The benefit of allowing depreciation to owner had become an instrument to dodge income tax liability, especially for non-banking finance companies (NBFCs). Sometime ago, such practices surfaced when the loss making state electricity boards (SEBs) joined hands with several NBFCs to exploit the provision for their mutual benefit. The modus operandi was somewhat like this: depreciation is excluded from the profit liable to tax. Depreciation, thus, made no difference to the loss-making SEBs with zero-tax liability. On the other hand, the NBFCs slush with profits were liable to the extant high tax rates. So the cash-strapped SEBs would sell-off their assets to NBFCs. As soon as the ownership of asset changed, the NBFC would lease the same asset to claim depreciation benefit. Thus, they were able to get huge tax shield. These transactions are called `Sale and Leaseback transactions.'

In earlier `Sale and Leaseback transactions,' the NBFCs used to keep the price of leased assets very high to claim higher depreciation and thereby higher tax shield. The draft of AS-19, to be vetted, seeks to tackle this loophole. The positive difference(profit) between the sale price and the lease price is proposed to be considered as immediate income or to be spread over a period of time in the case of an operating lease. Thus, the excess amount of lease price over sale consideration will be brought under the tax net.

Lessor-lessee relationship will assume a new garb once the ICAI introduces the proposed AS-19. The depreciation benefit is sought to be given to the actual user or the lessee somewhat analogous to the land to the tiller. Though this may sound as the step to check manipulation of the well -intentioned practice, some practical difficulties remain during the transition period. Presently, the leasehold assets are lying in the books of lessee. Now, the trying question is : how to bring back the leasehold asset in the books of the lessor? Further, how to determine the price for calculation of depreciation for the lessee to claim the same. One hopes the ICAI removes these ambiguities.

ITC Falling tobacco chewing, ever increasing fiscal imposts and anti-smoking campaign have not deterred ITC from holding on its own in a fiercely competitive market and the incipient slowdown. This is reflected in ITC's good showing in the second quarter ended September, 2000. This is despite the fact that the government policies affect the fortunes of the cigarette companies in a major way. ITC's dominant position in tobacco and cigarette industry has insulated it from adverse factors. The market too seems to have discounted these factors and the ITC scrip is currently trading at Rs 769 at a P/E ratio of 22.1.

Hotels and paper businesses, aided by a recovery in cigarette segment, have helped the topline to grow by 6 per cent to Rs 1,003 crore up from Rs 945 crore. Concerted efforts to enhance the premium segment have helped ITC. Its brands Wills, Gold flake and Benson & Hedges have remained strong. Nearly 75 per cent of the company's cigarette output is in filter segment and 45 per cent of it is packaged in the internationally preferred hinged - lid format. However, there is no evidence to support the company's claim on the growth in cigarette segment. In fact, ITC sold only 66,145 millions sticks in the year '99-00, down from 67,753 million sticks in 1998-99, a declining trend observed during the past 2 years.

Operating profits have witnessed a 20 per cent rise to Rs 428 crore (Rs 357 crore), helped by a tight leash on costs that in fact, showed a moderate decline of two per cent. Consequently, operating profit margin has risen to 42.6 per cent from 37.7 per cent. Tax provision of Rs 162 crore did not prevent net profit from going up by 21.7 per cent to Rs 252 crore (Rs 207 crore). The net profit margin, too, remained at 25 per cent.

The company has been sitting on a pile of cash, just over Rs 1,000 crore, and its productive deployment has been an issue of debate among analysts lately. The diversification plans of the company include a foray in the retail apparel segment to exploit the Wills brand, besides venturing into the greeting cards business. The company is to add to its hotel chain with the 5-star hotel in Mumbai, all set to kick off later in the year. ITC is also trying to harness the printing and packaging segment and the IT business. The diversification plans are crucial for the ITC's future. But, the impact of the diversification into unrelated areas raises an important question- will these moves add a zip to the bottomline when as a matter of fact the company is growing slowly in its core areas?

Manish Joshi and Sachchidanand Shukla