe harbour" (protection from liability) if they observe due diligence and act expeditiously on takedown notices. In Super Cassettes Industries Ltd v. Myspace Inc, the court ruled that intermediaries are not liable if they lack "actual knowledge" of infringing content and promptly remove it upon notice.

Trademark Infringement and Cybersquatting

Trademarks identify a brand’s goods or services and distinguish them from competitors. Digital infringement includes:

• Cybersquatting: Registering a domain name similar to a trademark with malicious intent to profit from its goodwill (e.g., the PETA vs. Michael Doughney case).
• Typosquatting: Registering common misspellings of legitimate websites to trick users.
• Keyword Advertising: Using a competitor's trademark as a keyword for sponsored ads.
• Meta-tagging: Using hidden code with another company's trademark to divert traffic.

Leading Case Laws

• Yahoo! Inc v. Akash Arora (1999): The first cybersquatting case in India, where the court held domain names are entitled to the same protection as trademarks.
• Titan Company Limited v. Lenskart Solutions Pvt. Ltd: Underscored that using a competitor's trademark in website meta-tags, even if invisible to users, is infringement.

Patent Infringement in the Digital World

Patent infringement in the digital realm can involve the unlawful use of proprietary algorithms or unique software features in SaaS platforms. A newer challenge is 3D printing, where users can download and print patented designs. Enforcement is difficult due to the borderless nature of the internet and the ease of digital copying.

Emerging Challenges: NFTs and AI

• Non-Fungible Tokens (NFTs): Artists have found their works "minted" as NFTs without consent, raising copyright and trademark concerns.
• Generative AI: Training models on copyrighted datasets without a license may infringe reproduction rights, and the ownership of AI-generated output remains an unsettled legal question.

Remedies and Enforcement

Rights-holders can pursue both civil and criminal remedies:

• Civil Remedies: Injunctions (to stop the activity), damages (compensation), an account of profits, and the seizure/destruction of infringing goods.
• Criminal Remedies: Section 63 of the Copyright Act imposes fines and imprisonment of up to 3 years. Sections 65A and 65B address illegal circumvention of technological protection measures. The Trademark Act also provides for imprisonment and fines for infringement.

Conclusion

While cyberspace amplifies the value of intellectual property, it also increases the risk of misappropriation. Indian jurisprudence is evolving by adapting classic principles to the digital world. However, there is a need for continuous legislative updates to address rapid technological changes like blockchain and generative AI. A coordinated strategy of legal vigilance, technical safeguards (like watermarking), and international collaboration is essential to protect creators' rights.

The Future of Accounting in the Age of Artificial Intelligence and Automation

By CA. Madhabi Sinha

Summary

Artificial Intelligence (AI) and automation are transforming the accounting profession by redefining how financial data is processed, analysed, and interpreted. Advances in machine learning, deep learning, natural language processing, robotic process automation, and optical character recognition have significantly improved efficiency, accuracy, and decision-making across accounting functions. While AI enhances operational capabilities and strategic insight, human judgment remains essential in professional reasoning, ethical oversight, regulatory interpretation, and advisory services. The article concludes that AI will not replace accountants but will fundamentally reshape the profession and require new skills and competencies.

Introduction

The speed and accuracy with which data entry, error detection, and compliance monitoring are performed today would have been unimaginable to accounting professionals only a few years ago. The emergence of artificial intelligence (AI) has fundamentally altered accounting practices by automating routine processes and enabling advanced analytical capabilities. AI-driven systems can process large volumes of structured and unstructured financial data, identify anomalies, and generate predictive insights that support managerial and regulatory decision-making.

Accountants have always pursued accuracy, efficiency, speed, and consistency, yet achieving all these objectives simultaneously has traditionally been difficult. This constraint has been substantially reduced through the introduction of AI. By relieving professionals of repetitive and labour-intensive tasks, AI has enabled accountants to focus more on analysis, interpretation, and advisory functions.

Literature Review

The integration of AI into accounting has attracted increasing scholarly attention. Scholars like Vasarhelyi et al. (2015) argue that continuous auditing systems enabled by advanced analytics will transform assurance services by allowing real-time monitoring of financial transactions. Sutt on et al. (2016) highlight the role of analytics and AI in enhancing decision-making and improving the quality of financial reporting, while Kokina and Davenport (2017) discuss the potential of cognitive technologies to augment accountants’ capabilities and shift their roles towards advisory services.

Bhimani and Willcocks (2014) emphasise that digital technologies are reshaping management accounting by enabling real-time performance measurement and predictive analytics. Brynjolfsson and McAfee (2017) suggest that AI-driven automation will transform knowledge-intensive professions, including accounting, by augmenting rather than wholly replacing human capabilities. IFAC (2020) similarly stresses the need for accountants to develop digital and analytical competencies to remain relevant.

What is Artificial Intelligence?

Artificial intelligence refers to the ability of systems to perform cognitive functions such as pattern recognition, inference, prediction, and decision optimisation by processing data and adapting to outcomes. In accounting, AI systems mimic cognitive tasks traditionally performed by professionals.

AI is often conflated with automation, but the two are distinct. Automation refers to the execution of predefined, rule-based, repetitive tasks that require manual updates when processes change. AI systems, by contrast, learn from historical data, adapt to changing conditions, and generate insights that support judgment-based decisions.

AI in Accounting Applications

Its applications span transactional processing, financial analysis, audit and compliance, and advisory services.

• Transactional Processing: AI automates workflows such as invoice processing, bank reconciliations, and expense validation.
• Financial Analysis: AI supports forecasting, budgeting, and variance analysis by analysing historical data to predict cash flows and revenues.
• Audit and Compliance: AI strengthens fraud detection, continuous auditing, and regulatory monitoring by examining complete datasets rather than relying on sample-based procedures.
• Advisory and Communication: AI assists with data-driven decision-making and generates narrative financial reports to assist in stakeholder communication.

Key Technologies Driving AI in Accounting

The major technologies underlying AI in accounting include:

• Machine Learning (ML): Enables systems to learn patterns from historical data for predictive analysis, such as credit risk assessment and automated reconciliation.
• Deep Learning (DL): An advanced form of ML that uses multi-layer neural networks to analyse complex and unstructured data like scanned invoices and bank statements.
• Robotic Process Automation (RPA): Automates repetitive, rule-based tasks such as downloading bank statements or posting journal entries.
• Natural Language Processing (NLP): Enables systems to interpret textual data like contracts and invoices for compliance review and sentiment analysis.
• Optical Character Recognition (OCR): Converts scanned documents into machine-readable text, serving as the data-capture layer.

Unified Intelligent Automation Framework

Modern accounting automation increasingly relies on a layered architecture where these technologies perform distinct but complementary functions.

Table: Unified Intelligent Automation Framework for Accounting

Layer	Technology	Purpose	Output
Data capture	OCR	Extract text and fields from documents	Clean, digitised data
Understanding	NLP	Interpret meaning and context	Categorised info
Intelligence	ML	Learn patterns and generate predictions	Forecasts and risk indicators
Execution	RPA	Perform actions in ERP systems	Completed tasks

Conceptual Framework: Human–AI Hybrid Accounting Model

This article proposes a model integrating AI with human judgment across four layers:

1. Data Acquisition Layer: Transformation of unstructured documents into structured datasets using OCR.
2. Intelligence Layer: ML, DL, and NLP models that produce insights and predictions.
3. Automation Layer: RPA execution of tasks like transaction posting based on intelligence layer outputs.
4. Human Oversight Layer: Professionals interpret AI outputs, apply judgment, ensure ethics, and make strategic decisions.

Challenges to AI Adoption

• Implementation Costs: High costs and infrastructure needs may hinder adoption for MSMEs.
• Data Security: Concerns regarding privacy (e.g., India’s DPDP Act) require robust governance.
• Regulatory Uncertainty: AI must comply with evolving accounting, audit, and tax standards.
• Ethical Concerns: Issues regarding transparency, bias, and accountability are significant.
• Workforce Readiness: Professionals must acquire new skills in analytics and technology governance.

Future Trends and Conclusion

AI is expected to support real-time accounting, self-driven systems, voice-enabled tools, and predictive tax engines. These developments will continue to shift accountants’ roles away from transaction processing toward strategic advising.

While AI can automate many tasks, human judgment remains indispensable. Professional assessment and ethical oversight cannot be fully automated. The future of accounting is a reconfiguration where intelligent systems extend human capability. To remain relevant, accounting professionals must develop skills in data analytics, technology management, and strategic thinking.

Depreciation of the Indian Rupee: A Deep Cut or an Opportunity?

By Richa Jain Kallra

Introduction

The Indian Rupee is currently navigating a challenging period, becoming one of the weaker-performing Asian currencies this year. This depreciation is notable because it is occurring despite strong domestic GDP growth, which has raised concerns about the underlying health of the economy. While it is often assumed that a fast-growing economy should lead to currency appreciation, currency markets are influenced by many variables beyond GDP, including inflation, trade balances, fiscal deficits, interest rate differentials, and global investor sentiment. The rupee’s current decline is the result of these interconnected global forces operating simultaneously.

External Sector Stress

The rupee’s slide indicates deep stress in India’s external sector, characterized by a chronic trade deficit where imports have outweighed exports for decades. This results in a higher outflow of capital than inflow, putting direct pressure on the currency. Official data shows the trade deficit widened to $119.3 billion in the 2025-2026 financial year, up from $94.6 billion the previous year.

Costs and Opportunities of a Weaker Rupee

A depreciating currency presents both significant challenges and specific economic advantages:

Challenges of a Weaker Rupee	Potential Advantages
Imports become more expensive, particularly crude oil and gas.	Indian exports become cheaper and more globally competitive.
Inflation rises due to higher import costs.	IT companies earn higher rupee revenues from dollar income.
Foreign education and overseas travel become costlier.	Merchandise exports like textiles, leather, and agriculture gain price competitiveness.
Companies with dollar-denominated debt face higher repayment costs.	Tourism and services become more attractive for foreign visitors.
The government's import bill increases, widening the fiscal burden.	Higher export earnings improve foreign exchange inflows over time.

Factors Putting the Rupee Under Pressure

The article identifies several key factors currently weighing down the rupee:

• Persistent Trade Deficit: High impact; demand for US dollars increases as imports consistently exceed exports.
• Heavy Crude Oil Imports: Very high impact; nearly 89% of India’s crude oil is imported and paid for in dollars.
• Foreign Investor Outflows (FIIs): High impact; investors convert rupees to dollars to exit Indian markets during times of global uncertainty.
• Higher US Interest Rates: High impact; attractive returns on US bonds pull capital away from emerging markets like India.
• Strong US Dollar: High impact; a globally stronger dollar automatically weakens most emerging market currencies.
• Geopolitical Uncertainty: Moderate to High impact; global conflicts trigger a "flight to safety" into dollar assets.
• Import Dependence: Moderate impact; large bills for electronics, fertilisers, and machinery increase dollar demand.

Historical Perspective

At the time of independence in August 1947, the rupee was valued at 4.76 per US dollar. This rate held until 1966, when wars, drought, and falling reserves forced a devaluation. The 1991 balance of payments crisis was a major turning point, leading to economic liberalization and a transition to a market-determined exchange rate by 1993. By the late 1990s, the rupee reached 43 per dollar, and by 2014, it crossed the 60 mark.

The Role of Crude Oil and Investment Trends

India is the world’s third-largest consumer of crude oil. In FY 2025, India imported 242 million tons of oil, with the bill rising to nearly $161 billion. Because these imports must be paid for in dollars, it creates constant pressure on the rupee. Additionally, there has been a significant pullout by foreign institutional investors (FIIs), leading to a Balance of Payments (BoP) deficit of over $30 billion last year. Meanwhile, Indian firms have increased their outward FDI, investing nearly $65 billion outside the country in recent years.

The Role of the Reserve Bank of India (RBI)

The RBI holds substantial foreign exchange reserves, which stood at $675.16 billion as of July 10, 2026. The RBI intervenes by selling dollars to slow the pace of depreciation or purchasing dollars to prevent sharp appreciation that could hurt exporters. While these reserves act as a buffer and signal financial strength, the RBI cannot completely stop depreciation driven by fundamental global market forces.

De-Dollarisation and the Road Ahead

Geopolitical events, such as the freezing of Russia’s reserves, have accelerated global conversations about de-dollarisation. India has joined this trend by inking agreements with countries like Russia to facilitate trade in rupees. However, challenging the dollar's dominance remains difficult; even China's yuan accounts for only a small portion of global reserves due to a perceived lack of transparency.

The article concludes that there are no short-term shortcuts to arresting the rupee's depreciation. The long-term solution lies in boosting manufacturing, exports, and quality standards to earn more dollars than are spent on imports. By making the Indian economy more productive and innovative, demand for the rupee will naturally increase as the world chooses to buy from India.

Classification of Corporate Liquid Term Deposits (CLTDs)/Flexi Deposits in financial statements under Ind AS framework

A. Facts of the Case

A company with centralized treasury operations invests available funds in various instruments, including Corporate Liquid Term Deposits (CLTD), Fixed Deposits (FD), and Mutual Funds, based on estimated requirements.

Key operational features of these CLTDs include:

• Sweep Facility: Balances in current accounts are transferred to CLTDs automatically (sweep) or via specific instructions.
• Withdrawal: Funds are withdrawn prematurely when needed. For auto-created CLTDs, withdrawals occur via reverse sweep on a LIFO (Last-In, First-Out) basis to meet requirements and maintain minimum balances.
• Value Risk: Premature withdrawals are subject to a significant risk of change in value due to reduced interest rates applicable for the actual tenure and, in some cases, additional penalties.

Classification Followed by the Company: The Company currently classifies these investments based on original and remaining maturity:

• Original maturity < 3 months: Cash and Cash Equivalents.
• Original maturity > 3 months but < 12 months (or remaining maturity < 12 months): Bank Balances other than Cash and Cash Equivalents.
• Remaining maturity > 12 months: Other Non-Current Financial Assets.
• 91-day maturity: Cash and Cash Equivalents.

C&AG Provisional Comment: The C&AG suggested that since there are no restrictions on withdrawal and the funds are highly liquid, these should be classified under ‘Cash and Cash Equivalents’.

Management Response: The management argues that the deposits are intended for long-term requirements beyond three months and are intended to be held until maturity. They maintain that because premature withdrawal results in a lower interest rate, they are subject to significant risk of change in value, thereby failing the Ind AS 7 criteria for cash equivalents.

B. Query

The core query is whether the Company's adopted classification is correct under the Ind AS framework, specifically regarding CLTDs with different original and remaining maturities, and whether 91-day deposits qualify as Cash and Cash Equivalents.

C. Points Considered by the Committee and Opinion

The Committee evaluated the case against Ind AS 7, which defines cash equivalents as short-term, highly liquid investments readily convertible to known amounts of cash and subject to an insignificant risk of changes in value.

Key Determination Criteria:

1. Short-term: Normally a maturity of three months or less from the date of acquisition.
2. Highly Liquid: Must be convertible/redeemable at any time without restriction.
3. Known Amounts of Cash: The realisable amount must be known at the time of initial investment.
4. Insignificant Risk of Value Change: Evaluation of potential value loss due to interest penalties or early redemption.
5. Purpose: Held to meet short-term cash commitments rather than for investment.

The Committee’s Opinion:

• Maturity > 3 months: CLTDs with an original maturity of more than three months (but less than 12) meet the liquidity criterion but fail the cash equivalent criteria. They are not held for short-term commitments, and their maturity value is subject to significant change if withdrawn prematurely. These should be classified as ‘Bank Balances other than Cash and Cash Equivalents’.
• Remaining Maturity vs. Original Maturity: An investment does not become a cash equivalent simply because its remaining maturity is three months or less; the standard measures from the date of acquisition.
• Non-Current Classification: CLTDs with original or remaining maturity exceeding 12 months should be classified as ‘other financial assets’ under ‘non-current assets’ as they do not meet the definition of a current asset.
• Demand vs. Term Deposits: Because these are deposited for a fixed period, they are considered ‘term deposits’, not demand deposits.
• 91-day Deposits: In this specific case, 91-day deposits meet all criteria (including being approximately three months) and should be classified as ‘cash equivalents’.
• Presentation: No separate presentation from regular term deposits is required for CLTDs/Flexi Deposits unless specific features (like restrictions or materiality) warrant distinct disclosure.

Consolidation of financial statements of an associate company which is a section 8 company, under Ind AS framework

A. Facts of the Case

• A company is a Defence Public Sector Undertaking.
• During F.Y. 2024-25, the Company invested in A M Foundation (AMF), which was established under the Defence Testing Infrastructure Scheme (DTIS).
• The Company holds 20% shareholding in this entity; accordingly, under Ind AS 28, ‘Investments in Associates and Joint Ventures’, the entity qualifies as an associate.
• AMF is incorporated as a section 8 company (a not-for-profit entity under the Companies Act, 2013).
• Apart from this investment, the Company has no other subsidiary, associate, or joint venture.
• The Company recognized this investment in AMF using the equity method.
• The statutory auditors issued a qualification, stating that because Section 8 prohibits profit distribution, the Company's profit and investment are overstated by the share of profit accounted for under the equity method.
• The Company seeks clarification on whether it must prepare Consolidated Financial Statements (CFS), as it believes its CFS would be identical to its Standalone Financial Statements (SFS) with just an additional disclosure regarding the section 8 company.

B. Query

1. Is an investor company required to apply the equity method of accounting in its consolidated financial statements for an associate that is a section 8 company, or should the investment be carried at cost?
2. If recognizing the share of profit/loss is not required, is the preparation of Consolidated Financial Statements (CFS) still mandatory even if the Company has no other subsidiary, associate, or joint venture?
3. Would preparation of SFS with appropriate disclosure be considered sufficient compliance?

C. Points considered by the Committee and Opinion

• The Committee noted that an associate is an entity over which the investor has significant influence, meaning the power to participate in financial and operating policy decisions.
• Merely holding 20% shares does not automatically conclude an entity is an associate; it must be determined based on the requirements of Ind AS 28.
• The Committee proceeded on the premise that the Company has significant influence and that AMF is indeed an associate.
• Under Section 129(3) of the Companies Act, 2013, if a company has one or more subsidiaries or associate companies, it shall prepare a consolidated financial statement.
• There is no specific exemption under the Companies Act or Ind AS from consolidation or the application of the equity method simply because an associate is a not-for-profit or section 8 company.
• ‘Consolidation’ for associates/joint ventures effectively means preparing financial statements by applying the ‘equity method’ in accordance with Ind AS 28.
• The prohibition on distribution of profits in a section 8 company does not preclude the existence of significant influence.
• However, the Company should consider these restrictions when assessing its ability to exercise significant influence.
• If significant influence exists, the Company should consolidate the financial statements of AMF using the equity method.
• In the consolidated balance sheet, the Company can include the share of profit (often referred to as ‘surplus’ for section 8 companies) as a separate line item or sub-head.
• This should be labeled clearly so users understand it represents a share of surplus from a section 8 company which is not distributable as dividends.
• Under Ind AS 112, the Company should disclose the nature of its relationship with the associate, describing its activities as not-for-profit and noting any regulatory restrictions on transferring funds (dividends) to the Company.

Performance over Privilege: The 16th Finance Commission’s New Fiscal Formula

By Dr. Mallikarjun Bali and Dr. S.B Kamashetty

Introduction

The President of India constituted the 16th Finance Commission in accordance with Article 280 of the Indian Constitution. Chaired by renowned economist Sri. Arvind Panagariya, the former vice-chairman of NITI Aayog, the Commission’s primary mandate is to define the financial relationship between the Central Government and the States for a five-year "award period". The committee submitted its report on November 17, 2025, and it was placed in Parliament on January 1, 2026.

The Income Distance Criterion

Among the various parameters used in the fiscal formula, the income distance criterion remains the most dominant. This parameter measures how far a state’s average per capita income is below the per capita income of the three best-performing states. By maintaining a significant share for this parameter, the formula aims to help poorer states obtain a better share of financial resources.

Weightage Adjustments

The 16th Finance Commission has introduced specific changes to the weightage of its distribution parameters:

• Income Distance: The weightage has been reduced by 2.5%, moving from 45% to 42.5%.
• Demographic Performance: This parameter saw a reduction in weight of 2.5%.
• Area: The weight assigned to a state's geographic area has also been reduced.

(Note: The provided source material contains only the introduction and initial analysis of the fiscal parameters for this article.)

Contract of Service vs Contract for Service

By CA. Nilesh Modi

Introduction

The distinction between a “contract of service” (employment) and a “contract for service” (independent professional arrangement) is a heavily debated issue in income-tax law. While the difference is only a single word, it is critical because it determines the character of income and the associated Tax Deducted at Source (TDS) obligations.

Why the Distinction Matters

The classification directly affects the applicable TDS rates:

• Employee (Contract of Service): TDS is deducted under Section 192 (Income-tax Act, 1961) or Section 392 (Income-tax Act, 2025) based on the average rate of income tax for the financial year.
• Consultant (Contract for Service): TDS is deductible under Section 194J (Income-tax Act, 1961) or Section 393(1) (Income-tax Act, 2025) at a rate of 10%.

Incorrect classification can lead to demands for short-deduction of tax, interest, and penalties for the payer.

Heightened Scrutiny and the Healthcare Industry

This issue is particularly relevant in healthcare, where senior doctors may practice in private hospitals for part of the day while maintaining independent clinics. The CBDT Action Plan for 2014-15 specifically directed field officers to examine cases where professional payments might be misclassified salary payments.

The ‘Nanavati Hospital’ Case

In ***CIT v. Dr Balabhai Nanavati Hospital (2025)***, the Revenue alleged that honorary doctors should be treated as employees. However, the Bombay High Court rejected this, holding that the relationship was not one of employer-employee and that payments were professional fees correctly taxed under Section 194J.

Judicial Tests for "Consultant" vs. "Employee": The court applied several yardsticks to determine that the doctors were independent professionals:

• Variable Remuneration: Income depended on actual consultations/procedures rather than a fixed monthly salary.
• Revenue-Sharing: The hospital retained a percentage for infrastructure, but doctors remained autonomous.
• Professional Autonomy: Doctors could practice at other hospitals or clinics.
• No Employee Benefits: Absence of PF, ESIC, or standard perquisites.
• Flexible Schedule: Doctors were not bound by fixed hours; availability was patient-driven.
• Lack of Control: The hospital did not exercise "real supervisory control" over the doctors' work.
• Income-Tax Disclosures: Doctors reported income under "Profits and Gains of Business or Profession" rather than "Salaries".

Controversies in Other Sectors

The dispute is not limited to hospitals. Individuals often prefer being treated as consultants because they can claim tax deductions for expenses or use presumptive taxation, which are generally unavailable to salaried employees.

• Educational Institutions: In the Max Muller (2004) case, part-time teachers were held to be employees because the institute controlled their syllabus, teaching periods, and attendance. Conversely, in ***Brilliant Study Centre Pvt Ltd vs ITO (2026)***, the Cochin Tribunal held teachers were consultants because the center did not exercise direction over their teaching duties, despite providing medical insurance and transport.
• Entertainment & Media: Radio Jockeys (RJs) were held to earn professional fees in ITO vs Entertainment Network (I) Ltd (2017) due to a lack of probation, fixed duty hours, or signed musters. However, in ***Red Chillies Entertainment Pvt Ltd vs ACIT (2025)***, a "production manager" was held to be an employee because they had fixed monthly pay, a company car, and mandatory office attendance.

Role of the Tax Auditor

Tax auditors must report instances of lower tax deduction in Column (8) of the Tax Audit Report (Form 3CD/26). If a CA believes an individual is an employee but the client has applied Section 194J (10% or 2%), this difference of opinion should be reported.

The case of Vijay Mariappan Austin Prakash vs ACIT (2026) suggests that while an agreement to shift from employment to consultancy is valid, the auditor should look beyond the "form" (the contract) and assess the "substance" of the relationship.

Indicative Questions for Determining the Real Relationship

To determine if a relationship is truly independent, auditors can ask:

1. Is there a master-servant relationship?
2. Who controls the "work to be done" and the "manner" of doing it?
3. Who determines the time and place of performance?
4. Who provides the tools and resources?
5. Is the remuneration fixed or variable?
6. Is the individual entitled to social security, annual leave, or national holidays?
7. Can disciplinary sanctions, suspension, or dismissal be imposed?
8. Who bears the risk/reward and is the individual liable for damages?
9. What position has the individual taken in their own ITR?
10. Are Labour Laws or GST applicable?

Conclusion

There is no set formula. The "real relationship" matters more than the label used in the agreement. Every organization and individual must ensure their arrangements pass the "basic smell test" by evaluating the totality of the circumstances.