Daily Updates and News

INCOME TAX ACT

SECTION 32

DEPRECIATION - RATE/ALLOWANCE OF

Additional depreciation : If plant and machinery eligible for additional depreciation under section 32(1)(iia) is put to use for less than 180 days in said financial year and, therefore, only 50 per cent of additional depreciation can be claimed in that year, balance 50 per cent can be availed in subsequent year - [2016] 66 taxmann.com 4 (Karnataka)

SECTION 244A

REFUNDS – INTEREST ON

Where TDS u/s 195 becomes refundable to resident deductor on account on non-resident payee waiving the payment and the resident deductor delays filing the refund application to the Department(files it 18 months after the date of waiver by non-resident), he will be entitled to interest on refund u/s 244-A only from the date of filing the refund claim only and not from date of deposit of TDS as law favours the vigilant only and not those who slumber and Department cannot be made liable for interest for any period prior to the date on which facts giving rise to refund are brought to the Department's notice - [2016] 66 taxmann.com 50 (Bombay)

CST & VAT

SECTION 5 OF KARNATAKA VALUE ADDED TAX ACT, 2003

TAX, IMPOSITION OF – EXEMPTION

Procedure for grant of exemption had undergone a sea change after 1.4.2005 and condition of ineligibility of unit, if it collects tax, had been done away with - [2016] 66 taxmann.com 5 (Karnataka)

STATUTES

CORPORATE LAWS

Settlement of Export/Import transactions in currencies not having a Direct Exchange Rate - A.P. (DIR SERIES 2015-16) CIRCULAR NO.42, DATED 4-2-2016

INDIRECT TAX LAWS (ST/CE. & CUS./CST & VAT)

Cenvat Credit (Second Amendment) Rules, 2016 – Amendment in Rules 2 and 3 - NOTIFICATION NO.2/2016-C.E. (N.T.), DATED 3-2-2016

Section 5A of the Central Excise Act, 1944 - Power to grant exemption from duty of excise - Omnibus general exemption to goods specified in Chapters 1 to 98 of Tariff – Refund of excise duty on purchase of cars by physically handicapped persons - CIRCULAR NO.1015/3/2016-CX, DATED 3-2-2016 Thanks & Regards, Meetesh Shiroya

Daily Updates and News

INCOME TAX ACT

SECTION 4 HINDU UNDIVIDED FAMILY – ASSESSABLE AS Pursuant to Hindu Succession (Amendment) Act, 2005, plaintiff, a female, being first born amongst co-parceners of HUF property, would by virtue of her birth, be entitled to be its Karta - [2016] 66 taxmann.com 28 (Delhi)

SECTION 9

INCOME - DEEMED TO ACCRUE OR ARISE IN INDIA

Deduction of export commission paid to foreign agents for sourcing of export orders in favour of assesse-firm without deduction of tax at source under section 195 is to be allowed where export commission paid to foreign brokers is not a sum chargeable to tax in hands of foreign brokers as contemplated under section 195 and is neither a fee for technical/managerial services as defined in explanation 2 to Section 9(1)(vii) so as to bring it to tax under fiction created by deeming provisions of Section 9 - [2016] 66 taxmann.com 30 (Mumbai - Trib.)

SECTION 14A

EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME

Interest paid to partners on capital contribution is not a statutory allowance under section 40(b) but is an expenditure under section 36(1)(iii) and, thus, if this expenditure is incurred in relation to income which does not form part of total income as envisaged under section 14A, same shall only be allowed as deduction only against exempt income under section 14A or in other words, such interest expenditure on partner's capital shall be disallowed under section 14A - [2016] 66 taxmann.com 30 (Mumbai - Trib.)

SECTION 271(1)(c)

PENALTY - FOR CONCEALMENT OF INCOME

Where assessee had only claimed expenditure which was disallowed by AO and due to which carry forward loss arose. It could not be said that assessee had furnished inaccurate particulars of income by showing carried forward loss as once a loss was shown in e-return, the software suo-motu reflects the returned loss as carried forward loss. Further, the fact that assessee had not claimed carry forward loss in subsequent year was evident of the fact that there was no intent on part of assessee to furnish inaccurate particulars - [2016] 66 taxmann.com 27 (Bombay)

ARBITRATION AND CONCILIATION ACT

SECTION 9

COMPOSITION OF ARBITRAL TRIBUNAL - GROUNDS FOR CHALLENGE

As per principles of tracing benefits acquired by fraud, breach of confidence, breach of fiduciary relationships or by other wrongdoings do not get benefit under the defence of change of position. Change of position as a defence has to be casually linked to the receipt that makes it inequitable for the recipient to make restitution. Mere fact that the recipient has spent the money in whole or in part does not make it inequitable as expenditure might have been incurred by him in any event in ordinary course of things. But a bona fide recipient is entitled to establish the defence that he had increased his outgoings as a result of the receipt. Since analogous principles have to be applied in the instant case, the sketchy pleadings and no material save and except the shareholding pattern in Southend does not entitle VSL to any tracing order against Southend which is an independent entity -[2016] 66 taxmann.com 29 (Delhi)

CUSTOMS ACT

SECTION 112

PENALTY - SMUGGLING/ILLEGAL IMPORT

Penalty under Customs can be imposed simultaneously on firm and its partners: Larger bench of HC - [2016] 66 taxmann.com 49 (Bombay)

STATUTES

DIRECT TAX LAWS

Government Sets up Tax Policy Research Unit and Tax Policy Council - PRESS RELEASE, DATED 2-2-2016 Thanks & Regards, Meetesh Shiroya

Daily Updates and News

INCOME TAX ACT

SECTION 37(1)

BUSINESS EXPENDITURE - ALLOWABILITY OF

Deferred revenue expenditure : Where decision to abandon project was taken in relevant year, balance deferred revenue expenditure relating to said project would be deemed to arise in relevant year and would be allowed as such - [2016] 65 taxmann.com 311 (Calcutta)

SECTION 68

CASH CREDIT

Share capital : Where it was alleged that on-money received in cash by real estate companies from flat purchasers was routed back in those companies in form of share capital/ unsecured loans, etc. using assessee as a conduit, unless identity and creditworthiness of concerned fund owner were confirmed, addition made in hands of assessee could not be deleted - [2016] 65 taxmann.com 310 (Delhi)

SECTION 254

APPELLATE TRIBUNAL - POWERS OF

Power to recall : Where assessee was prevented by sufficient cause from appearing before Tribunal, Tribunal was justified in recalling its ex parte order and rehearing appeal already disposed of on merit - [2016] 65 taxmann.com 311 (Calcutta)

COMPANIES ACT

SECTION 166 OF COMPANIES ACT, 2013

DIRECTOR - PROHIBITION OF ASSIGNMENT OF OFFICE BY

Director's grievance against company./co-director does not justify violation of his/her fiduciary duties under section 166 of the Companies Act,2013 by carrying on a business competing with that of the company. If he/she had any grievances, he/ she can avail the remedy but there is hardly any justification to start parallel/similar to the business of the company. In the present case, the defendant No.1 being a director in running the business in which she was participating in all activities still chose to start her independent business in competing the business of her own company. The act of the defendant No.1 was prima facie not bonafide as it was done for monetary purposes - [2016] 66 taxmann.com 18 (Delhi)

SECTION 433

WINDING UP - CIRCUMSTANCES IN WHICH A COMPANY MAY BE WOUND UP

Mere filing of application for recovery of debt before Tribunal under provisions of Recovery of Debts due to Banks and Financial Institutions Act, 1993 would not entail a bar in law to laying a winding up petition under provisions of Companies Act where conditions provided therefor are proved to have been satisfied - [2016] 65 taxmann.com 312 (Rajasthan)

SARFAESI ACT

SECTION 15

MANNER AND EFFECT OF TAKE OVER OF MANAGEMENT

SARFAESI Act, 2002 prevails over the Sick Industrial Companies (Special Provisions) Act, 1985 to the extent of inconsistency therewith. Section 15(1) proviso 3 of the Sick Industrial Companies (Special Provisions) Act, 1985. 3 covers all references pending before the BIFR, no matter whether such reference is at the inquiry stage, scheme stage, or winding up stage. This being so, it is clear that in any case the present reference under Section 15(1) of the Appellant No. 1 company has abated inasmuch as more than 3/4th of the secured creditors involved have taken steps under Section 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - [2016] 66 taxmann.com 17 (SC)

CENTRAL EXCISE ACT

SECTION 11A

RECOVERY - OF DUTY OR TAX NOT LEVIED/PAID OR SHORT-LEVIED/PAID OR ERRONEOUSLY REFUNDED - ADJUDICATION OF DEMAND

Where different laboratories give different chemical report over composition of product manufactured by assessee and Department seeks to reply upon report of Chief Chemist in its favour, assessee is justified in seeking response to queries and also cross-examination of Chief Chemist; hence, non-grant of opportunity to cross-examine would violate principles of natural justice - [2016] 65 taxmann.com 313 (Gujarat)

SECTION 35G

APPEALS - APPEALS TO HIGH COURT (JURISDICTIONAL COURT)

Where assessee's unit was situated at Silvassa within Union Territory of Dadra, Nagar and Haveli, even if Adjudicating Authority, Vapi [Gujarat] had issued show cause notice and part of investigation had taken place at Vapi, writ petition against assessment order could be brought before Bombay High Court - [2016] 65 taxmann.com 315 (Gujarat)

STATUTES

CORPORATE LAWS

Report of Companies Law Committee - PRESS RELEASE

FDI – Reporting under FDI Scheme, mandatory filing of Form ARF, FDGPR and FCTRS on E-Biz Platform and Discontinuation of Physical Filing From 8-2-2016 - A.P. (DIR SERIES 2015-16) CIRCULAR NO.40, DATED 1-2-2016

INDIRECT TAX LAWS (ST/CE. & CUS./CST & VAT)

Andhra Pradesh Pradesh Value Added Tax (Amendment) Act, 2016 – Amendment In Sections 2, 4, 13, 21, 22, 31, 32, 34, 38, 39, 45 & 47 And Insertion Of Section 4A - [ACT NO.4 OF 2016], DATED 12-1-2016

Bihar Value Added Tax Ordinance, 2016 – Amendment in Sections 3A, 14 & 70 - NOTIFICATION NO.LG-01-01/2016/04LEG., DATED 28-1-2016

Submission of Form DP-1 online by all Dealers – Extension of date thereof - NOITIFICATION NO.F.3(352)POLICY/VAT/2013/1395-1405

Inclusion of show cause notice's issued in relation to levy of CVD on Vessels imported for breaking in call-book -CIRCULAR NO.1014/2/2016-CX Thanks & Regards, Meetesh Shiroya

Drafting the Articles of a Private Company

Drafting the Articles of a Private Company

With India’s Startup India Action Plan in force, it is expected that in the coming years a large number of entrepreneurs would incorporate their entities to enter a startup friendly Indian market. Any startup would need its very own constitutional documents, i.e. articles of association and memorandum of association. While incorporating a company with the standard documents available online is more pocket-friendly, drafting the constitutional documents to one’s specific need is always more effective and ideal. Especially with subsequent amendment to the Companies Act, 2013 and the exemptions provided to the private companies under the notification dated June 5, 2015, every startup has the advantage of drafting its constitutional documents accordingly, which allows it to comply with less strict provisions. This post discusses the exemptions available to private companies or the amended provisions to be kept in mind while a startup drafts its articles of association or an existing private company alters its existing articles.

Effect of the Exemption Notification

Under the provisions of Section 462 of the Companies Act, 2013 (“Act”), the Central Government has the power to declare which provisions of the Act shall not be applicable to a certain class/classes of companies, if it thinks it is necessary for public interest. The Central Government, exercising its power, has published the exemption notification on June 5, 2015. This notification is applicable only to private companies as defined under Section 2(68) of the Act and shall not be applicable to deemed public companies. A private company is defined as a company which has a minimum paid-up capital and which restricts the right to transfer its shares. Such a company shall have at most 200 members. Whereas, a subsidiary of a public company is deemed to be a public company for the purposes of the Act, even if such company is incorporated as a private company. The exemptions available to a private company, which can be incorporated in its articles, are discussed below.

Relaxation in Related Party Transaction: If one wishes to incorporate the matter of related party transactions, it is necessary to remember the relaxation provided therein for private companies. As per the exemption notification, a private company shall not be a related party of:

i.               its holding, subsidiary or an associate company; or

ii.              a subsidiary of a holding company to which the private company is also                    subsidiary.

Hence, any contract or arrangement of such nature shall not require any approval under section 188 of the Act. Moreover, in accordance with the provisions of the exemption notification, a member shall not be disqualified to vote on the resolution required to be passed to approve any arrangement or contract to which such member is a related party.

Kinds of Share Capital and Voting Rights: Section 43 of the Act lays down that, a company, limited by shares, shall have two kinds of share capital viz. equity share capital and preference share capital. Section 47 deals with the voting rights attached to the shares. These provisions, read with the rules made thereunder, restrict the rights of a company limited by shares to issue shares with differential rights and require strict compliance with the rules made for this purpose. The exemption notification lays down that if the articles or memorandum of association so provide(s), the provisions of Sections 43 and 47 shall not be applicable to private companies.

The implication of this exemption is that, a private company shall have the liberty to decide the kind of share capital it wishes to have or the voting rights attached to any class of shares. So, the startup drafting its articles, or a company amending its existing articles can now amend its articles in a way which would allow them to issue equity shares of a new class which may or may not contain any voting rights, while under the provisions of Section 47, the equity shareholders always enjoyed the right to vote at all resolutions placed before its members. Again, a company can even issue preference shares with such mandatory voting rights, i.e. the preference shareholders shall have the right to vote in resolution placed before the members, even if such resolution does not concern those shareholders.

However, one must keep in mind that if the memorandum or articles of a company do(es) not provide that the provisions of sections 43 and 47 shall not be applicable, such private company would continue to be bound by the provisions of those two sections. In addition to section 47, section 106 of the Act also provides for certain restriction on voting rights. The exemption notification lays down that the provisions of that section shall continue to be applicable on private companies unless the section provides otherwise, or unless the articles of the company provide otherwise.

ESOP: If the articles are to provide for the issuance of shares through any employees’ stock option plan as per the provision of section 62(1)(b), now they might state that such issuance shall be made through an ordinary resolution passed by the members at a general meeting, although the company is free to continue to insert more restrictive provisions than the ones prescribed under the Act.

Borrowing Powers: While drafting the articles related to the borrowing power of a private limited company, one must remember that although the provisions of sections 73 shall continue to be applicable to private companies, the prohibition on acceptance of deposits from public would not be applicable in case a private company accepts from its members any amount exceeding 100% of aggregate of the paid-up share capital and free reserves.

Notice of Meeting: Section 101 of the Act and Secretarial Standard on General Meetings lay down that a company requires to provide at least 21 days’ clear notice before commencing a general meeting, annual or otherwise. A meeting can also be convened at a shorter notice if at least 95% of the members give their consent for the meeting. A company shall also be free to impose stricter provisions than the prescribed ones. The exemption notification has, however, relaxed these provisions and it lays down that if the articles of association of a private limited company otherwise provide, the provisions of section 101 shall not be applicable to such company. Hence, the company shall be at liberty to decide the provisions governing the notice of general meetings.

Explanatory Statement, Quorum, Chairman, and Proxy: Sections 102 to 105 lay down the provisions governing explanatory statements, quorum for general meeting, the procedure to elect the chairman of a general meeting, and the procedure to provide proxies. While the provisions of these sections would continue to govern private companies, if however, the articles of a private company provide otherwise, such provisions would not be applicable. Hence, a private company now has the option to provide for its own regulations with respect to notice of general meeting, statement to be annexed to notice, quorum for meetings, chairman of meetings and proxies in its articles. In addition to the foregoing, each private company would also have the power to decide its own regulations regarding voting by show of hands and/or demand for poll, as provided under section 107 and section 109 of the Act respectively. The relaxation provided under the exemption notification is expected to reduce the compliance requirements with respect to general meetings of a private limited company, subject to its articles.

Appointment & Powers of Directors: Although a private limited company has the liberty to provide in its articles that any retiring director shall not be eligible to stand for directorship, the provisions to that effect provided in the Act would not be applicable to such a company. Hence, any such requirement would solely be subject to the choice of the company. In addition to the foregoing, none of the restrictions applicable to the board of directors, under the provisions of Section 180 of the Act, shall be applicable to the board of a private company. Any interested director of such company can now participate in any meeting where such subject of interest is discussed, subject to disclosure of his/her interest. Hence, a company drafting its articles may want to keep this in mind.

Appointment of WTD/MD/Manager: As per the provisions of section 196(4), every company shall appoint a whole time director (“WTD”), managing director (“MD”) and/or manager with the approval of the board (obtained at a board meeting), which shall be approved by the members at the next general meeting of the company. Such appointment would also require compliance with the provisions of Section 197 and Schedule V of the Act. Any variation to the conditions specified under Schedule V would, in addition, require the approval of the Central Government. Every company usually specifies the manner in which such WTD, MD or manager can be appointed, in its articles. The private companies are now exempted from this requirement, as the provisions of both sub-section 4 and 5 of section 196 shall not be applicable to such companies. Thus, no approval is required by a private company at its board meeting or at a subsequent general meeting. They do not need to comply with the provisions of section 197 of the Act, dealing with managerial remuneration or, the conditions laid down under Schedule V. Hence, any variation thereto would not require any approval from the Central Government either. A private company, thus, has the liberty to lay down the procedure for such appointment in its articles in any matter it deems fit.

Effect of the Companies Amendment Act

In order to facilitate ease of doing business in India, the Act was further amended by the Companies (Amendment) Act, 2015 (“Amendment Act”), which received the assent of the President on May 25, 2015. This amendment was a welcome move and a private company might want to keep few provisions of the Amendment Act in mind while drafting its articles or restated articles.

Common Seal: While the Companies Act 1956 and the Act (of 2013) both required every company to have a common seal, and the model articles of association of a private limited company (as provided in Table F of Schedule I) also contains provisions as to such common seal, the Amendment Act has made the requirement of having a common seal, optional. Every place where authorisation by means of such seal was required, has been amended to require authorisation by two directors or by one director and the company secretary, where there’s no such seal. Hence, while drafting the articles, a private company (although, it is applicable for every company) should keep this in mind.

Related Party Transactions: While the exemption notification has relaxed the definition of related party for private companies, the Amendment Act has relaxed the procedural aspect as well. A related party transaction (which crosses the prescribed threshold) required the consent of the members obtained at a general meeting, by passing a special resolution. Under the Amendment Act, a company can now pass an ordinary resolution to that effect. The provision requiring passing of a special resolution by the holding company has also been done away with. Although, as the exemption notification excludes the holding companies from the definition of related party, this provision holds little importance to private companies.

Payment of Dividend: Section 123 of the Act lays down the provisions for declaration of dividend. The Amendment Act has modified this Section to add a new provision which lays down that no company shall declare dividend unless the carried over previous losses and the depreciation not provided in previous year or years are set off against profit of the company for the current year. If a company wishes to lay down detailed regulations governing the distribution of dividend, it might add the amended provisions of Section 123 thereto.

The constitutional documents of a company are the most important documents. The articles lay down regulations for operation of the company. For this reason, having detailed articles of association helps a company in various ways. The Indian judiciary has, time and again, given more preference to the articles over any other agreement. If a company reflects the abovementioned provisions in its articles, it would be fruitful to incorporate the amendments made to the applicable laws and to avail the relaxations provided by the Government.

Thanks & Regards,

Meetesh Shiroya

Daily Updates and News

INCOME TAX ACT

SECTION 10B

EXPORT ORIENTED UNDERTAKING

Computation of deduction : Interest on FDRs which were under lien with Bank for facilitating letter of credit and bank guarantee facilities would qualify for deduction under section 10B - [2016] 65 taxmann.com 287 (Delhi)

SECTION 14A

EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME

Rule 8D : Disallowance made under section 14A, read with rule 8D, towards interest expenditure would not be tenable where Assessing Officer failed to establish a nexus between interest bearing funds and investment made - [2016] 65 taxmann.com 295 (Karnataka)

SECTION 32

DEPRECIATION - ALLOWANCE/RATE OF

Goodwill : Where assessee purchased business as going concern, consideration paid in excess of value of tangible assets was classifiable as goodwill eligible for depreciation and, therefore, further exercise to value goodwill was not warranted - [2016] 65 taxmann.com 288 (Delhi)

SECTION 153

ASSESSMENT - TIME-LIMIT FOR COMPLETION OF ASSESSMENT

Limitation for purpose of section 153 would start from end of assessment year in which notice under section 148 is served upon assessee and not from end of assessment year in which such notice is issued - [2016] 65 taxmann.com 293 (Bombay)

SECTION 275

PENALTY - BAR OF LIMITATION FOR IMPOSITION

Pending assessment : Where appeal of assessee against addition made in assessment was pending before Tribunal, order imposing penalty under section 271(1)(c) was premature - [2016] 65 taxmann.com 293 (Bombay)

CENVAT CREDIT RULES

RULE 2(l)

CENVAT CREDIT - INPUT SERVICE

Advertisement and Sales Promotion : Where principally agreement is to appoint agent/stockist for storing and selling goods of assessee, such stockist would be 'commission agent' and not 'sales promotion agent'; hence, commission so paid to him is ineligible for credit. - [2016] 65 taxmann.com 283 (Gujarat)

STATUTES

CORPORATE LAWS

Revision in Position Limits for Agricultural Commodities - CIRCULAR NO.CDMRD/DMP/ CIR/32/2016, DATED 29-1-2016

INDIRECT TAX LAWS (ST./EX./CUS. & (CST & VAT))

Rajasthan Value Added Tax (Amendment) Rules, 2016 – Amendment in Rules 14, 16, 22A, 33 and Form VAT-01 and Substitution of Rules 12, 13, 25 & 77 - NOTIFICATION NO.F.12(79)FD/TAX/ 2014-111, DATED 8-1-2016 Thanks & Regards, Meetesh Shiroya

A woman can become Karta of HUF if she is eldest member of a family, rules Delhi HC

 A woman can become Karta of HUF if she is eldest member of a family,          Rules Delhi HC

When someone makes mention of 'karta' in the context of an Indian family, he invariably thinks of a male member. That has just been changed in a landmark ruling by the Delhi High court this week.

The Delhi high court has ruled in a landmark verdict that the eldest female member of a family can be its "Karta". "Karta" a unique position carved out by Hindu customs and ancient texts, denotes managership of a joint family and has traditionally been inherited by men.

"If a male member of a Hindu Undivided Family (HUF), by virtue of his being the first born eldest, can be a Karta, so can a female member. The court finds no restriction in law preventing the eldest female co-parcenor of an HUF from being its Karta," Justice Najmi Waziri said in this unique judgment made public earlier this week.

The Karta occupies a position superior to that of other members of HUF and has full authority to manage property, rituals or other crucial affairs of the family. These include taking decisions on sale and purchase of family assets, mutation of property, etc.

The ruling came on a suit filed by the eldest daughter of a Delhi based business family staking claim to be its Karta on the passing away of her father and three uncles. The eldest son of a younger brother declared himself to be the next Karta but was challenged by the daughter of the eldest brother who is also the senior most member of the family.

In the court order, Justice Waziri said that the "law gave equal rights of inheritance to Hindu males and females, its objective is to recognise the rights of female Hindus and to enhance their rights to equality apropos succession.

Thanks & Regards,

Meetesh Shiroya