Make acquisition of more than one house eligible for exemption u/s 54 – ICAI
Section 54- Investment in residential house
Several disputes are in existence as to whether an assessee can buy more than one house under provisions of section 54 of the Income-tax Act, 1961. In the recent times High Courts and ITAT have taken a consistent view that in order to avail the exemption u/s 54 of the Act, investment in a "residential house" is required to be made. Here a residential house means a "dwelling unit", which may encompass more than one flat or living places, if all of them together are meant for one family for living together. It is submitted that permitting investment of the sale proceeds in more than one house properties when the need of housing is increasingly felt due to increase in population, would be a step in the right direction. Even otherwise, investment upto Rs. 50,00,000 is encouraged and allowed u/s 54EC of the Act.
It is suggested that a provision be introduced whereby acquisition of more than one house be eligible for exemption u/s 54.
Source- Pre-Budget Memorandum 2014 on direct taxes by Institute of Chartered Accountants of India
Why Tax Practitioners Bill Required For India?
Advocate B.S.K.RAO
1. Below are the accounting bodies of various country's world over on date, In spite of this, they have separate bodies/legislation for regulation of Tax Professionals. Reason being, situation similar to that of latest Supreme Court verdict in the case of Bar Council of India Vs A.K.Balaji about Practice of Law by only Advocates/Attorneys arisen (See Exhibit-1). More over each professional body mentioned below possess members in the range of 1,00,000 to 5,00,000. In fact, in all below mentioned country's, population is less & existing members are sufficient to meet the requirement of their economy. Indian position is different. India is highly populated, existing 65,570 practicing Chartered Accountants spread throughout India does not meet the requirement of our country (See Exhibit-2). Therefore, India needs Tax Practitioners Bill to generate Tax Professionals to support voluntary compliance for widening genuine tax base of assesses.AICPA (USA), ACCA (UK), CICA(Canada), CGA (Canada), CICMA(Nigeria), CIMA(UK),CIPFA (UK), CPA (Australia), GCPAS (Germany), ICIA(Canada), HKICP (Hong Kong), ICAA (Australia), ICAEW (UK), ICAI (Ireland), ICAI (Financials-India), ICAI (Cost & Management-India) ICAS (UK), ICMAP (Pakistan), IFA (UK), MIA(Malaysia), NZICA (New Zealand), PICPA (Philippines), SAICA (South Africa), MIA(Malta)
2. Our esteemed Central Govt. should come out with subordinate legislation; introduce Tax Practitioners Bill covering all Tax Law Professionals in India also. Such Tax Practitioners Bill should be introduced with preamble stating that "Majority of person practicing tax law in India are Non-Advocates, in order to protect them & also in the interest of Govt. revenue, this Tax Practitioners Bill has been introduced". Then such Tax Practitioners Law can not be struck down in view of SC verdict in the case of Bar Council of India Vs A.K.Balaji. Treasury Department Circular No.230 for regulations governing practice before the Internal Revenue Service in USA (See Exhibit-3) & Tax Agent Service Act of Australia (See Exhibit-4) are very good examples for kind consideration of Deptt. of Revenue, Ministry of Finance, Govt. of India to have similar Tax Practitioners Law in India also, to widen genuine tax base of assesses.
3. Among Legal Practitioners, Cost & Management Accountants, Company Secretaries, Chartered Accountants and Income-Tax Practitioners, who wants to practice tax law in India, should mandatory seek registration under Tax Practitioners Law, whatever their parent body say is immaterial & Tax Practitioners Law should recognizes the qualifications acquired by all five class of Tax Professionals mentioned above. Population wise India is a large country, Govt. can not relay on one professional body for seeking voluntary compliance under Indian taxation laws. Tax Practitioners Bill is well suited to India, required for India & need of the hour. Why can't India have professional body to generate Tax Professionals to support voluntary compliance for very purpose of collection of revenue under all Indian taxation laws. I hope Deptt. of Revenue, Ministry of Finance, Govt. of India will consider this suggestion of mine working in the interest of all Tax Professionals and Govt. revenue since 2001.
Receipt of Credit Notes from the Seller – Impact on Tax Credit of the Purchaser under Delhi VAT Act
Rakesh Garg, FCA
A. IntroductionDelhi, being the trading centre, issuance of credit notes in respect of discounts and incentives by the sellers to the buyers is a common marketing phenomenon. Where the consideration as per the original sale bill is reduced due to offer of discount, incentives, etc., credit note is issued by the seller to the purchaser. Many a times, credit note is issued in the chain of marketing supply, i.e., from the manufacturer to the distributor, then to the wholesaler, and then to the retailer; so that the benefit of incentive is passed on to the ultimate consumer.
Ideally, the seller is required to reverse its output tax on the amount of such credit notes, and the buyer to reverse its corresponding input tax credit. However, sometimes, the seller does not reverse its output tax due to certain difficulties discussed later; and accordingly buyer does not reverse its input tax credit. The DVAT Department is invariably rejecting the input tax credit accruing to the purchaser based on these credit notes, even if the seller has not reversed/adjusted its output tax. Numerous cases are pending before the DVAT Tribunal and the Objection Hearing Authorities.
With the issuance of Circular No. 30 of 2013-14 dated 19th December 2013 by the DVAT Department, the stand of the Department is very clear. The said circular states, -
"1. Under section 10(1) of the DVAT Act, 2004 where any purchaser has been issued with a credit note or debit note in terms of section 51 of this Act or if he returns or rejects goods purchased, as a consequence of which the tax credit claimed by him in any tax period in respect of which the purchase of goods relates, becomes short or excess, he shall compensate such short or excess by adjusting the amount of the tax credit allowed to him in the tax period in which the credit note or debit note has been issued. Such adjustment of tax credit shall be made in the context of sale/purchase made in Delhi and not in the context of inter-state sale/purchase.
2. The credit note issued by the selling dealer may relate to :
(i) Trade discount by any name called including quantity discounts, end of year discounts, close out discounts, target discounts, bonus or incentives in the form of general credit to the purchaser's account or supplying additional quantity of the goods dealt in by the selling dealer or providing/supplying perks, such as allowing package tours or giving gift articles, etc. [Post sale perks and discounts].
(ii) Relating to goods returned or rejected by the purchaser.
(iii) Due to variation in rate or quantity in individual sale invoice.
(iv) Consideration for other facilities offered by the purchaser, such as, rent for window display, sign-boards, lease rental of premises, other establishment expenses, etc.
(v) Reimbursement of expenses incurred by purchaser on behalf of seller. (vi) Cash discount. (For payment made before the agreed date).
3. Trade vs. Cash Discounts
Trade discounts are incentives for a customer to purchase a product. They may be new customer discounts, quantity discounts, repeat customer discounts, end of year discounts, close out discounts, and many more. Whatever be the type, they are designed to entice a customer to purchase now, to purchase more and to purchase this. Trade discounts are generally reflected in the credit side of the Trading Account of the dealer.
Cash discounts, on the other hand, are incentives for a customer to pay the bill once they have made that purchase. They tell the customer when the bill must be paid, and communicate whether there are financial benefits (discounts) for paying before that deadline. Cash discounts are generally reflected in the credit side of the Profit & Loss Account of the dealer.
4. Trade discounts could further be classified into two types of discounts-
(a) Discounts given at the time of sale – According to the trade practice, such discounts are offered at the time of sale and VAT is charged on the resultant cost. Suppose, the cost of a good is Rs. 120/-. The seller offers a discount of Rs. 20/-. The resultant cost of the commodity now becomes Rs. 100/- and VAT @ 12.5% (say) would be Rs. 12.50 making the sale price to Rs.112.50. The seller is liable to pay Rs. 12.50 as VAT to Government and the buyer is entitled to an ITC of Rs. 12.50 on the purchase. The tax liability of the buyer would depend on the sale price at which the good is sold to consumer. In this case, no VAT adjustment is required to be made.
(b) Post sale discounts – If in the above example, the original seller offers a post-sale discount of say Rs. 10/-. Then, the cost of the good would become Rs. 90/- and VAT liability would be Rs. 11.25. But, the seller has already paid Rs. 12.50 as VAT and accounted for the same in his books of accounts. Thus, the seller is entitled to make adjustment of Rs. 1.25 (12.50-11.25) in accordance with the provision of Section 8 of DVAT Act. The sale price would now be reduced to Rs. 101.25 (112.50 -11.25). By reducing the cost price by Rs. 10/-, the seller has to issue credit note of Rs. 11.25 (10 + 1.25) to the buyer. It hardly matters whether the seller indicates the value of credit note as Rs. 11.25 or Rs. 10.00 plus Rs. 1.25 as VAT. Consequently, the buyer now becomes entitled to an ITC of Rs. 11.25 instead of Rs. 12.50 already claimed. Thus, an ITC of Rs. 1.25 (12.50-11.25) has to be reduced by the purchaser as provided in section 10 of DVAT Act.
5. The reduction in ITC by buyer is independent of reduction in output tax liability by seller. The seller may reduce the liability by revising return or making adjustment for the reduction in the output tax liability of current tax period's return in terms of section 8. While assessing or scrutinizing the return of buyer in a particular ward, it is difficult to find out whether the pairing selling dealers have also reduced their output tax liability. The sellers may be registered in different wards. There is no system of issue of certificate to buyer by seller stating that the output tax corresponding to credit note has been adjusted or not and neither it is desirable in VAT regime.
6. Cash discount stated at 2(vi) issued by selling dealer is not eligible for adjustment to output tax in terms of provisions of Section 8 of the DVAT Act. Therefore, the credit notes issued on this account need not be mentioned in Annexure 2C of the return. Similarly, the purchasing dealer need not to mention such Credit notes in Annexure 2D of the return in Form DVA T-16.
7. Input tax credit has to be adjusted by the purchasing dealer in respect of credit / debit notes related to items listed at 2(i) to 2(v). Credit note related to cash discount need not be subjected to ITC reversal. Consequently, the selling dealer will not be eligible to make adjustment of output tax on account of issue of credit note with respect to 2(vi) i.e. cash discount."
Under the Delhi VAT Act, a purchasing dealer is eligible to claim input tax credit under section 9 of the Delhi VAT Act on his eligible purchases meant for the purpose of making taxable sales within Delhi or inter-State sales or exports made out of India. The purchasing dealer is required to adjust his input tax credit under section 10 of the Delhi VAT Act due to, amongst other reasons, return/rejection of goods or issuance of credit/debit note by the selling dealer. In accordance with section 8 of the Act, a selling dealer shall adjust his output tax in the specified circumstances and issue a credit/debit note in terms of section 51 of the Act disclosing the amount of VAT separately.
If the seller has adjusted his output tax in his VAT returns u/s 8 of the Act, the purchasing dealer shall undoubtedly reverse his input tax credit u/s 10 based upon the amount of tax separately disclosed in the credit note issued by the seller. However, where, inspite of payment of full tax by the seller on the basis of his original invoice and not adjusting the output tax by him u/s 8 of the Act in his VAT returns, the purchasing dealer is asked by the Authorities to reverse his input tax credit, it causes double taxation and undue harassment.
In this Article, an attempt has been made to analyze various provisions of the Delhi Value Added Tax Act, 2004 (DVAT Act, in short) in this regard and to find an answer to the following question: -
"Whether the purchasing dealer is obliged to reverse his input tax credit u/s 10 of the Act even if the selling dealer has paid full tax on the basis of original invoice and has not adjusted his output tax u/s 8 of the Act read with section 51 and rule 45 of the Delhi VAT Rules?"
B. Provisions under the DVAT Act and Rules made thereunder
B.1 Section 2(1)(zd) – "'sale price' means the amount paid or payable as valuable consideration for any sale, including-
(i) to (vii)…….
less -
(a) any sum allowed as discount which goes to reduce the sale price according to the practice, normally, prevailing in trade;
(b) …………….
and the words "purchase price" with all their grammatical variations and cognate expressions, shall be construed accordingly;"
B.2 Section 8 – Adjustments to tax
(1) Subject to such conditions as may be prescribed, this section shall apply where, in relation to the sale of goods by any dealer –
(a) that sale has been cancelled;
(b) the nature of that sale has been fundamentally varied or altered;
(c) the previously agreed consideration for that sale has been altered by agreement with the recipient, whether due to the offer of a discount or for any other reason;
(d) the goods or part of the goods sold have been returned to the dealer within six months of the date of sale; or
(e) the whole or part of the price owed by the buyer for the purchase of the goods has
been written-off by the dealer as a bad debt;
been written-off by the dealer as a bad debt;
and the dealer has –
(i) provided a tax invoice in relation to that sale and the amount shown therein as tax
charged on that sale is not the tax properly chargeable on that sale; or
charged on that sale is not the tax properly chargeable on that sale; or
(ii) …………………
(2) Where a dealer has accounted for an incorrect amount of tax as contemplated in sub-section (1), that dealer shall make an adjustment in calculating the tax payable by that dealer in the return for the tax period during which it has become apparent that the tax is incorrect, and if –
(a) the tax payable in relation to that sale exceeds the tax actually accounted for by the dealer, the amount of that excess shall be deemed to arise in the tax period in which the adjustment is made, and shall not be attributable to any prior tax period; or
(b) the tax actually accounted for exceeds the tax payable in relation to the sale, the amount of that deficiency shall be subtracted from the tax payable by the dealer in the tax period in which the adjustment is made, and shall not be attributable to any prior tax period.
B.3 Section 10 – Adjustment to tax credit
(1) Where any purchaser has been issued with a credit note or debit note in terms of section 51 of this Act or if he returns or rejects goods purchased, as a consequence of which the tax credit claimed by him in any tax period in respect of which the purchase of goods relates, becomes short or excess, he shall compensate such short or excess by adjusting the amount of the tax credit allowed to him in respect of the tax period in which the credit note or debit note has been issued or goods are returned.
(2) to (4)………..
(5) Where the goods which have been purchased by a dealer are sold at a price lower than the price at which it was purchased by the dealer, the tax credit on such purchases shall be reduced proportionately in the tax period during which the goods are sold.
Explanation. – The tax credit claimed on a particular purchase shall not exceed the amount of tax payable on its sale."
B.4 Section 51 – Credit and Debit Notes
Where a tax invoice has been issued in respect of a sale and –
(a) the amount shown as tax in that tax invoice exceeds the tax payable in respect of the sale, the dealer shall provide the purchaser with a credit note, containing such particulars as may be prescribed; or
(b) ………………
B.5 Rule 6A(3) – Restrictions and Conditions governing Tax Credit
(3) The provisions of sub-section (5) of Section 10 of the Act relating to proportionate reduction of tax credit on purchases of goods sold at a price lower than the purchase price shall apply to the cases where, during the tax period, the dealer receives credit note or notes from the selling dealer, on account of discount, commission, rebate, remission in price or incentive, or by whatever name called.
Explanation :- For the removal of doubt, it is hereby clarified that the provisions of subsection (5) of Section 10 of the Act shall not apply to a case where in the ordinary course of business the goods are sold by a dealer at a loss.
B.6 Rule 45 – Credit and Debit Notes
For the purposes of section 51, a credit note and a debit note shall be signed by a person authorised to sign the return to be filed under the Act and shall contain the following particulars, namely:-
(a) the name, address and registration certificate number of the selling registered dealer;
(b) the name and address of the purchaser and his registration number where the purchaser is a registered dealer;
(c) a description of the reason for issuing the credit note or debit note, as the case may be;
(d) the serial number of the relevant tax invoice affected by the credit note or debit note, as the case may be; and
(e) the amount of the variation to the tax amount shown on the tax invoice.
C. Nature of credit notes generally issued by the selling dealer
Generally, the credit notes issued by the selling dealer are of the following nature: -
(i) Relating to goods returned or rejected by the purchaser;
(ii) Due to variation in rate or quantity in individual sale invoice;
(iii) Bonus or target discounts or incentives in the form of general credit to the purchaser's account or supplying additional quantity of the goods dealt in by the selling dealer or providing/supplying perks, such as allowing package tours or giving gift articles, etc [Post sale perks and discounts].;
(iv) Consideration for other facilities offered by the purchaser, such as, rent for window display, sign-boards, etc.;
(v) Provision of various services, such as, window hiring for display of goods, deploying man-power for promotion of goods, etc.; and
(vi) Reimbursement of expenses incurred by the purchaser on behalf of the seller.
D. Issue of credit notes under the DVAT Act
As per section 51(a) of the DVAT Act, where a tax invoice has been issued in respect of a sale and the amount shown as tax in that tax invoice exceeds the amount of tax payable in respect of the sale, the dealer shall provide the purchaser with a credit note, containing such particulars as may be prescribed.
The said section should be read along with section 8 of the DVAT Act, which, inter alia, has laid that a selling dealer shall adjust his output tax if -
8(c) the previously agreed consideration for that sale has been altered by agreement with the recipient, whether due to the offer of a discount or for any other reason;
Moreover, reading the entire clauses of section 8 together, which allow the sellers to reverse their output tax not only due to cancellation of sales, offer of discounts and return of goods (within six months), but also even for the bad debts; intention of the Statute prima-facie appears that wherever consideration payable by the purchaser to the seller is reduced subsequent to the date of sale for whatever reasons, the seller is allowed to reduce its output tax.
It may also be noted that the DVAT provisions require issuance of debit/credit notes by the seller; and do not require issuance of corresponding credit/debit notes by the purchaser.
E. Reversal of Output Tax by the selling dealer
There are various judgments by the Courts pertaining to 'Sales Tax Era' where it was pronounced that cash discount, incentive, turnover discount and bonus discount do not form part of the sale price, and hence, no tax was payable on such discount. However, these judgments have lost their significance under the VAT Enactments due to input tax credit mechanism, inspite of similar definitions of the term "sale price" under both the regimes. Under the VAT structure, unlike the sales tax regime, output tax is reversed on the amount of discount, and the selling dealer may pass on this tax to the purchasing dealer, who, in turn, shall reverse his input tax credit. Needless to say that these judgments, at present also, have relevance for the purposes of Central Sales Tax Act where the purchasing dealer cannot claim set-off of tax paid by him to the selling dealer.
In terms of section 2(1)(zd) of the DVAT Act, while determining "sale price", a dealer is eligible to reduce, from the valuable consideration, any sum allowed as discount which goes to reduce the sale price according to the practice, normally, prevailing in trade. Under the DVAT
Act, post-sale discounts are allowed by way of adjustment in the output tax u/s 8 of the Act.
In a recent judgment in IFB Industries Ltd. vs. State of Kerala (2012) 49 VST 1 (SC), it was held that trade discount, which is uniformly allowed to all the purchasers, does not form part of the sale price. In BPL Ltd. vs. Asstt. CCT (2014) 69 VST 149 (MP), the Court held that the trade discount, which is not shown in the invoices and is allowed to the retailers subsequently through credit notes, shall be allowed as deduction from the sale price.
It may, however, be pertinent to note that inspite of Circular no. 30, which requires the selling dealer to reduce its output tax on the amount of credit notes, few VAT officers have disallowed reversal of such output tax to the sellers since the sellers failed to provide necessary evidence to the Authorities in respect of reversal of corresponding input tax credit by the purchasers.
Why the sellers sometimes are reluctant to reverse their output tax:
- Sellers are operating through common SAP; and States are having different provisions in respect of reversal of input tax credit on the credit notes. Central Excise also does not require for such reversal.
- Many a times, it also happens that the discount does not pertain to any single invoice and it is not practically feasible to compute the impact of tax on such discount by the selling dealer. To illustrate, a company is selling goods to a distributor, taxable at 0%, 4% and 12.5%, and at the end of the year, since the distributor has exceeded the specified target of turnover, a discount of 2% is allowed on total off-take. In the credit note issued due to target discount, it is difficult for the company to ascertain the amount of bill-wise output tax to be reversed.
- In some other cases, credit notes are given for reimbursement of expenses incurred by the purchaser, rent for display of goods, etc., which are not relatable to any sale or purchase.
- Another reason is that the Authorities ask the selling dealers to provide for the evidence of corresponding reversal of input tax credit by the purchaser.
F. Reversal of Input Tax Credit by the Purchaser u/s 10(1)
Before proceeding further, it is significant to mention that in the Andhra Pradesh and Tamil Nadu VAT Act, it has been provided that wherever any credit note is to be issued for discount or sales incentives by any dealer to another dealer after the date of issuing tax invoice, the selling dealer shall pass a credit note without disturbing the tax component on the price in the original tax invoice. In other words, the quantum of input tax credit already claimed by the buying dealer as well as the tax already paid by the selling dealer shall not be reversed.
Under the Kerala VAT Act and the U.P. VAT Act, the respective Commissioners have issued circulars stating that where the supplier has not claimed deduction in terms of the credit note for the amount of discount and has paid full tax as shown in the sale bill, then, the purchaser shall be entitled to avail full input tax credit on the basis of his purchase bill, provided the supplier has issued a declaration to the purchaser to the effect that entire tax, as shown in the sale bill raised on the purchaser, has been paid and no deduction in the turnover has been claimed by him based upon such credit note.
However, in the DVAT, instead of providing such mechanism, the VAT Authorities are disallowing the input tax credit on the credit notes, even if the selling dealer has not adjusted his output tax under section 8 of the Act. Circular No. 30 dated 19.12.2013 has gone a step further, which requires reversal of input tax credit even on the amount of rent for window display, sign-boards, lease rental of premises and reimbursement of other expenses. Since these amounts are paid / credited by the seller either towards provision of certain services or for reimbursement of expenses, and are not related to sale or purchase of goods, purchaser should not be required to reverse its input tax credit.
In accordance with section 10(1) of the DVAT Act, the purchaser is under an obligation to reverse his input tax in the following two circumstances, namely, -
(i) Where the purchaser rejects or returns goods to the seller, he will reduce his input tax credit in relation to that purchase, irrespective of issuance of credit note by the seller.
(ii) If the discount (based upon the targets or in the nature of incentives) or other adjustment is allowed by the seller, then the purchaser shall compensate to the Government by making adjustment in his input tax credit based upon such credit note issued in accordance with section 51 read with Rule 45 (i.e., where the seller has adjusted his output tax).
However, where the seller has not adjusted the output tax, and has accordingly issued a credit note without separately indicating the amount of VAT (i.e. seller has paid DVAT on full value of the invoice without making any subsequent adjustment); should the purchaser reverse his input credit u/s 10(1) of the Act in relation to such credit notes?
Answer of the author is "No" because reversal of input tax credit, in such a case, shall be lawful only if the selling dealer has adjusted his output tax in terms of section 8 of DVAT Act and has issued a credit note, disclosing the amount of tax separately, in terms of rule 45 of the DVAT Rules. Moreover, any such attempt will definitely be against the intention of the Legislature and spirit of the VAT mechanism, which allows credit to the purchaser for tax paid by him to the seller on his eligible purchases. We have already seen that several other States have either made provisions or have issued circular to avoid undue harassment to the dealers and, simultaneously, to safeguard the revenue.
Concept of input tax credit, as envisaged in the DVAT Act, is not new in India. It has been adopted in the Central Excise Act by way of Modvat/Cenvat Credit for more than twenty five years. Under the Central Excise Act, in a number of cases, it has been held that the purchasing dealer is not required to reverse his Cenvat Credit unless the selling dealer has also reversed the same or sought a refund in relation thereto. In the case of Brown Kraft Industries Ltd. vs. CCE 2007 (6) STR 275, the Mumbai Tribunal (also Kedia Electricals Ltd. vs. CCE 2006 (206) ELT 852 (Bangalore Tribunal) held, -
"There is no loss to the revenue as far as the payment of duty is concerned by the assessee, i.e., supplier of the goods on the proper correct assessable value. If there is a short payment of duty or refund claimed by the assessee supplier or reduction of sale price of the goods, there is some meaning in the action of the department to demand the appellants to reduce or reverse the credit equal to short payment of duty or refund claim. There is no such exercise by the authorities concerned at the suppliers end. Duty is paid on the basis of regular practice which is as per trade practice or on mutual agreement and the trade discounts/ cash discounts and other discount are the normal practice, which cannot be quashed by the department as long as they receive the correct quantum of duty, on correct assessable value. Therefore, I am of the confident view that the department cannot direct the appellant to reverse the credit or to disallow the credit as the Appellants had paid the duty and taken credit which is equivalent to duty shown in the invoice issued by the supplier, as such the confirmation of the demand for excess credit is not sustainable and penalty imposed thereof along with interest is not sustainable."
Similarly, there is no loss to the Government due to non-reversal of input tax credit by the purchaser since the seller has not reversed his output tax. Since there is no loss to the Government, nothing requires compensation to the Government in terms of section 10(1) of the Act. In addition, through this reversal of input tax credit, there would be an unjust enrichment on the part of the Government by retaining the double taxation (both from the seller as well as the purchaser on a single transaction of sale and purchase). Moreover, if the Government can make the e-system for verification of claim of input tax credit of the purchasers (through matching of Forms 2A and 2B), it can certainly make the e-program for reversal of the input tax credit of the purchasers in those cases where the sellers have reversed their output tax based upon the credit notes.
In the case of Andhra Agencies vs. State of A.P. (2009) 19 VST 1 (SC), the matter before the Supreme Court was whether the value representing the credit notes issued by the manufacturer were to be included in the taxable turnover. In Andhra Pradesh General Sales Tax Act, 1957, at relevant time, the intermediate dealer of liquor was required to pay tax on the incremental value. The Revenue sought to tax the intermediate dealer at "sale value – purchase value – value of credit notes". However, the Apex Court held that the intermediate dealer would be liable to pay tax at "sale value – purchase value", i.e., in other words, he would pay tax on the value of credit notes only if the tax was not paid on such value by the manufacturer. The same has been discussed by the Supreme Court by way of an illustration, as under :
"…… Hypothetically taking the sale price to be Rs. 100, the tax to be paid by the selling dealers has to be on 100. He may collect 90, after giving discount. If the sale price of the intermediate seller is Rs. 110 his liability to pay tax shall be on Rs. 10 i.e., 110-100. The Department's stand is that it should be 20 i.e., 110-90. This stand will not be correct if the first seller had paid tax on 100. Therefore, it has to be verified as to what was the amount on which tax was paid on the illustrative figures given above by the selling dealer."
In two separate judgments, the Haryana Tribunal [Vishal T.V. Care vs. State of Haryana (2010) 7 VSTI C-372 (Har Trib) and Laxmi Narain Ved Prakash vs. State of Haryana (2010) 7 VSTI C-255 (Har Trib)] held that the Authorities were not justified in reducing input tax credit without verification of the fact that the selling dealers have claimed benefit on such credit notes by reducing output tax liability; and therefore, matter was remanded for verification.
Further, the provisions in respect of credit notes have been inserted in the DVAT Act [Section 10(5) discussed in the next Para] with effect from 1.4.2010; and specifically in respect of credit notes. Incorporation of section 10(5) under the DVAT Act itself signifies that reversal of credit notes were never covered within the scope of section 10(1); that is, had that been covered within section 10(1), there were no need to insert section 10(5).
Therefore, the purchaser is not required to reverse its input tax credit u/s 10(1) on the amount of credit notes unless the seller has reversed its output tax on such credit notes; and thus, the Circular no. 30 dated 19.12.2013 in respect of reversal of input tax credit by the purchaser in all the cases (i.e., whether or not the seller has reversed the output tax) does not seem to be in accordance with the intent and spirit of the Law.
G. Reversal of Input Tax Credit by the Purchaser u/s 10(5)
Sub-section (5) has been inserted in section 10 of the DVAT Act w.e.f. 1.4.2010 restricting the input tax credit to the purchasing dealer if the goods have been sold at a price lower than the purchase price. Effective from the same date, Rules 6A(3) and (4) of the DVAT
Rules have been inserted to confine the scope of section 10(5) to those cases where the dealer receives credit note(s) from the selling dealer on account of discount, commission, rebate, remission in price or incentive, or by whatever name called. Therefore, we may say that section 10(5) read with Rule 6A(3) are the direct and specific provisions in respect of input tax credit on the credit notes relating to discount, incentives, etc.
Insertion of these provisions is an attempt by the Government to set at rest the litigation relating to reversal of input tax credit by the purchaser on the amount of credit notes received from the seller, particularly in those cases where the seller has not reversed output tax on the amount of credit notes.
Similar to the DVAT Act, the Karnataka VAT Act also requires reversal of the input tax credit which is in excess of output VAT where goods were sold below the purchase price.
Interpreting these provisions and section 10(5) of the DVAT Act, the Karnataka High Court held that where goods were sold below the amount stated in the original tax invoice, the said provision would be invoked and the purchasing dealer would reverse his input tax credit.
[Jayam & Co. vs. Asstt. CCT (2013) 65 VST 261 (Kar)]
Let us take an illustration to understand section 10(5) and Rule 6A(3) in relation to credit notes. Suppose, "PQR" purchases goods at Rs. 1000/- (ITC of Rs.50); and receives post-sale credit note from his seller of Rs.100/- (Tax Rs.5/-). If he sells goods at Rs. 1020/-, he is not required to reverse input tax credit u/s 10(5), since inspite of receiving the credit note of Rs.100/-, he sells the goods at above the original purchase price of Rs.1000/-. Suppose, he sells the goods at Rs.980/- (below Rs.1000/-), then he is required to reverse the input tax credit proportionately only on Rs.20/- (and not entire Rs.100/-) u/s 10(5). Where, however, the seller has reversed his output tax by Rs.5/-, and accordingly, the purchaser has reversed his input tax credit by Rs.5/- u/s 10(1), then the purchaser shall not be required to again reverse the input tax credit u/s 10(5).
Another question which invites our attention is: whether section 10(5) of the DVAT Act is applicable, retrospectively, that is, to the credit notes issued before 1.4.2010? Applying the judgment of the Delhi High Court in the case of Shanti Kiran India (P) Ltd. vs. CTT (2013) 57 VST
405 (Del), where the Court held that insertion of section 9(2)(g) of the DVAT Act (allowing input tax credit to the buyer if the seller has paid its output tax) w.e.f. 1.4.2010 is not applicable retrospectively; it may be stated that section 10(5) is also applicable prospectively.
Therefore, to conclude, purchaser is required to reverse proportionate input tax credit under section 10(5) based upon the credit notes issued by the seller if he has sold the goods
below the price stated in the tax invoice; and only to the extent of such negative value. Where, however, the seller has reversed his output tax on the amount of credit notes, the purchaser shall reverse his input tax credit u/s 10(1) of the Act.
Before parting, it is necessary to quote few lines from the judgment of the Gujarat High Court in the case of Vimal Enterprises vs. Union of India 2006 (195) ELT 267 (para 18), -
"If, on facts, it is possible to find out that the transaction is genuine and bona fide transaction, the identity of the supplier is established, the document showing duty paid inputs is supported by the facts, and the records of the supplier show that the supplier has purchased duty paid goods before resale and passed on the credit of duty, there is no reason why the benefit should be denied. Once the object for which a provision is enacted is satisfied merely venial or technical breach by itself should not permit the authorities to adopt a stand which frustrates the object for which the entire scheme of Modvat has been framed. The endeavour must be to ensure that the scheme is made effective and not frustrated. In other words, the goods, which have been subjected to duty when used as inputs for manufacture of final product, should not be made to bear duty once again as that would have a cascading effect not intended by legislature in so far as the ultimate consumer is concerned."
Disclaimer:
This Paper contains personal views of the author and has been prepared for academic use only. Errors or omission may kindly be brought to the notice of the author
IT IS MY SUBMISSION THAT THIS SHOULD INCLUDE TAX AUDIT REPORT OF THE COMPANY WITH ANNUAL ACCOUNTS SENT TO SHAREHOLDERS. AUDITORS AND MANAGEMENT TAKE ADVANTAGE OF THIS AND DOING WRONG THINGS IN ACCOUNTS AND OTHER WAY OUT THE SAME IS DELETED IN TAX AUDIT REPORT. THE REASON BEHIND IS THAT IT IS CLAIMED THAT IT CAN NOT BE INSPECTED BY SHAREHOLDERS!!
Statutory Registers Under Companies Act 2013
- INCORPORATION DOCUMENTS: Company shall preserved at its Registered office:
- All Documents and Information as ORIGINALLY filed with ROC For Incorporation of Company (under Section-7 sub-section (1))
- To be preserved permanently till its dissolution under this Act by the Company.
- PCS who will Incorporate Company will maintain the copy of All the documents of Incorporation.
- MOA & AOA: Company shall preserved Permanently at its Registered office MOA & AOA of filed with ROC, duly Updated from time to time as per section -15.
Copies of MOA & AOA given to Members: A company shall, on being so requested by a member
- Send to him within 7 (seven) days of the request
- on Payment of such fess as prescribed in the Companies (Register offices and Fees) Rules, 2014.
- A copy of: MOA & AOA
Penalty: If a company makes any default in complying with the
provisions of this section, the company and every officer of the company who is in default shall be liable for each default, to a penalty of one thousand rupees for each day during which such default continues or one lakh rupees, whichever is less.
3. RECORD OF PRIVATE PLACEMENT: Section 42 read with Rule 14 of CA(Prospectus and Allotment of Securities) Rules, 2014-Company shall maintain complete Record of Private Placement under PAS-5 at its Registered Office.
4. REGISTER OF RENEWED AND DUPLICATE SHARE CERTIFICATE:
- This register shall be maintain under SH-2 indicating against the name(s) of the person(s) to whom the certificate is issued, the number and date of issue of the share certificate in lieu of which the new certificate is issued, and make necessary changes indicated in the Register of Members .
- Register shall be kept at the Registered office of company or at such other place where the Register of Members is kept.
- Register shall be preserved PERMANENTLY.
- Entry made in register shall be authenticated by the CS or person as may be authorized by the Board
5. REGISTER OF SWEAT EQUITY SHARES:
- This Register shall be maintain under FORM NO. SH-3.
- Register shall be kept at the Registered office of company.
- Entry made in register shall be authenticated by the CS or person as may be authorized by the Board
6. REGISTER OF TRANSFER & TRANSMISSION: The Company shall maintain Separate Register for Transfer & Transmission of Equity/ Preference Shares (Section – 56).
- REGISTER OF EMPLOYEE STOCK OPTION: (Section 62(1) (b) Read with Rule 12 of Chapter IV):
- This Register shall be maintained under FORM NO. SH-6.
- Register shall be kept at the Registered office of company OR such other place as Board may Decide.
- Entry made in register shall be authenticated by the CS or person as may be authorized by the Board.
8. REGISTER OF SECURITY BUY BACK: (Section -68 (9) read with Rule 17of Chapter IV)-
- This Register shall be maintained under FORM NO. SH-10.
- Register shall be kept at the registered office of Company.
- Entry made in register shall be authenticated by the CS or person as may be authorized by the Board.
9. REGISTER OF DEPOSIT: (Section 73 and 76 read with rule 14 of Companies (Acceptance of Deposit) Rules, 2014-
- Company shall maintain register of deposit accepted or renewed.
- Register shall be kept at the registered office of Company.
- Entry in register shall be made within 7 (Seven) days from the date of issuance of the receipt duly authenticated by the director & Secretary of the company or person as may be authorized by the Board.
- Register shall be maintain at least 8(Eight) year from the Financial year in which the latest entry is made in the register.
Particular of Register:
- Name, address and PAN of the depositor/s;
- Particulars of guardian, in case of a minor;
- Particulars of the nominee;
- Deposit receipt number;
- Date and the amount of each deposit;
- Duration of the deposit and the date on which each deposit is repayable;
- Rate of interest or such deposits to be payable to the depositor;
- Due date for payment of interest;
- Mandate and instructions for payment of interest and for non-deduction of tax at source, if any;
- Date or dates on which the payment of interest shall be made;
- Details of deposit insurance including extent of deposit insurance;
- Particulars of security or charge created for repayment of deposits;
- Any other relevant particulars;
10. REGISTER OF CHARGE: (Section 85 read with Rule-10 of company (Registration of charges) Rules, 2014-
- This Register shall be maintained under FORM NO. CHG-10.
- Register shall be kept at the registered office of Company.
- Entry in register shall authenticated by the director & Secretary of the company or person as may be authorized by the Board
- Register of Charge shall be Preserved PERMANENTLY.
- The Instrument creating Charge or Modification thereon shall be preserved for a Period of 8 (Eight) Year from the date of Satisfaction of Charge.
Particular of Register:
- Particular of all the charges registered with the Registrar on any of the property, assets or undertaking of the company.
- The particulars of any property acquired subject to a charge as well as particulars of any modification of a charge and satisfaction of charge.
Register Open for Inspection:
- Registers are open for inspection during Business Hours-
- By the Members or Creditors of the company without fees;
- By any other person on payment of fees;
- Subject to reasonable restriction as the company may, by its articles, impose.
PENALTY:
The company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to ten lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.
11. REGISTER OF MEMBERS: (Section 88 (1) (a) and Rule 3 of the Companies (Management and Administration) Rules, 2014-
- Every Company Limited by shares shall maintain registers of members in FORM NO. MGT-1.
- Company shall maintain separate register of debenture holders or security holders, in FORM NO. MGT-2 for each type of Debenture or other Securities.
- Entries in the register will be made in 7(Seven) days from the date of approval of allotment, Transfer of share, debentures or any other securities.
- In case of Buy Back, Forfeiture, reduction, sub-division, consolidation etc. entries shall be made within 7 (Seven) Days after approval for the same in register of members or in the respective register.
- If any change occurs in the status of members or debenture holder or any other security holder entries thereof explaining the change shall be made in the respective register.
PLACE OF KEEPING OF REGISTERS:
- The registers shall be maintained at the registered office of the company.
- By passing SR in GM the company can keep the register at any other place within the city, town or village in which the registered office is situated or any other place in India in which more than 1/10th (one-tenth) of the total members entered in the register of members reside.
INDEX OF THE NAMES TO BE INCLUDED IN REGISTER:
- Every register maintained under sub-section (1) of section 88 shall include an index of the names entered in the respective registers
The maintenance of index is not necessary in case the number of members is less than 50 (fifty).
The company shall make the necessary entries in the index simultaneously with the entry for allotment or transfer of any security in such Register.
AUTHENTICATION OF ENTRIES:
- The entries shall be authenticated by the company secretary of the company or by any other person authorized by the Board for the purpose,
The date of the board resolution authorizing the same shall be mentioned.
FOREIGN REGISTER:
A. A company may, if so authorized by its articles, keep in any country outside India, a part of the Register of :
- Members or
- Debenture Holders or
- Security Holders or
- Beneficial Owners, RESIDENT IN THAT COUNTRY.
B. The company shall, within 30 (thirty) days from the date of the opening of any foreign register, file with the Registrar notice of the situation of the office where such register is kept in Form No. MGT.3 along with the fee
C. The company in the event of any change in the situation of such office or of its discontinuance, shall, within 30 (thirty) days from the date of such change or discontinuance, as the case may be, file notice in Form No. MGT.3 with the Registrar of such change or discontinuance.
D. A foreign register shall be deemed to be part of the company's Principle Register.
E. Foreign register shall be maintained in the same format as the principal register.
F. The company shall—
- Transmit to its registered office in India a copy of every entry in any foreign register within 15 (fifteen) days after the entry is made; and
- Keep at such office a duplicate register of every foreign register duly entered up from time to time.
G. Every such duplicate register shall, for all the purposes of this Act, be deemed to be part of the principal register.
H. The company may discontinue the keeping of any foreign register; and thereupon all entries in that register shall be transferred to some other foreign register kept by the company outside India or to the principal register.
I. A foreign register shall be open to inspection and may be closed, and extracts may be taken there from and copies thereof may be required, in the same manner, mutatis mutandis, as is applicable to the principal register, Exception: No need to give advertisement in News Paper.
ENTRY IN REGISTER OF BENEFICIAL INTEREST:
- Where any declaration under section 89 is received by the company, the company shall make a note of such declaration in the register of members.
INSPECTION OF REGISTERS:
- The Registers are open for inspection by any Member, Debenture-Holder, other security holder or beneficial owner, during Business Hour Without payment of any fees.
- Inspection by any other person on payment of such fees as may be specified in the Articles of Association of the company but not exceeding Rs. 50/- (Fifty) for each inspection.
- Any such member, debenture-holder, other security-holder or beneficial owner or any other person may—
- Take EXTRACTS from any register, or index or return without payment of any fee; or
- Require a COPY of any such register or entries therein or return on payment of such fees as specified in AOA but not exceeding Rs. 10/-(Ten) for each page.
- Such copy or entries or return shall be supplied within 7(Seven) days of deposit of such fee.
PERSEVERANCE OF REGISTER:
- Register Members preserved PERMANENTLY.
- Register of Debenture and Other Security Holder shall be preserved for 8 year from the date of Redemption of Debenture and other Security.
12. MINUTES OF MEETINGS: A distinctive Minute Book shall be maintained for each type of Meeting:
- General Meeting of Members OR Creditors
- Board Meeting
- Meetings of Each Committee
(CSR Committee, Audit Committee, Nomination and Remuneration Committee, Shareholders Relationship Committee and other Ad-hoc Committees).
- Entry in the Minute Book shall be made within 30 days from the conclusion of the meeting.
- Each page of Book shall be initialed and last page of Book shall be dated and signed by:
General Meeting:
- Chairman of Meeting with in the period of 30(Thirty) Days.
- In case of Inability of Chairman, by a Director Duly authorized by Board for purpose. Board & Committee Meeting:
- Chairman of said Meeting
- Chairman of Next Succeeding Meeting
Postal Ballot Resolution:
- Chairman of Board with in period of 30(Thirty) days.
- In case of no chairman of Board, by a Director duly authorized by Board for purpose.
POSTAL BALLOT:
- Resolution passed by Postal Ballot shall be recorded in the Minute Book of General Meeting.
- Following thing mention in Minute Book:
- Brief Report on the Postal Ballot Conducted
- Proposed Resolution
- Result of voting thereon
- Summary of Scrutinizer's Report
- Date when entry made in Minute book
MAINTENANCE:
General Meeting:
- Minute Book of General Meeting shall be preserved permanently.
- Minute Book of General Meeting shall be kept at Registered Office.
- Kept open, during Business Hours to inspect by any member without charge. (Company may restrict it by mention in AOA or Passing resolution in GM, but company have to kept open at least 2 hour on each Business Day)
Board & Committee Meeting:
- Minute Book of Board meeting shall be Preserved Permanently.
- Minute Book of Board and committee Meeting shall be kept at Registered Office or such other place as Board may decide.
COPY OF MINUTE BOOK OF GENERAL MEETING:
- Such copy Minute shall be supplied within 7(Seven) days of deposit of such fee.
- Require a Copy of Minute on payment of such fees as specified in AOA but not exceeding Rs. 10/-(Ten) for each page.
- If a member request for Soft copy of Minutes of preceding of any GM held in Preceding 3(three) Financial year, same with free of cost.
MAINTENANCE AND INSPECTION OF DOCUMENT IN ELECTRONIC FORM:
- Every LISTED company or a company having Not Less Than One Thousand Shareholders, Debenture Holders And Other Security Holders, shall maintain its records in electronic form.
- Existing Companies, data shall be converted from physical mode to electronic mode within 6(SIX) months from the date of notification of provisions.
13. BOOKS OF ACCOUNTS:
- Preserve for a period of at least 8 Financial Years.
Books of Accounts and other books and papers may be open for inspection by a Director of the Company.
- REGISTER OF DIRECTORS & KEY MANAGERIAL PERSONNEL: (Section 170(1) and Rule 17 of the Companies (appointment and Qualification of Directors) Rules, 2014)-
- Every company shall keep at registerd office a register containing such particulars of its -
- Directors
- KMP's
- Which shall include the details of the securities held by each of them in the – Company
- Its Holding
- Subsidiary
- Subsidiary of companies' Holding Company
- Subsidiary of Companies Associate Companies.
PARTICULAR OF REGISTER:
o Director Identification Number (optional for key managerial personnel);
o Present name and surname in full;
o Any former name or surname in full;
o Father's name, mother's name and spouse's name(if married) and surnames in fullǢ
o date of birth;
o Residential address (present as well as permanent);
o Nationality (including the nationality of origin, if different);
o Occupation;
o Date of the board resolution in which the appointment was made;
o Date of appointment and reappointment in the company;
o Date of cessation of office and reasons therefor;
o Office of director or key managerial personnel held or relinquished in any other body corporate;
o Membership number of the Institute of Company Secretaries of India in case of Company Secretary, if applicable; and
o Permanent Account Number (mandatory for key managerial personnel if not having DIN);
The company shall also include in the aforesaid Register the details of securities held by them in the company, Its holding company, subsidiaries, subsidiaries of the company's holding company and associate companies relating to-
- The number, description and nominal value of securities;
- The date of acquisition and the price or other consideration paid;
- Date of disposal and price and other consideration received;
- Cumulative balance and number of securities held after each transaction;
- Mode of acquisition of securities ;
- Mode of holding – physical or in dematerialized form; and
- Whether securities have been pledged or any encumbrance has been created on the securities
INSPECTION OF REGISTER:
- Register shall be open for inspection during business hours.
- The members shall have a right to take extracts there from and copies thereof, free of cost within thirty days.
- Register Shall also be kept open for inspection at every annual general meeting of the company and shall be made accessible to any person attending the meeting.
15. REGISTER OF LOAN INVESTMENT AND GUARANTEE:
Every company Giving Loan or giving a guarantee or providing security or making an acquisition under this section shall keep a register in FORM NO. SH-12 which shall contain particulars of:
- Loan
- Guarantee Given
- Security provided
- Investment made
MAINTENANCE & INSPECTION:
- The register shall be kept at the registered office of the company.
- The Register shall be open to inspection at such office by Members;
- Extracts may be taken by any member,
- Copies may be furnished to any member of the company on payment of such fees as prescribed in AOA not exceeding Rs. 10(TEN) for each page.
16. REGISTER OF INVESTMENT MADE BY A COMPANY HELD NOT IN ITS NAME: (Section 187(2) and (d)
- The General rule is that all the investment made by a company shall be made and held in its name.
- Where Investment of a company are not held by it in its name but in the name of a depository, the company shall maintain a register in FORM NO. MBP-3 at its registered office which shall contain such particulars as prescribed, namely, the investment in shares and other securities chronologically.
- Register shall be open for inspection by any member of debentures holder of the company without fee during business hours.
- The entry shall be authenticated by the company secretary of company or any person authorized by Board.
17. REGISTER OF CONTRACT OR ARRANGEMENTS IN WHICH DIRECTORS ARE INTERESTED:
- Every company shall maintain one or more registers in Form MBP 4, and shall enter therein the particulars of-
o Company or Companies or Bodies Corporate, Firms or Other Association of individuals, in which any director has any concern or interest, as mentioned under sub-section (1) of section 184:
o Contracts Or Arrangements with a BODY CORPORATE OR FIRM or other entity as mentioned under sub-section (2) of section 184, in which any director is, directly or indirectly, concerned or interested; and
o Contracts Or Arrangements with a RELATED PARTY with respect to transactions to which section 188 applies.
- The Register shall be PLACED BEFORE NEXT MEETING OF BOARD and SIGNED BY ALL DIRECTORS PRESENT AT MEETING.
- The entries in the register shall be made at once
- Entry shall be authenticated by the company secretary of the company or by any other person authorized by the Board for the purpose.
- The register shall be kept at the registered office of the company.
- The register shall be preserved permanently.,
- The company shall provide extracts from such register to a member of the company on his request,
- Within seven days from the date on which such request is made upon
- The payment of such fee as may be specified in the articles of the company but not exceeding ten rupees per page.
- KEEPING CONTRACT OF SERVICE WITH MANAGING OR WHOLE-TIME DIRECTOR: Every Public Company shall keep at its Register Office-
- Copy of Contract of service, if any, entered into with a Managing or Whole-Time Director; or
- Where the Contract is not in writing, a written memorandum setting out its terms.
- Copy of the contract of service or Memorandum shall be open for inspection by the member without fee.
(CS DIVESH GOYAL, ACS-35817, +91-8130757966, csdiveshgoyal@gmail.com)
Proposed exemptions to Private companies -Analysis of MCA draft Circular
CA Gaurav Mittal
Yesterday, the government has placed a draft notification for comments on the MCA Website relating to exemptions granted to private companies. Private companies are closely held business entities that are not permitted to invite the public to subscribe to their shares or accept deposits from the public. Private companies are defined under the Companies Act, 2013 (Companies Act) to inter alia mean a company, which restricts the right to transfer its shares and limits the number of its members to 200.
The earlier Companies Act had a separate class of companies, namely, private companies that are subsidiaries of public companies on whom certain additional regulatory requirements were imposed in line with public companies. Under the Companies Act have been included in the definition of public company. The proposed amendments would not cover these companies.
The proposal is to create a separate class of companies having 50 or less members. Certain restrictions have been proposed to be withdrawn only for companies with 50 or less members. This will make the applicability of the provisions fluid and the benefit of having companies with 200 members for a private company is diminished. Interestingly, the proposals do not mention a small company and are considering the creation of a third class of private companies that have 50 members or less.
In general, the objective of the proposed amendments appears to be to allow private companies to regulate their own affairs, as was the case under the previous companies act. The real impact of the proposals will be seen only through the actual text of the legislative amendments. The move is certainly something that would be applauded by industry, corporates as well as professionals like company secretaries, auditors and legal professionals.
The major changes proposed to be made are highlighted below:
1) Kind of Capital and Voting Rights
The provisions of Section 43 and 47 of the Companies Act dealing with equity and preference share capital and voting rights have been made wholly inapplicable to private companies. This takes it back to the position under the Companies Act, 1956 (the previous Companies Act) in respect of kinds of share capital that may be issued by companies and voting rights available to members. Private companies may issue differential shares with differential voting rights, which will be governed largely by its articles. This would offer a big relief to companies that are starting a new business or to investors, who can minimize their risk by subscribing to shares with differential rights as compared to shares with same rights. This should be welcomed by industry and other practising professionals.
2) Further issue of shares
Timelines have been reduced for acceptance of rights shares under Section 62(1)(a) by members. This would also be a welcome move as it will speed up the process in private companies where the shareholding is not diverse or scattered. However, the suggested amendment goes beyond the prescription of the previous Companies Act, by making the timeline the maximum time for reference.
There is a reference to amendment of timelines under Section 62(2) but no suggestions appear in the table. It appears to have been missed out.
3) Issue of ESOP in Private Companies
The requirement of a special resolution for issuing shares to employees under an ESOP scheme has been done away with. If the suggested change is implemented private companies may issue ESOP by way of an ordinary resolution of its members. In addition to the special resolution, the Companies (Share Capital and Debenture) Rules, 2014 require certain other requirements as well of an unlisted company including inter alia the following:
a) Restriction on quantum of sweat equity shares to be issued at 15% of existing paid up share capital or value of INR 5 crore whichever is higher, with a total cap of 25% of paid up share capital at all times,
b) Lock-in of 3 years on the sweat equity issued,
c) Valuation of intellectual property to be made by a registered valuer, and
d) Treatment of sweat equity as part of compensation package of the concerned employee.
In addition to the proposed changes to the Companies Act in this behalf, appropriate modifications would need to be made to the Companies (Share Capital and Debenture) Rules, 2014, if any real respite is proposed to be offered to private companies as the other conditions imposed seem to be more onerous than the passing of a special resolution. However, the government may choose to keep reporting requirement of such ESOP issue to ensure that appropriate information in that behalf is captured.
4) Deposits
The regulation prohibiting acceptance of deposits from public, specifically, section 73 (2), which permits a company to accept deposits from its members subject to certain conditions stipulated therein, will not applicable to private companies having 50 or less members. Such a company, however, cannot accept monies exceeding 25% of aggregate paid up capital and free reserves or 100% of paid up capital whichever is higher, subject of course to compliance with reporting requirements.
5) Notice of meetings and other business of companies
Sections 101 to 107 and 109 that deal inter alia with notice of meetings, quorum, chairman, voting at meetings and poll, have now been made applicable only to public companies except in the event that:
a) it is otherwise specified in the section; and
b) unless the articles of association of the private company otherwise provide.
This amendment was necessary as it is against the very spirit of, functioning of private companies, for the law to regulate their internal processes and mechanisms. The idea here appears to be to arrive at the same position as the 1956 Act. However, appropriate amendments to the rules may also be mandated
6) Qualification of auditor
The restriction contained in Section 141(3) (g) which disallows a person who is in full time employment elsewhere, or a person or a partner of a firm holding appointment as auditor, if such person is at the date of appointment holding appointment of more than 20 companies, has now been made inapplicable to a private limited company. This would be a big relief to auditing firms as well as private companies, particularly auditors of large group companies.
7) Appointment of directors
The government has suggested that Section 160 and 162 be wholly made inapplicable to a private company. This move is positive and in keeping with the spirit that private companies should be allowed to regulate its own business. Proposal for moving resolution for appointment of two or more directors as well as provisions relating to non-retiring director seeking appointment to the office of director do not make any sense in the context of a private company which is closely held.
The original position under the previous Companies Act has been sought to be reinstated.
8) Restriction on the power of board
Restriction of powers of the board, hitherto applied to all companies. The suggestion of the government is that the requirement of special resolution for matters of importance listed in Section 180 shall not apply to private companies having 50 or lesser number of members. The matters referred to section 180 are:
a) to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.
b) to invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation,
c) to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company's bankers in the ordinary course of business:
d) to remit, or give time for the repayment of, any debt due from a director.
The proposed change is in line with the provisions under the previous Companies Act.
9) Loans to directors
The much talked about and debated provisions of Section 185 providing restriction on a company from advancing any loans or providing any other security to any of its members have now sought to be made inapplicable to a private limited company subject to the following conditions:
a) the private company not having borrowings from other body corporates or financial institutions of more than twice its paid up capital or INR 50 crore whichever is lower;
b) the private company not having any investment by another body corporate in its share capital.
This seems like a half-hearted attempt at righting a wrong. The problem with the thresholds provided is that the section could not be applicable at the time of issuing the loan but could be subsequently applicable. The rationale for such fluid thresholds is not clear. The actual amendment may provide some clarity. If an amendment is brought in lines of the aforesaid thresholds of exemption, it will cause a lot of confusion in implementation.
10) Related Party Transactions
The most dreaded provision of all in respect to operations of private companies that are largely family run businesses is now done away with in toto. The suggestions provide that Section 188 shall not apply to private companies.
This is a welcome move and will be largely applauded by stakeholders, corporate professionals and industry as a whole. (In an older post, the issue of related party transactions as applicable to private companies and the disclosures required to be obtained by private companies to ensure compliance with Section 188 is available here.) – Read- Section 188 – Related Party Transaction under Companies Act, 2013
11) Appointment of managing director, whole time director and manager
The requirement of taking Central Government approval where the remuneration was in variance with Schedule V in case of managing directors, whole-time directors and managers has sought to be done away with.
The move is in keeping with the provisions of the previous Companies Act.
12) Appointment of key managerial personnel
The restriction of a whole-time key managerial personnel holding office in more than one company (except the subsidiary of such company) is now sought to be made inapplicable to a private company. The Act also requires that a KMP choose 1 of the 2 or more positions held by such KMP in any different companies.
(Author may be contacted at mittalgaurav05@gmail.com)
Circular on extension of timeline for alignment of employee benefit schemes with SEBI (ESOS and ESPS) Guidelines, 1999
CIRCULAR No. CIR/CFD/POLICYCELL/3/2014 , Dated-June 27, 2014
Sub: SEBI Circulars No. CIR/CFD/DIL/3/2013 dated January 17, 2013, CIR/CFD/DIL/7/2013 dated May 13, 2013 and CIR/CFD/POLICYCELL/14/2013 dated November 29, 2013 – Extension of time line for alignment
- SEBI vide circular No. CIR/CFD/DIL/3/201 3 dated January 17, 2013, inter alia, made certain amendments to the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 {"SEBI (ESOS and ESPS) Guidelines, 1 999″} and employee benefit schemes involving securities of the company were required to be aligned with the SEBI (ESOS and ESPS) Guidelines, 1999. The time line for alignment was subsequently extended vide aforesaid circulars dated May 13, 2013 and November 29, 2013.
- Meanwhile, following a consultative process, SEBI Board has approved certain proposals for framing a new set of regulations concerning employee benefit schemes dealing in shares of the company. The new regulations shall come into force as and when notified.
- In view of the above, it has been decided to modify the said circular dated November 29, 2013 to extend the time line for aligning existing employee benefit schemes with the SEBI (ESOS and ESPS) Guidelines, 1999 till the new regulations are notified. However, it is reiterated that prohibition on acquiring securities from the secondary market shall continue till the existing schemes are aligned with the new regulations to be notified.
- This circular is being issued in exercise of the powers under Section 11 read with Section 1 1A of the Securities and Exchange Board of India Act, 1992.
- This circular is available on SEBI website at www.sebi.gov.in under the categories "Legal Framework"and "Issues and Listing".
Yours faithfully,
Harini Balaji
Deputy General Manager
+91-22-26449372
harinib@sebi.gov.in
Deputy General Manager
+91-22-26449372
harinib@sebi.gov.in
Clarification with regard to use of the words 'Commodity Exchange' in a company-reg.
General Circular No: 26/2014, Dated: 27th June, 2014
Subject: Clarification with regard to use of the words "Commodity Exchange" in a company-reg.
In continuation of this Ministry's circular no. 02/2014 dated 11.02.2014, it is hereby clarified the use of the word "Commodity Exchange"may be allowed only where a "No Objection Certificate" from the Forward Markets Commission (FMC) is furnished by the applicant. All other provisions of the Companies (Incorporation) Rules, 2014 will continue to be applicable.
21 It is also clarified that the certificate from Forward Markets Commission will also be required in cases of companies registered with the words "Commodity Exchange before the issue of this circular.
- This issues with the approval of competent authority.
No. 2/2/2014-CL-V
Your's faithfully
(KMS Narayanan)
Assistant Director (Policy)
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Assistant Director (Policy)
23387263
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Karniti: Taxpayers please note recent changes in Income Tax Return
Keeping conversation between Lord Krishna and Arjuna as the foundation, we will learn certain basic financial and tax matter in KARNITI series of articles. Let us try to get answers to our questions in a bit different and joyful manner. The character of Arjuna will be played by the common man or tax payer and the character of Lord Shri Krishna the Expert for giving solutions to all problems. This is a small attempt to get answers to our queries related to tax matters in simple manner. There is no intention of hurting anyone's religious feeling and this is a small attempt of knowledge sharing in a simple way.
Arjuna (Fictional Character): Krishna, June Month is coming to end. Now, it's time to file Income Tax Returns for the year 2013-14. The due date for filing the income tax returns is 30th September for the taxpayers who are Company or to whom Tax Audit under Income Tax is applicable and for others like salaried persons, etc. the due date for filing is 31st July. That's why; new changes are brought in various Forms of Income Tax returns.
Krishna (Fictional Character): Arjuna, all taxpayers should file income tax returns before due date. As per status and income of the taxpayers, government has defined the types of Income Tax Returns. In this year government made various changes in the forms due to amendments in laws or for what of more information for tax payers.
Arjuna: Krishna, Please tell in detail the changes that took place in Income Tax Returns?
Krishna: Arjuna the major changes in Income Tax Returns are as under:
- All taxpayers filing E-Returns will have to compulsorily update correct mobile number and E- Mail ID's. Otherwise there will be login issues before uploading of return on income tax Depts Website.
- Now onwards Income Tax Refund will be issued directly in the bank account of the taxpayer through ECS only, cheques are discontinued. Therefore at most care should be taken while mentioning Bank Account Number and IFSC Code in the income tax returns.
- From this year while claiming TDS in Income Tax return facility has been given to carry forward the TDS of previous year and brought forward TDS to next year. Due to this reconciliation of TDS claimed on Income and total available TDS as per Form 26 can be made. Tax payers which follow cash system of accounting will be benefited, like Doctors, Advocates, CAs and other professionals.
- As per newly inserted Section 87A if annual income of the taxpayer is up to Rs. 5,00,000/- then Tax relief of maximum of Rs. 2,000/- is given. For claiming this relief separate space has been inserted in the return.
- As per newly inserted Section 80EE if taxpayer has purchased house up to Rs. 40 Lakh and taken housing loan of Rs. 25 Lakh then taxpayer can claim deduction of interest up to Rs. 1 Lakh. For claiming this deduction separate space has been inserted in the return.
- If income of the taxpayer is more than Rs. 1 crore then surcharge of 10% is applicable. For this separate space has been inserted in the return.
- All salaries taxpayers will now have to give now separate details of LTA (Leave Travel Allowance) and HRA (House Rent Allowance) and other allowances separately. This will help Govt. to track proper claim of such deductions, recent HRA and LTA fallacious claimed by some MPs and Govt. taxpayers may have forced for such changes.
- From this year the details of short and long term capital gain will have to be given in three parts viz. a) sale of plot / flat b) sale of STT paid shares and mutual funds c) sale of other assets. Further in case of sale of land or building Stamp Duty Value will have to be mentioned. Further if taxpayer is availing exemption under capital gains then value of newly purchased asset, date of acquisition of the asset and if invested in capital gain account then its details will have to be mentioned.
- Corporate or LLP assessee will have to mention Corporate Identification Number or LLP Identification Number. Further Director or Designated Partner Identification Number will have to be mentioned. This will help in cross check of information with other legal departments by income tax dept or visa a versa.
- If assessee carrying on business is taking deduction of bad debts of more than Rs. 1 Lakh of single person, then his PAN will have to be mentioned.
- As per newly inserted section 43 CA if, taxpayer have sold other than capital assets below stamp duty value (eg. builders / developers) then the difference between the two will be considered as deemed income of the assessee and tax will have to be paid on it. For this separate space has been inserted in the return.
- If there is more than one owner of the house then, while mentioning details in the schedule of Income from House Property the percentage of co ownership will have to be given.
- From this year e-filing of wealth tax return is compulsory and in this return the details of all wealth whether taxable or not, will have to be given in depth.
Arjuna: Krishna, What one should learn from these upcoming changes?
Krishna: Arjuna, Today computerization has increased tremendously in functioning of Tax departments. Due to which now all tax departments exchange information of taxpayers with each other. Therefore taxpayers should give correct information to all the departments without hiding and should pay appropriate tax as per laws. As one lie leads to other lie. If in one department, wrong / incorrect information is given then in other department information will have to give in same manner. All knows the Result of telling lie. Filing correct return is the responsibility of all the citizens. If returns are not filed then due to computerization on the basis of PAN of the taxpayer, information of TDS, big transactions of Banks, etc. is received by the Income tax department and they can catch hold. Now Department will immediately inform taxpayer on mobile and email. Further the notices sent through email are legally valid. Therefore taxpayer cannot find escape route of non-receipt of notice and hence compliance of law will increase.
Dear Taxguru lovers, your comments are very precious, please spare few seconds for it. Thanks.
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