| 'Welcome relief to closely held companies' |
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The requirement of setting off lower of past losses and depreciation was not brought forward from the Companies Act 1956 to the Companies Act 2013. As a result, companies were able to distribute dividend from current year profits, without setting off past losses and depreciation. The provision of setting off past losses and depreciation has been introduced. Companies that had unadjusted past losses and declared profits out of current profits in Financial Year 2014- 15 will no longer be able to declare dividend going forward, until the past losses are offset. RELATED- PARTY TRANSACTIONS Certain material related party transactions covered under Section 188, such as sales, purchases, leasing, and selling of property, required special resolution in the shareholders meeting, and interested related parties were not permitted to vote. Considering the hardship imposed on companies in obtaining special resolution of minority shareholders, the requirement of obtaining a special resolution has been replaced by an ordinary resolution. This amendment will provide a welcome relief to closely held companies that faced a challenge in obtaining special resolution from the non- interested shareholders. OMNIBUS APPROVALS FOR RELATED PARTY TRANSACTIONS All related party transactions are required to be approved by the audit committee. The 2013 Act does not specifically permit omnibus approval by the audit committee, while such a provision was included in the amended Sebi Clause 49. Companies may now be able to obtain omnibus approvals for related party transactions since the amendment permits obtaining omnibus approvals from the audit committee. REPORTING OF FRAUDS BY AUDITORS All frauds identified by the auditor during the performance of their duties are required to be reported to the Central government. The Act did not provide any materiality thresholds for reporting. The Bill has included an enabling provision for the prescription of a materiality threshold for reporting of frauds tot he Central government. The amendment however has also included a requirement to include in the Board Report all the frauds which have not been reported to the Centre. The requirement to disclose frauds in the Board Report is useful information for stakeholders, but may result in sensitive information being made available publicly. UNCLAIMED DIVIDEND The Companies Act 2013 provided that all shares in respect of which dividend were unpaid or unclaimed be transferred to the Investor Education and Protection Fund ( IEPF). The Companies ( Amendment) Bill 2014 specifies that the shares are required to be transferred to IEPF only when the dividend is unpaid or unclaimed for a period of 7 years consecutively. LOANS AND GUARANTEES Loans by companies to wholly- owned subsidiaries and guarantees by holding company made to banks or financial institutions in respect of borrowings by subsidiaries for their principal business activities were permitted by way of an amendment to the Rules to Section 185. The Companies (Amendment) Bill 2014 now includes the guidance that was earlier included in the Rules in the Act. This change is important as the guidance is now moved to the Act, which is more authoritative. (Courtesy: KPMG in India) COMPANIES ( AMENDMENT) BILL 2014 Parliament last week cleared the Companies ( Amendment) Bill, 2014, which seeks to simplify some provisions of the Companies Act, 2013, to facilitate ease of doing business. Here's what it means for businesses: |
Time for companies to come clean | |||
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SUDIPTO DEY Over the past week, many corporate lawyers and tax experts have been poring over the draft of the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015, popularly referred to as the anti- black money Bill, which was passed by Parliament. Also under the lens were the different provisions of the Benami Transactions ( Prohibition) Bill 2015, and their implications on companies. While this Bill, introduced in the Lok Sabha, is aimed at curbing generation of black money in the country, the anti- black money Bill targets undisclosed wealth stashed in tax havens abroad by resident Indians. The proposed laws are applicable to individuals, partnership firms, un- incorporated entities and companies. They will also be applicable to transactions that are not properly disclosed, or not disclosed at all. The proposed laws have huge implications on the way business is conducted. This comes with attendant legal consequences in case of violations for key managerial personnel of a company. These include imprisonment up to seven years in the case of Benami Transaction (Prohibition) Bill, and up to 10 years for the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill. Fines go up to 25 per cent of the fair value of any benami property. Penalties for undisclosed foreign income and assets extend up to 300 per cent of the taxable amount. Tax experts say one of the challenges faced by the government and enforcement agencies in their fight against black money is the use of ' shell companies' in India and abroad to convert illegally- held money. " These are more often than not, used to obscure the ultimate beneficial owner, route ill- gotten wealth or commit fraud," says K V Karthik, senior director, Deloitte in India. The new laws will help detect cases in which ' shell companies' are being used to layer or mask the origination of ill- gotten wealth. This will also assist banks in case funds are siphoned off by the borrowers, and assets created in benami names, say forensic specialists. The definition of a benami transaction includes both movable and immovable properties. So, apart from physical properties, gold and company stocks will also come under the purview of benami transactions. Vikram Babbar, director, fraud investigation &dispute services, EY, points out that banks are mandating forensic audits on corporate borrowers who are categorised under non- performing assets. " This is to ascertain the genuineness of the situation and identify any case of fund diversion or siphoning by borrowers," says Babbar. Armed with stronger laws, if diverted funds are invested in benami transactions, it would lead to prosecution of the borrower group, says a tax expert. Both these Bills, apart from confiscation, also provide for prosecution, acting as a major avenue to block the generation and holding of black money in the form of benami property or shell companies. It is important to assess whether their transactions are in line with the provisions of the antiblack money law. " It is not only required to get the risks assessed but also how it impacts the business," says Nidhi Goyal, managing director ( tax and regulatory affairs), Protiviti India, a risk and business consultancy firm. Following the review and risk assessment, corrective actions and compliancecheck should be done by corporates to maintain stability in their businesses. "This process has to be extended to any special purpose vehicle or group companies," adds Goyal. Dinesh Anand, leader (forensics services) at PwC India, says businesses will have to perform a number of steps to effectively address and mitigate risks that are associated with these proposed pieces of legislation. This includes understanding and examining in detail the compliance obligations associated with each of these laws individually. Prepare and undertake comprehensive risk management exercises to ensure all areas of operation impacted by these proposed legislation not only follow robust business practices, but are also equipped to comply with reporting obligations. "Businesses must ensure that employees and third- parties are adequately trained on compliance related issues, while putting in place a monitoring system to red flag any potential problematic transactions," says Anand. For those companies that might potentially fall foul of the provisions of the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, Rakesh Nangia, managing partner, Nangia & Co, advises these should simply come clean and avail of the one- time window offered by the government to pay penalty and tax on any such disclosed foreign income or asset. EY's Babbar, however, feels the effectiveness of the new laws will depend on putting in place a fast- track mechanism for such cases. "The punishment should be time bound, and not left to the weaknesses in the judicial system delaying the whole process," says Babbar. It is important for companies to be wary of undisclosed foreign incomes and assets, as well as and benami transactions. BENAMI TRANSACTION (PROHIBITION) BILL, 2015 |Definition of benami: Includes both movable and immovable properties. So, gold and company stock shares included in the definition, apart from physical properties INVESTIGATING AUTHORITIES HAVE POWER TO |Call for information and impound documents |Issue a notice and attach properties involved in benami transaction |Confiscate with vesting rights in any Benami property PENALTY FOR ENTERING INTO A BENAMI TRANSACTION |Rigorous imprisonment ranging between one and seven years |Fine to the extent of 25% of the fair market value of the property |Those guilty of the offence includes anybody who abets or induces any person to enter into the benami transaction PENALTY FOR FURNISHING FALSE INFORMATION |Punishable with rigorous imprisonment for six months to five years |Liable to pay fine which may extend up to 10% of the market value of the property OFFENCES BY COMPANIES |A company can be booked for contravention of the law and punished accordingly | Any director, manager, secretary or other officer shall be deemed to be guilty if the contravention has taken place with their consent, connivance or any neglect on their part THE UNDISCLOSED FOREIGN INCOME AND ASSETS ( IMPOSITION OF TAX) BILL, 2015 PAY INTEREST |For not filling or disclosing incorrect foreign income or assets |For default in payment of advance tax PENALTY |Up to 300% of the tax on undisclosed foreign income and assets |Effective total tax and penalty could equal 120% of the foreign undisclosed asset and income PROSECUTION |Imprisonment for a period of three to 10 years LIABILITY & PROSECUTION IN CASE OF COMPANIES |Overrides the Companies Act, 2013 and the Limited Liability Partnership Act, 2008 |Unlimited liability in hands of director/ manager of a company or partners in case of LLP |Where an offence under the Bill is committed by a company, it is deemed that those in charge for conduct of the business are guilty |Provides wide powers to tax authorities for recovery of dues WHERE THE SHOE PINCHES The proposed laws have huge implications on the way business is conducted. This comes with attendant legal consequences in case of violations for key managerial personnel of a company |
| BRIEF CASEN M J ANTONY |
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International Inc vs Union of India. This firm entered into two production sharing contracts with the Ministry of Petroleum in 1992 for exploration of oil fields in Gujarat and other states. While filing income tax returns, the firm claimed benefit of Section 42 of the Income Tax Act. It is a special provision for deductions and allowances for prospecting mineral oil. Such benefits must be specifically mentioned in the agreement and they must be laid on the table of each House of Parliament. The tax authorities granted benefits to the firm from 2001- 02 when production started. But in 2005- 06 they found that there was no such clause in the agreement. The firm claimed that it was an " inadvertent omission", which could be cured by the ministry. The petroleum ministry therefore sought a clarification from the finance ministry, which did not respond. The tax authorities therefore rejected the claim of benefits. The firm moved the Delhi High Court, but its petition was dismissed. Its appeal was also dismissed with the observation that " though it may be somewhat harsh on the firm, we come to the irresistible conclusion that it is not entitled to the relief claimed. It availed of the benefit for a few years and acted on the understanding that such a benefit would be given to it, but we have no option but to hold that the contract did not provide for this benefit." Late- comers miss incentives for units government and the North Eastern Council declared a policy decision in 1997 for promotion of industries in that region. Several industries applied for the promised incentives, but they were delayed or not forthcoming. Therefore, they moved the Gauhati High Court. It asked the authorities to process their applications. The scheme was later caught in allegations of financial irregularities and scrapped. Meanwhile, another set of industries moved the high court seeking the same relief as given to the earlier batch of industries. The single judge bench of the high court rejected their petitions on the ground that those industries were not vigilant and waited for the result of the first batch of cases. The scheme had been scrapped. However, the division bench of the high court followed the order in the first set of cases and granted relief to the late- coming industries. The government therefore appealed to the Supreme Court. In its judgment, Union of India vs Shri Hanuman Industries Ltd, the apex court rejected the arguments of the late- comers and upheld the view of the single judge. " We are of unhesitant view that in view of their deliberate delay, negligence and inaction, they have disentitled themselves of the benefit of law," the Supreme Court judgment said, and added: " It would be iniquitous and repugnant as well to public exchequer to entertain their belated claim."
Time bar does not apply to tribunals proceedings, the Supreme Court firm at Alang on the ground of delay in moving the court. The firm contended that it had moved a wrong forum by mistake and therefore that period of litigation should not be taken into account for limitation purposes. The Supreme Court accepted that argument and set aside the orders of authorities below. It said that the consistent view in its leading judgments involving labour, sales tax, land acquisition, rent control and other disputes was that the tribunals were not courts. The Constitution in the relevant chapters also uses the expression ' court' to refer to the court system in general. As opposed to this court system is a system of quasi- judicial bodies called tribunals. Articles 136 and 227 refer to courts as distinct from tribunals. Since they have been dealt with differently, the Limitation Act will not apply to both; but only to courts. SC appoints umpire in arbitration petro chemical plant. But it apparently could not fulfill its obligations. The Indian company issued arbitration notice and nominated former chief justice V N Khare for its side. The Korean company contested arguing that the arbitration was covered by the Singapore International Arbitration Act and not the Indian Arbitration and Conciliation Act. However, it nominated a foreign arbitrator. The two arbitrators could not agree on the president. Therefore, the Supreme Court named the umpire. Bias alleged against NTPC arbitrator The Delhi High Court has stated that if a party to the arbitration has apprehension about the impartiality of the arbitrator, it has to approach him to give a preliminary decision on that objection. This is provided in Sections 12 and 13 of the Arbitration and petition of Gangotri Enterprises Ltd against National Thermal Power Corporation. When disputes arose over the Simhadri Super Thermal Power Project in Andhra Pradesh, a manager of the NTPC was appointed arbitrator, according to the contractual clause. Gangotri objected to the choice since the arbitrator was in charge of the project and he was an employee of the power corporation, he would not be able to act impartially. It cited an earlier judgment of the Supreme Court ( Indian Oil Corporation vs Raja Transport) in which it had criticised the practice of public sector undertakings nominating its own officers as arbitrators in disputes with private firms. In this case, NTPC maintained that the appointment was according to the contract and denied any possible bias. Therefore, Gangotri moved the court to appoint an independent arbitrator. It also complained that it was threatened with blacklisting and its bank guarantee had been encashed. The court stated it could not decide these issues and there was a separate procedure under the Act to raise objections. Moreover, the court found that there was inordinate delay in seeking to remove the arbitrator. A weekly selection of key court orders |
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