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Category: Corporate And Other Laws

Consumer – Builder –Agreements are prepared in a one-sided-Delay in handing over of possession – Liable to pay interest and compensation: Consumer Protection Act, 1986.

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Shri Satish Kumar Pandy & Anr. vs. M/s. Unitech Ltd.; Consumer Case No. 427 of 2014 alongwith others (NCDRC, New Delhi) dated 8/6/2015

The complainants group of matters, booked apartments with the opposite party in a complex known as ‘vistas’ which was being developed in sector 70 of Gurgaon, and they entered into individual “Buyers Agreement” with the opposite party. The possession of the apartments was agreed to be delivered to them within 36 months from the date of their respective agreements. The grievance of the complainants was that neither the possession of the apartments has been given to them nor was the construction complete though the last date stipulated in the Buyer’s Agreement for delivery of the possession to them had already expired more than 2 years ago. The complainants therefore, approached the Commission seeking delivery of the possession of the flats agreed to be sold to them or in the alternative payment of current market value of such houses. They were also seeking payment of compensation on account of loss of rental income to them with effect from the stipulated date of possession and compound interest @18% p.a. with effect from the stipulated date of possession. The complainants were also seeking compensation on account of their mental torture, agony etc.

The Commission observed that the learned counsel for the complainants stated, on instructions, that the complainants were not interested in taking refund of the money paid by them to the opposite party and they wanted to have possession of their respective flats even if the said possession was to be delivered in terms of the revised date of possession indicated in the abovereferred letter of opposite party. Thus the only question which survived for consideration in these complaints was as to what interest/compensation was to be paid to the complainants by the opposite party, till the date the possession being delivered to them.

The Hon’ble Commission observed that for the exceptional circumstances mentioned in Clause 4 of the agreement the opposite party was required to hand over the possession of the apartment to the flat buyers within 36 months from the date of signing the agreement with them. The exceptional circumstances which could justify delay in hand over the possession of the apartments were:-

(a) Lock-out
(b) Strike
(c) Slow-down
(d) Civil Commotion
(e) War, enemy action, terrorist action, earthquake or act of God and
(f) any reason or circumstance beyond the control of the developer.

The delay in handing over the possession of the apartments would also be justified if there was to be a new legislation, regulation or order suspending, stopping or delaying the construction of the complex and the apartments.

The Commission observed that neither any new legislation was enacted nor an existing rule, regulation or order was amended stopping suspending or delaying the construction of the complex in which apartments were agreed to be sold to the complainants. There was no allegation of any lock-out or strike by the labour at the site of the project. There was no allegation of any slow-down having been resorted to by the labourers of the opposite party or the contractors engaged by it at the site of the project. There was no civil commotion, war, enemy action, terrorist action, earthquake or any act of God which could have delayed the completion of the project within the time stipulated in the Buyers Agreement.

The word ‘slow down’ having been used along with the words lock-out and strike, it has to be read ejusdem generis with the words lock-out and strike and therefore, can mean only a slow down if resorted by the labourers engaged in construction of the project.

Therefore, the plea of the opposite party that the completion of the project was delayed due to non-availability of water, sand and bricks in adequate quantity was rejected.

Since the delay in construction of the apartments could not be justified by the opposite party, it was required to pay compensation to the flat buyers. The contention of the learned counsel for the opposite party was that such compensation had to be calculated @ Rs. 5/- per sq. ft. of the super built area of the apartment for the period of delay in offering the possession beyond the period indicated in clause 4 of the Buyers Agreement, the complainants having agreed to the aforesaid term while agreeing to purchase the apartments. This was also the contention of the learned counsel for the opposite party that the terms of the contract are binding on the parties and cannot be altered by a consumer forum.

The Hon’ble Commission observed that a person who, for one reason or the other, either cannot or does not want to buy a plot and raise construction of his own, has to necessarily go in for purchase of the built up flat. It is only natural and logical for him to look for an apartment in a project being developed by a big builder such as the opposite party in these complaints. Since the contracts of all the big builders contain a term for payment of a specified sum as compensation in the event of default on the part of the builder in handing over possession of the flat to the buyer and the flat compensation offered by all big builders is almost a nominal compensation being less than 0.25% of the estimated cost of construction per month, the flat buyer is left with no option but to sign the Buyer’s Agreement in the format provided by the builder. No sensible person would volunteer to accept compensation constituting about 2-3% of his investment in case of delay on the part of the contractor, when he is made to pay 18% compound interest if there is delay on his part in making payment.

Thus the commission held that a term of this nature is wholly one sided, unfair and unreasonable. The builder charges compound interest @ 18% per annum in the event of the delay on the part of the buyer in making payment to him but seeks to pay less than 3% per annum of the capital investment, in case he does not honour his part of the contract by defaulting in giving timely possession of the flat to the buyer. Such a term in the Buyer’s Agreement also encourages the builder to divert the funds collected by him for one project, to another project being undertaken by him. He thus, is able to finance a new project at the cost of the buyers of the existing project and that too at a very low cost of finance.

The complainants have specifically alleged that some of the clauses in the Buyer’s Agreement were one sided and they were made to sign already prepared documents. It is also alleged that some of the clauses contained in the Buyer’s Agreement are totally unreasonable and in favour of the opposite party only. It is further alleged that the clause providing for compensation at the nominal rate at Rs.5/- per sq. ft. of the super built up area is unjust and exploits the complainants. It is also alleged that the opposite party has been utilising the money of the complainants for its own purposes. Therefore, the commission held that the opposite party should pay adequate compensation to the complainants which would not only take care of the additional financial burden on them on account of the delay in construction of the flat but would also give some compensation to them for the harassment and mental agony which they have suffered all along and were likely to suffer atleast for some more time on account of the opposite party having not delivered the possession of the flat to them by the date stipulated in the Buyer’s Agreement.

The cost of
the borrowing for individual home buyers was about 10% per annum though it had
gone upto 11.5% in last few years. Accordinfg to the commission, if the
opposite party, paid simple interest @ 12% per annum to the complainants, that
would not only take care of the additional financial burden on them but also
give some monetary compensation to them for their sufferings on account of the
delay in handing over possession of the flat purchased by them.

It transpired
during the course of arguments that the service tax has increased with effect
from 01.06.2015. Had the opposite party delivered possession in time, the
complainants would have paid service tax at the pre-revised rate. Therefore,
held that the increase in service tax with effect from 01.6.2015 should be
borne by the opposite party.

The
commission also directed a rate higher than 12% per annum should be paid by the
opposite party, if the revised date of delivery of possession is not honoured
by the opposite party.

CALCULATING TURNOVER – CHALLENGES & AMBIGUITIES

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Introduction
Accountants are often the most trusted advisers of businesses. It is therefore essential that accountants also understand when key disclosures need to be made to regulators. Among other things, the Competition Act, 2002 (‘the Competition Act’), regulates merger and acquisitions (combinations) of large enterprises. Combinations that satisfy the relevant asset/turnover thresholds prescribed in Section 5 of the Competition Act require mandatory prior notification to, and approval from, the Competition Commission of India (‘CCI’). While the Act provides a relatively detailed guidance on calculating the value of assets, the definition of ‘turnover’ is very wide. ‘Turnover’ is defined to include the value of sale of goods or services, excluding indirect taxes1. Beyond this skeletal definition, there is no other statutory guidance parties can rely on. To ensure compliance with the law, accountants should remain vigilant and work with lawyers to determine when notification to the CCI is required.

Importance of turnover
Turnover calculation is critical from a merger control perspective as the very requirement to notify a transaction often hinges on the turnover of the parties involved. Transactions where the parties fail to meet the asset and turnover thresholds under Section 5 of the Competition Act need not be notified. Further, to assess whether a transaction qualifies for the exemption under the Government of India notification S.O. 482(E) dated March 4, 2011 (‘Target Based Exemption’), parties need to assess if the target’s turnover in India is below INR 750 crores (or if target’s assets in India are below INR 250 crores). Computation of turnover by the parties will guide their decision on whether to notify transaction or not. Absent clarity on how to actually compute turnover for the purposes of the Act, businesses and their advisors face substantial uncertainty while deciding whether a transaction requires notifying to the CCI or not. Given the potentially substantial penalties that may be attracted for not notifying a transaction to the CCI, businesses and their advisors require clarity on how to calculate turnover so they can make the decision to notify or not notify with reasonable confidence.

The implications of getting it wrong are significant. A combination is void until it is cleared by the CCI as not being likely to cause an appreciable adverse effect on competition in India. In addition, substantial penalties of up to 1% of the turnover of the combination apply for failing to give the CCI notice of a notifiable combination.

Issues in turnover calculation

Here we examine 2 (two) questions which often surface in calculation of turnover while determining whether a transaction needs to be notified to CCI:

How to calculate turnover of enterprises which generate their revenue from commissions (i.e. enterprises which receive a gross amount which they subsequently transfer to another enterprise while retaining a percentage as their commission)? – It is possible that considering only the commissions earned while calculating turnover could lead to a decision not to notify a transaction to CCI whereas a turnover calculation based on gross receipts would require that a notification be made.

What constitutes turnover ‘in India’ for the purposes of the Competition Act? – Determining turnover ‘in India’ of an enterprise is crucial as both the turnover thresholds under Section 5 of the Competition Act as well as the de minimis thresholds under the Target Based Exemption have an India nexus requirement (i.e. a certain amount of turnover should be ‘in India’). Despite the critical importance of determining the residency of an enterprise’s turnover, when it comes to determining what constitutes turnover ‘in India’, there are no statutory guidelines at all.

Calculation of turnover for enterprises which generate their revenue from commissions
To determine the turnover of an enterprise, in practice, in most cases, the CCI looks at the audited books of accounts of an enterprise. However, in certain cases a simple reading of the books of accounts does not suffice and the CCI can and, in some cases, has gone beyond the books of accounts to determine the turnover.

In Fair Bridge/Thomas Cook2 , the CCI refused to consider the turnover figures for Thomas Cook (India) Limited (‘Thomas Cook’), as reflected in its books of accounts, as the ‘turnover’ for the purposes of the Competition Act. Considering the nature of Thomas Cook’s package tour operating business wherein Thomas Cook charges a consolidated amount for a packaged tour (which includes transportation, boarding, lodging, sightseeing and similar services). The CCI held that Thomas Cook’s turnover would include the gross amount charged to customers and not merely the commissions earned. In interpreting turnover to include gross receipts instead of commissions, the CCI relied on mainly two grounds – (i) Lack of a principal-agent relationship between Thomas Cook and the vendors who actually provided the lodging, boarding, sightseeing and similar services; and (ii) Provisions in Accounting Standards and Guidance Notes issued by the Institute of Chartered Accounts of India (‘ICAI’) as well as internationally accepted accounting practices followed by leading tour operators worldwide.

While Fairbridge/Thomas Cook decision does clarify the CCI’s stance on turnover calculation to a certain extent, the situation is still not completely clear. The CCI has considered commissions and not gross receipts to be the correct measurement of turnover of an enterprise acting as an agent for another entity, which is in line with the Indian Accounting Standards issued by the ICAI3. However, can this be interpreted to mean that in all situations where there is no principal-agent relationship, gross receipts are the correct measure of revenue? The answer is far from clear.

Thus, it appears that a mere lack of a principal-agent relationship need not necessarily imply taking the gross amounts which flow through an intermediary (such as an online retailer) as the turnover for the purposes of the Competition Act. However, absent any statutory clarification or definitive decisional observations by the CCI, calculation of turnover continues to remain an area of interpretive ambiguity.

We would suggest that accountants work closely with lawyers to determine whether the CCI is likely to treat commissions or gross receipts as the relevant turnover as the measure of revenue.

What constitutes turnover ‘in India’?
There are no statutory guidelines on determining what constitutes turnover ‘in India’. Calculating turnover ‘in India’ for an enterprise is crucial as: (i) parties involved in a transaction need to satisfy the asset/turnover thresholds u/s. 5 of the Competition Act to be considered ‘combinations’ and these thresholds have an India-nexus requirement, i.e. a certain amount of assets/turnover must be ‘in India’; and (ii) the applicability of the Target Based Exemption depends upon the target’s turnover ‘in India’.

Two issues which arise in determining an enterprise’s turnover ‘in India’ are: (i) whether the value of sales in the Indian market by a foreign company (i.e. a company not incorporated in India) cwonstitute turnover in India; and (ii) whether sales in non-Indian markets by Indian companies (i.e. companies incorporated in India) constitute turnover in India.

From the CCI’s decisional practice the following also constitute turnover in India:

  • revenue from sales in the Indian market by a foreign enterprise; and
  • revenue from export sales by an Indian enterprise.

Again, it is not always clear what the CCI would consider constitutes turnover ‘in India’.

Conclusion
While
the CCI is continually clarifying the rules, ambiguities in calculating the
turnover for certain enterprises which work on a commission based business
model remain. Further uncertainty also exists when it comes to determining what
constitutes turnover ‘in India’. Given these ambiguities, it is important that
accountants and lawyers use each others’ expertise to ensure that compliance
with the law is achieved.

Hindu Succession – Hindu female dying intestate – Her step son falls in category of heirs of husband – Hindu Succession Act 1956. Section 15(10)(b).

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S. A. Ramalingam vs. Elumalai AIR 2015 Madras 235

The suit was filed by the respondent/plaintiff for declaration of his right, title and interest in respect of and recovery of the suit items, which admittedly belonged to one Sampoornammal, who was none other than the stepmother of the plaintiff.

The facts that Sampoornammal, who was the senior wife of Ramasamy Padaiyachi, was the original owner of the property and during the subsistence of the first marriage, Ramasamy Padaiyachi married one Rajammal as his second wife. Rajammal gave birth to the plaintiff through Ramasamy Padaiyachi. Shri Ramasamy Padaiyachi predeceased the senior and junior wives and the senior and junior wives also died thereafter and after their death, the defendant (son of one of the paternal uncles of Sampoornammal – senior wife) has been in possession and enjoyment of the suit properties.

The dispute in respect of the suit items arose between the plaintiff/step-son of  Sampoornammal and the defendant,.

The Hon’ble Court observed that the relationship between the parties was not disputed. The plaintiff being the step son of the owner falls in the category of the heir of the husband as referred to in clause (b) of section 15(1) and will come as legal heir of female dying intestate.

The Hon’ble Apex Court in the decision reported in (1987) 2 SCC 547 (Lachman Singh vs. Kirpa Singh and others) has categorically laid down that the in the case of a female Hindu dying intestate, a step son, that is, the son of her husband by his another wife falls in the category of the heirs of the husband referred to in clause (b) of section 15(1) and will come in as her heir. That being the legal position, both the courts below by relying on the law so laid down by the Apex court, rightly held that the plaintiff being step son of Sampoornammal, under clause 15(1) (b) of the Hindu Succession Act, was entitled to succeed to her property, in the absence of other legal heirs and the denial of his right, title and interest by the defendant insofar as the suit items are concerned, is hence legally not sustainable. When the plaintiff is held to be entitled to the suit items, the possession of the suit items by the defendant without any right would amount to trespass and encroachment. Though the defendant sought to set up title on the strength of release deed executed by the plaintiff’s mother for her herself and on behalf of the plaintiff, who was the erstwhile minor son, the same for want of any right to do so by Rajammal and for want of registration was held to be not valid a document. When release deed is held to be invalid, the question of taking steps to set aside the same for the purpose of establishing the right of the plaintiff did not at all arise.

Part C | Information On & Around

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Attack on RTI activist in Latur:

The entire episode of this attack was recorded on cell and the video was circulated widely. When on my cell, I went through it for nearly 40 minutes. Tears flowed from my eyes. What inhuman activities by Shiv-Sena workers. (If any one desires to view the video, call me on 9821096052, I shall forward it).A Right to Information (RTI ) activist from Latur, Mr. M B, was brutally beaten and his face blackened allegedly by Shiv Sena activists on the premises of a college in the district in front of over 2,000 students, teachers, staff and onlookers. The activist had sought information through RTI queries, about unauthorised construction activity.Sena youth wing president Mr A.T said that those responsible for thrashing Mr. M B had been dismissed by the party. “Heard of the unfortunate incident in Latur. The party strongly condemns the disgraceful act. Those involved have been moved from the party,” he tweeted.

Senior member of the institution which runs the college, Mr. S B, has been arrested and the police have launched a manhunt for around 25 Sena activists.

Mr. M B told TOI , “A group of people with saffron scarves waiting in an SUV with a Shiv Sena emblem assaulted me. They dragged me into their car where they beat me, snatched my phone, and brought me to Shahu junior college campus. They kicked and showered blows on me while some assaulted me with belts and iron rods. They poured wangan lubricant on me.”

District Police Chief D C told TOI that they have photos of the incident and are trying to zero in on the culprits based on the pictures.

RTI activist receives 32kg of ‘replies’:

An RTI activist, who was denied information by panchayat officials for his queries under the Right to Information Act, finally received 32 kilos of papers as replies after waiting for eight months.

Mr. D J had requested information on the expenditure and details of work sanctioned by the executive officer of Vellalore town panchayat for a period of six months from August 2014 to February 2015.

He finally received the reply, costing the government more than Rs.11,000. As per the courier slip, courier charges alone were Rs.1,130 and the weight of the bundle was 32 kilos. “The panchayat officials told me they spent over Rs.9,000 just on photo copies,” he said.

3 RTI Activists sad story:

Three RTI activists were arrested in the last week of September on the charge of running an extortion racket targeting builders. The Mulund police said that Mr. L S, Mr. P C and Mr. A M had demanded Rs.2 lakh from a developer for not filing complaints with various government departments.

The developer, Mr. S G, had planned to refurbish an old house with the help of his relative. In January, Mr. L S allegedly met him and sought Rs.1 lakh for not blocking the repairs by filing a complaint with the local BMC ward office.According to the First information report (FIR), Gharat paid Rs.50,000. But a few months later, Mr. P C again approached Mr. S G and demanded Rs.1 lakh. The developer paid Rs.10,000.

Earlier this month, Mhaske allegedly tried to extract more money by saying that Mr. L S and Mr. P C were part of this group.

This time, Mr. S G alerted the Mulund police, who arrested the three men. Cops sought their remand for seven days, saying they wanted to find out if the trio was part of a bigger extortion ring that targeted builders. The court granted the request.

Mr. L S and Mr. P C have two previous criminal cases pending against them.

Part B | RTI Act, 2005

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Maharashtra Chief Information Commissioner Mr. Ratnakar Gaikwad has said:

Ten years after the Act was enacted, Gaikwad said the public authorities still do not think it necessary to put out all information, though section 4 of the RTI Act requires it. On the performance of information commissioners in Maharashtra, Gaikwad said there were two aspects:

Quantitative and qualitative. “In the last decade, around 44 lakh RTI queries were received across the state and 99% disposed of. Of the 1.54 lakh queries that have gone into appeal, 1.2 lakh have been disposed of. As on September 30, around 30,000 are pending,” he said.

The state information commissioner also wants a provision to be introduced in the Act to punish those who use it for blackmail. “Such persons must be blacklisted,” he said, adding that there must be a limit on the number of RTIs a person can file before the same PIO in a month.

Part A | Decision of CIC

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Whether PIO can file a Writ against order of the appellate authority – CIC:

The petitioner is the Public Information Officer, Syndicate Bank Regional Office at Mugulrajapuram, Vijayawada, under the Right to Information Act, 2005 (for short ‘the Act’).

The AP High Court held:
This court is of the opinion that the Writ Petition, filed by the Public Information Officer, is not maintainable because even though he is an employee, he is designated as Public Information Officer, who is charged with the duty of dealing with the requests of persons seeking information and render reasonable assistance to such persons. U/s. 7 of the Act, the Public Information Officer shall dispose of the requests received by him either by providing information on payment of the prescribed fee or by rejecting the request for any of the reasons specified in sections 8 and 9 of the Act. A person, who does not receive a decision within the time specified under sub-section 1 of section 7 of the Act or is aggrieved by the decision of the Central Public Information Officer or the State Public Information Officer, is entitled to file an appeal to such Officer, who is senior in rank of the Central Public Information Officer or the State Public Information Officer. A second appeal against such decision shall lie to the Central Information Commission or the State Information Commission as the case may be.

The scheme of the Act, discussed above would reveal that every Public Information Officer nominated as such under the Act has a dual role to play viz. as an officer of the Public Authority and also the Public Information Officer. While such Officer is loyal to his employer while acting in his role as the Officer, he acts as a quasijudicial authority while disposing of the request made for furnishing information. His orders are subject to further appeals. Therefore, in the opinion of this Court, the Public Information Officer cannot don the role of the Officer of the Public Authority in relation to the orders passed by the appellate authorities against the orders passed by him. If his order is reversed by the appellate authority, he cannot be treated as aggrieved party giving rise to a cause of action for him to question such Orders. It is only either the public authority, against whom the directions are given, or any other party, who feels aggrieved by such directions, that can question the orders passed by the appellate authorities. As such, the Public Information Officer, who filed this Writ Petition, is wholly incompetent to question the order of the appellate authority and the Writ Petition filed by him is not maintainable.

Even on merits, this Court has no hesitation to hold that the information sought for by respondent No. 2 does not fall within the exempted category u/s. 8 (1) (h) of the Act because that information, which respondent No. 2 has sought, relates to pending proceedings before the Debt Recovery Tribunal. However, what is exempted u/s. 8 (1) (h) is information, which would impede the process of investigation or apprehension or prosecution of respondent of offenders. It is not the pleaded case of the Bank that any investigation or apprehension or prosecution of respondent No. 2 will be impeded by furnishing information sought for by him. Even if the information relates to a pending dispute before a Court or Tribunal, that would not fall u/s. 8 (1) (h) of the Act.

For the above-mentioned reasons, the Writ Petition is dismissed.

[PIO, Syndicate Bank, Regional Office, Mugulrajapuram, Vijaywada vs. Central Information Commission: Writ Petition No. 28785 of 2011 before the Hon’ble Sri Justice C V. Nagarjuna Reddy]

Hindu Law – Suit for partition – Concept of dual ownership – Land and building or structure standing thereon

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Dattaram Waman Kambli vs. Shantaram Bapu Kambli & Ors.; AIR 2015 (NOC) 474 Bom.

The plaintiff and his two brothers namely, the defendant nos. 1 and 2 had equal share in the land. The dispute was about the entitlement of the plaintiff to any share in the house, which was constructed on the land in question. The plaintiff did not dispute that he had not contributed anything towards the construction of the house and the defendant nos. 1 and 2 were permitted to construct the house with their own funds. The house was constructed in the year 1977 in which the defendant nos. 1 and 2 were residing.

The learned counsel for the appellants submitted that the concept of dual ownership is recognised in India and it has been accepted by the Courts in India despite a contrary concept prevailing under the British law.

It was submitted that though, the share of the plaintiff in the land is not disputed, in view of the aforesaid position of law accepted by the Courts in India, the plaintiff is not entitled to get any share in the structure of the house constructed thereon. As against this, the learned counsel appearing for the respondent (Original Plaintiff) submits that the Hindu law does not recognise such a concept of dual ownership.

The Hon’ble Court observed that in Ramkrishna Girishchandra Dode & Others vs. Anand Govind Kelkar & Others delivered by this Court reported in (1999) 1 Bombay Case Reporter 63, it has been held as under:

“The concept of dual ownership one of the land and the other of the structure on the land has been recognised by several decisions of this Court. The consistent view taken by this Court is that where the landlord get a decree for eviction of a plot of land against a tenant the licensee or a sub-tenant inducted by the tenant on the structure put by him has no right against the landlord. If therefore the landlord is entitled to get vacant possession of the land, he is entitled to evict the occupant in the said structure erected by the tenant, in as much as the occupant of the structure has no legal right against the landlord in so far as the land is concerned. The land must be put in possession of the landlord, free from any encumbrance whatsoever.”

In view of the aforesaid position of law, it was apparent that the concept of the dual ownership, one of the land and the other in the building or structure standing thereon had been recognised and accepted by the Courts in India. The applicability of the principle would not be different even if it is a case between the real brothers and the law as has been laid down by the Courts in India would apply to the dispute between the real brothers also. Merely because, the plaintiff had share in the land beneath the building, it does not automatically follow that he would have share in the building constructed also. The plaintiff did not dispute that he has not contributed anything for construction of the house on the land in which he has a share. It is also not in dispute that he had permitted his brothers to construct building/house with their own funds. No objection was raised for such construction. Therefore, it had to be held that though the plaintiff has share in the land, he did not have any share in the structure or building erected thereon.

The plaintiff is not entitled to a partition and possession of the suit house.

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Hindu Law – Partition – Doctrine of throwing Property in common hotchpot – Assessment under the Wealth tax Act would be evidence : Hindu Succession Act section 23

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Vineeta Sharma vs. Rakesh Sharma & Ors. AIR 2015 (NOC) 895 (Del)

The
plaintiff had filed a suit for partition against her brothers and
mother in respect of constructed premises. The undisputed facts were
that the suit premises were purchased and constructed by the plaintiff’s
father, wherein he along with his family stayed for some time and also
let out a portion thereof to the tenants. The plaintiff’s case was that
since her father and brother died intestate, she was entitled to
one-fourth share in the suit premises. She stated that whenever she
visited her paternal home, she stayed in the suit premises. The
plaintiff averred that the suit premises were never treated as HUF
property and no Will was ever executed by their father.

The
defendants No. 1 and 2 (sons) contested the suit. Their case was that
the plaintiff being the married daughter, had only restricted rights in
the suit premises and could not seek its partition. They averred that
the plaintiff was also not entitled to any share, as the suit premises
was a HUF property, and was so assessed by the Income Tax Department as
also the Wealth Tax Authorities.

The plaintiff deposed that her
father acquired the suit premises from his own earnings, savings and
loans and had constructed the same in March, 1966, when all the
defendants were studying and they could not have contributed to the
construction expenses.

On the other hand, the defendants stated
that their father had abandoned his individual rights in the suit
premises by making a declaration on affidavit dated 23.05.1966,
submitted by him with the Income Tax Department, and which was accepted
as HUF property vide Assessment Order dated 31.03.1976 for the
Assessment Year 1972- 73. They stated that from the Assessment Year
1972-73 to 1988-90 and until the demise of their father, the premises
had been assessed to Income-tax as well as Wealth-tax, as HUF under the
provisions of Income-tax Act as well as Wealth-tax Act.

The
Hon’ble Court observed that as per the plaintiff, the suit premises was
self-acquired property of their father, whereas as per defendants No. 1
and 2, though, it was the self-acquired property of their father, he had
thrown it in the hotchpot of HUF.

The law relating to blending
of separate property with joint family property is well settled.
Property, separate or self-acquired of a member of a joint Hindu family
may be impressed with the character of joint family property, if it was
voluntarily thrown by the owner into the common stock with the intention
of abandoning his separate claim therein, but to establish such
abandonment a clear intention to waive separate rights must be
established.

The separate property of a Hindu ceases to be
separate property and acquires the characteristics of a joint family or
ancestral property not by any physical mixing with his joint family or
his ancestral property but by his own volition and intention, by his
waiving and surrendering his separate rights in it as a separate
property. The act by which the coparcener throws his separate property
in the common stock is a unilateral act. There is no question of either
the family rejecting or accepting it. By his individual volition, he
renounces his individual right in that property and treats it as a
property of the family. No sooner than he declares his intention to
treat his self-acquired property as that of the joint family property,
the property assumes the character of joint family property. The
doctrine of throwing into the common stock is a doctrine peculiar to the
Mitakshara school of Hindu law.

The Hon’ble Court observed that
from the Assessment Order dated 31.03.1972 of the Assessment Year 1972-
73, it is seen that the plaintiff’s father had declared some income
from the suit premises in the status of HUF. It is also seen therefrom
that the HUF came into existence under the assessee’s declaration made
on 23.05.1966 on an affidavit. The Income Tax record of the subsequent
year upto the Assessment Year 1999-2000 would evidence that the
plaintiff’s father had been filing Income Tax Returns and been assessed
to Income Tax as Karta of HUF. The incomes received from the suit
premises was being declared by the plaintiff’s father as of HUF and was
assessed as such during all these years. The Assessment Order under the
Wealth Tax Act of the years 1977-78 onward would also evidence the suit
premises having been assessed as HUF for the purpose of Wealth Tax. From
all this record, it was concluded that the plaintiff’s father, for all
purposes, had consciously abandoned his individual rights in the suit
premises to HUF with effect from 23.05.1966. The affidavit filed by the
plaintiff’s father with Income Tax Department declaring the suit
premises as HUF on 23.05.1966 was not the solitary step taken by him,
but, he continued to maintain the HUF status of the suit premises till
he died. In view of all this, even the payment of property tax by the
plaintiff’s father in his name and not that of HUF or even for that
matter, filing of eviction case against the tenant Bank of Baroda in his
own name than that of HUF would not make any difference. There is no
dispute that the suit premises was initially acquired by the plaintiff’s
father in his own name and it was in those circumstances that the suit
premises continued to be assessed to property tax in his individual name
rather than that of HUF. The payment of property tax by any means does
not create any right or title in the name of the assessee. Filing an
eviction case by the plaintiff’s father in his own name instead of the
HUF, can also be said to be only for the convenience. In any case, the
partition could only be filed by him in his name, being the Karta of
HUF. Thus it was held that the suit premises was of the HUF property of
the plaintiff’s father, with he being the Karta thereof till his death.

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Foreign Judgement – Enforceable before Court in India – Civil Procedure Code, section 13(b)

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Masterbaker Marketing Ltd vs. Noshir Moshin Chinwalla, AIR 2015 (NOC) 771 (Bom.)

A foreign Court which has jurisdiction over the subject matter and passes a decree, the same is conclusive u/s. 13 of the CPC. The plea of the defendant that judgement was obtained by playing fraud hence could not be conclusive could not be considered as it had not submitted to the jurisdiction of the competent Court in a foreign country. The defendant would not be allowed to raise up his hands after the plaintiff has gone through the process of trial and undertaken the execution by applying to the executing Court to retry the issue.

The plaintiff had filed his plaint. The defendant was given notice of the action. He was served a summon. He was called upon to answer the plaintiff’s claim. The trial Court was bound to hear the defendant and to dismiss the plaintiffs claim if it was fraudulent or perjurial. It was, therefore, not only the defendant’s right to get the action of the plaintiff dismissed if it was perjurial or fraudulent, but also its duty to bring perjurial act constituting fraud to the notice of the Court if it was known to the defendant at the time of the trial. If that was not done at the time of trial then and was sought to be done later after the judgment was passed, it would constitute a retrial issue. That retrial is forbidden by the salutary principle of resjudicata. If permitted, it would allow all defendants not to defend the claim and allow any decree to be passed which would then be challenged whilst being executed. That would be an abuse of the Court process.

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Territorial Jurisdiction – Infringement of Copyright and/or Trademark

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Introduction
A question that arises in almost every matter
pertaining to violation of intellectual property rights is – Which Court
would have the necessary territorial jurisdiction to try, entertain and
dispose of the present proceedings? By this article, an endeavour shall
be made to explain which Court/Courts would have territorial
jurisdiction in respect of matters of infringement of copyright and/or
trademark.

The determination of territorial jurisdiction of a
civil court is governed by the Code of Civil Procedure,1908(“CPC”)1
Section 20 of the CPC which would be the relevant Section with respect
to cases of infringement of copyright and/or trademark provides that a
Suit may be filed, inter alia, either where the Defendant actually and
voluntarily resides or carries on business or works for gain or where
the cause of action arises wholly or in part. An explanation appended to
the said Section provides that a Corporation is deemed to carry on
business at its sole or principal office in India or at a place, where
in respect of any cause of action arising at such place it has a
subordinate office.

Hence, under these provisions, a Plaintiff
would be obliged to travel to where the Defendant actually and
voluntarily resides or carries on business or works for gain or where
the cause of action has arisen, wholly or in part. To illustrate this
point, consider a a case where an owner of copyright in a musical work
resides in Delhi, however, his musical work is being infringed by a
Defendant in Chennai by causing unauthorised communication thereof in a
bar in Chennai itself and nowhere else. In such a case, the Plaintiff
copyright owner would be constrained to travel to Chennai to file a
proceeding to restrain the acts of infringement of copyright since both
the Defendant is residing in Chennai as also the cause of action has
arisen in Chennai. Such acts of infringement often take place in remoter
parts of the country, making it even more cumbersome for a Plaintiff to
travel to every nook and corner of the country to protect his
intellectual property rights.

These difficulties were noted by
the Joint Committee that was constituted prior to the passing of the
Copyright Act, 1957 (“CA”) in as much as it was observed that many
authors are deterred from instituting infringement proceedings because
the court in which the proceedings are to be instituted are at a
considerable distance from the place of their ordinary residence. The
Joint Committee recommended that such impediments should be removed and
the proceedings should be allowed to be instituted in the local court
where the person instituting the proceedings ordinarily resides, carries
on business etc2.

Hence, it was in this background that an
additional forum was provided for by Legislature in section 62 of the CA
to enable authors to file a suit for infringement of copyright where
they reside or they carry on business or work for gain3. Subsequently,
section 134 was also brought into effect in the Trade Marks Act, 1999
(“TMA”) to provide an additional forum even in case of infringement of
trademark at a place where the Plaintiff resides or carries on business
or works for gain.

It is the scope and purview of both these
provisions that is sought to be explained and commented upon in this
Article. In fact, the Supreme Court has in a recent judgment dated 1st
July, 2015 in the case of IPRS vs. Sanjay Dalia4 dealt extensively with
the ambit and scope of the said provisions. My effort shall be to
explain the ratio decidendi of the Apex Court and thereafter highlight
certain issues which may still need to answered by the Hon’ble Courts to
afford complete clarity on these provisions.

STATUTORY PROVISIONS
Before
adverting to the aforesaid decision of the Apex Court in the case of
IPRS vs. Sanjay Dalia5, it would be helpful to consider the actual text
of the relevant provisions which provide, inter alia, as under :-

CA
“Section
62. Jurisdiction of court over matters arising under this Chapter. —
(1) Every suit or other civil proceeding arising under this Chapter in
respect of the infringement of copyright in any work or the infringement
of any other right conferred by this Act shall be instituted in the
district court having jurisdiction.

(2) For the purpose of sub-section (1), a “district court having jurisdiction” shall,
notwithstanding anything contained in the Code of Civil Procedure, 1908
(5 of 1908), or any other law for the time being in force, include a
district court within the local limits of whose jurisdiction, at the
time of the institution of the suit or other proceeding, the person
instituting the suit or other proceeding or, where there are more than
one such persons, any of them actually and voluntarily resides or
carries on business or personally works for gain.”

TMA
“134. Suit for infringement, etc., to be instituted before District Court. —
(1) No suit– (a) for the infringement of a registered trade mark; or
(b) relating to any right in a registered trade mark; or (c) for passing
off arising out of the use by the defendant of any trade mark which is
identical with or deceptively similar to the plaintiff’s trade mark,
whether registered or unregistered, shall be instituted in any court
inferior to a District Court having jurisdiction to try the suit.

(2) For the purpose of cls. (a) and (b) of sub-section (1), a “District Court having jurisdiction” shall,
notwithstanding anything contained in the Code of Civil Procedure, 1908
(5 of 1908) or any other law for the time being in force, include a
District Court within the local limits of whose jurisdiction, at the
time of the institution of the suit or other proceeding, the person
instituting the suit or proceeding, or, where there are more than one
such persons any of them, actually and voluntarily resides or carries on
business or personally works for gain…”

It may be noted
that though the current TMA contains Section 134 which provides an
additional forum to a Plaintiff, the earlier Trade and Merchandise Marks
Act, 1958 contained no such provision. Under the Trade and Merchandise
Marks Act, 1958, a Plaintiff was constrained to follow the Defendant
and/or the cause of action for vindication of his rights as u/s. 20 of
the CPC. This position has, however, now changed u/s. 134 of the TMA. A
bare perusal of both section 62(2) of the CA and section 134(2) of the
TMA which are pari materia6 in nature would show that they make a
significant departure from the provisions of the CPC and provide for the
existence of an additional forum in a Suit relating to infringement of
copyright and/or trademark, before a Court, where the Plaintiff actually
and voluntarily resides or carries on business or works for gain.

Both section 62(2) of the CA and section 134(2) of the TMA are additional forums and do not take away or abridge the right of a Plaintiff, if he so chooses to follow the Defendant and/or the cause of action u/s. 20 of the CPC. Hence, a Plaintiff in a suit for infringement of copyright and/or trademark would be entitled to approach the appropriate Court either u/s. 20 of the CPC or u/s. 62(2) of the CA or u/s. 134(2) of the TMA, as the case may be. It is possible, in a given case, that the appropriate Court could be the same Court whether section 20 of CPC is applied or the provisions of the CA or TMA are applied. An illustration would be that, take a case where an owner of copyright in a musical work resides in Delhi. The Defendant is also residing in Delhi and is infringing the musical work by causing unauthorised communication thereof in a bar in Delhi itself and nowhere else. In such a case, the Courts at Delhi would have the necessary territorial jurisdiction to entertain such a Suit for infringement of copyright since firstly, as u/s. 62 of CA, the Plaintiff resides in Delhi. Secondly, u/s. 20 of CPC, the Defendant also resides in Delhi and thirdly, even the cause of action is arising in Delhi. Hence, in such a case, it would only be the Courts at Delhi which would have the necessary territorial jurisdiction.

The question however, is of cases where only section 62 of the CA and/or section 134 of the TMA are invoked as conferring territorial jurisdiction on the Court.

    IPRS VS. SANJAY DALIA7

The Apex Court was dealing with two appeals from the Delhi High Court in this case. In the first Appeal, the facts were that the the Plaintiff was carrying on business through a Branch Office situate at Delhi and it was on this basis that the territorial jurisdiction of the Delhi High Court had been invoked. In the second Appeal, also the territorial jurisdiction of the Delhi High Court was invoked on the basis that the Plaintiff had a branch office at Delhi. In both these matters, the admitted position was that the registered office of the Plaintiffs was not in Delhi nor had any cause of action arisen in Delhi at the time of filing the suits but only the Branch Offices were in Delhi. Proceedings had been filed on the basis, as a suit could be filed wherever the Plaintiff was carrying on business and since these Plaintiffs had a branch office in Delhi, they must be deemed to carry on business in Delhi thereby, rendering the Delhi High Court as the Court having the necessary territorial jurisdiction. Objections were however, raised by the Defendants to the territorial jurisdiction of the Delhi High Court, on the basis that in both these matters the Plaintiff had a registered office in Bombay where the cause of action had also arisen and hence, it should be the Courts at Bombay which would have the necessary territorial jurisdiction. A Division Bench of the Delhi High Court upheld the objection of the Defendant in the first matter whilst in the second matter, the Division Bench of the Delhi High Court, allowed an amendment to be made to the Plaint to add averments to the effect that the infringing magazines were being circulated in Delhi as well thereby showing that cause of action had arisen in Delhi, and on this basis rejected the plea of the Defendant of lack of territorial jurisdiction. It was against these two Orders of the Delhi High Court, that appeals were preferred before the Apex Court.

The Supreme Court was thus called upon to answer whether in light of section 62 of CA and section 134 of TMA could a Plaintiff Corporation file a Suit anywhere it chose to, based on the existence of a branch office or must the Plaintiff Corporation be constrained to file proceedings at a place where either its registered office is situated or at a place where it has a branch office and where the cause of action has also arisen akin to the Explanation to section 20 of the CPC. The Explanation to section 20 of the CPC as mentioned earlier provides that a Corporation is deemed to carry on business at its sole or principal office in India or at a place, where in respect of any cause of action arising at such place it has a subordinate office.

The Supreme Court after considering the legislative history and the purpose for which the provisions had been brought onto the statute book observed that if the provisions are not interpreted purposively, as is being suggested by the Supreme Court, it could lead to abuse of the provisions, in as much as the Plaintiff will institute a suit in a wholly unconnected jurisdiction based solely on the existence of a branch office. The Supreme Court illustrated the possible abuse and observed, inter alia, that “There may be a case where plaintiff is carrying on the business at Mumbai and cause of action has

arisen in Mumbai. Plaintiff is having branch offices at Kanyakumari and also at Port Blair, if interpretation suggested by appellants is acceptable, mischief may be caused by such plaintiff to drag a defendant to Port Blair or Kanyakumari. The provisions cannot be interpreted in the said manner devoid of the object of the Act.” It has also been observed that such a counter mischief to the defendant was unforeseen by Parliament and it is the court’s duty to mitigate the counter mischief.

Hence, the Supreme Court has held that the additional right to institute a suit at a place where the Plaintiff resides or carries on business has to be read subject to certain restrictions, such as in case plaintiff is residing or carrying on business at a particular place/having its head office and at such place cause of action has also arisen wholly or in part, plaintiff cannot ignore such a place under the guise that he is carrying on business at other far flung places also. The very intendment of the insertion of provisions in the CA and TMA is the convenience of the plaintiff. The interpretation of provisions has to be such which prevents the mischief of causing inconvenience to parties. The Supreme Court whilst interpreting these provisions was also of the view that the issue raised before it had not been raised in any of the earlier cases cited before it

It was in light of these findings that the Supreme Court was pleased to dismiss both the appeals by holding that the provisions of section 62 of the CA and section 134 of the TMA have to be interpreted in the purposive manner. There is no doubt about it that a suit can be filed by the plaintiff at a place where he is residing or carrying on business or personally works for gain. He need not travel to file a suit to a place where defendant is residing or cause of action wholly or in part arises. However, if the plaintiff is residing or carrying on business etc. at a place where cause of action, wholly or in part, has also arisen, he has to file a suit at that place.

Whilst this judgment, brings much required clarity to the issue as to the interpretation of these provisions of the CA and TMA, in my opinion, these findings of the Supreme Court amount to introducing an Explanation or a Sub-section (3) to both section 62 of the CA and section 134 of the TMA, which explanation or sub-section had not been provided even by the Legislature whilst passing the said statutes.

The effect of this judgment would be to limit the scope and effect of these provisions. Plaintiffs would now be obliged to file proceedings in accordance with these principles laid down by the Apex Court. The effect of this judgment will, in fact, be felt in several pending proceedings, which proceedings may have been initiated prior to this judgment at a place where the Plaintiff had only a branch office but no cause of action, based on the bare language of these provisions. Already in several proceedings in different High Courts, to my knowledge, applications have been moved for rejection/return of plaint on account of lack of territorial jurisdiction of that Court based on this judgment.

    CONCLUSION

Even though this judgment does bring forth a fair amount of clarity on the issue of territorial jurisdiction in cases of infringement of copyright and/or trademark, in my opinion, certain important issues still remain to be answered in connection with the interpretation of these provisions.

To illustrate an issue which still needs to be addressed and has not been conclusively determined by the Supreme Court, consider a situation, where the Plaintiff is having a branch office in Delhi and the cause of action has also arisen there whilst its registered office is at Bombay. In such a case, can it be said that the Plaintiff is precluded from approaching the Courts at Bombay and must only file his case in the Courts at Delhi or is it still his option to choose the forum of his convenience between these two forums.

It may be noted that the Supreme Court in the IPRS judgment, was dealing with two cases where factually this position did not arise and in both cases, jurisdiction had been invoked only on the existence of a branch office and not on the basis of a combination of branch office plus cause of action. It is trite law that a decision is an authority for what it actually decides8 and hence, considering the nature of the facts involved, it would be difficult to assert that this issue has been conclusively adjudicated upon.

In my opinion, however, in the IPRS case itself, the Supreme Court had referred to its earlier judgment in Patel Roadways vs. Prasad Trading Co.9 wherein the Court whilst explaining the provisions of Section 20 of the CPC had observed, inter alia, that “The clear intendment of the Explanation, however, is that, where the corporation has a subordinate office in the place where the cause of action arises, it cannot be heard to say that it cannot be sued there because it does not carry on business at that place.”

Thus, from the perspective of the convenience of the Defendant and not the Plaintiff, the Supreme Court has already opined that it is the location of the subordinate office, within the local limits of which a cause of action arises, which is to be the relevant place for the filing of a suit and not the principal place of business.

On an analogy of this principle of convenience of parties as explained by the Supreme Court, in my opinion, it could be urged that a Plaintiff corporation which has a subordinate office in the place where the cause of action arises, ought not to be heard to say that it will not sue there since it would like to sue at a place where it has its registered office. The obvious convenience involved of both parties would have to be considered as has been explained by the Supreme Court. Considering that the Plaintiff has a branch office at that place he can hardly be heard to complain that the place is not convenient and also from the perspective of the Defendant, considering cause of action is arising at that place, it would mean that the Defendant and/or its products and/or services are to be found at that place thereby indicating that such a place would be convenient to the Defendant also. Hence, on the basis of convenience of both parties, it ought to be held that it is only the Court where the cause of action has arisen and where the Plaintiff also has a branch office which is the Court having the necessary territorial jurisdiction.

Another issue which has remained unanswered is the effect of this judgment on the Chartered High Courts i.e. the High Courts of Bombay, Calcutta and Chennai. As explained herein above, the Supreme Court has in a sense incorporated the Explanation to section 20 of CPC into the provisions of the CA and the TMA, however, by virtue of section 120 of CPC, section 20 of CPC itself does not apply to the Chartered High Courts. The territorial jurisdiction of the Chartered High Courts is governed by their respective Letters Patent and not by section 20 of CPC10. Hence, in such a situation can it be said that this interpretation would apply to these Chartered High Courts or would these Courts be able to exercise a more unrestricted jurisdiction than the other High Courts.

Whilst in my opinion, the judgment in IPRS does leave door ajar for several new issues to be resolved upon to bring forth complete clarity on the subject, the judgment is an important step forward towards interpreting and laying down the contours of the territorial jurisdiction of a Court in respect of proceedings initiated u/s. 62 of the CA or section 134 of the TMA.

Appellate Tribunal – Difference of Opinion between Members of Bench on factual matters – Advice to Tribunal – Disagreement and dissent to be avoided by meaningful discussion and continuous dialogue.

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Commissioner of Customs (II) vs. Nitin Aminchand Shah 2015 (323) ELT 466 (Bom.)

In the initial order passed on 6-8-2013 by the CESTAT, there was difference of opinion between the Member (Judicial) and the Member (Technical). The Member (Judicial) was of the opinion that for the reasons indicated by him, the appeals of the assessee deserved to be allowed. Whereas the Member (Technical) passed a separate order upholding the Department’s stand, but yet remanded the case to the Commissioner for ascertaining the value of the impugned goods by constituting a Panel in accordance with the Departmental instructions.

On account of this difference of opinion, the matter was referred by the President, CESTAT to a Third Member. In the meanwhile, the importers filed rectification of mistake applications pointing out the alleged mistake in the initial order of the Tribunal dated 6-8-2013. As was expected, even when these applications for rectification were placed before the same Bench, the Members thereof differed. The applications were admitted by the Member (Judicial) whereas the Member (Technical) recorded a separate order. That separate order of the Member (Technical) did not conclude the applications for rectification of mistake. Thereafter, the rectification applications were finally decided on 8-12-2014 but recording a dissent and difference of opinion between the two Members.

Then, this difference of opinion was also marked and referred to the same Third Member who was to resolve the disagreement in the initial order dated 6-8-2013.

The Hon’ble Court observed that this was one more instance where the Members of the Bench have differed and recorded dissenting opinions. By consent of both sides, the appeals decided by the initial order dated 6-8-2013 were restored to the file of the CESTAT for being decided afresh in accordance with law. The Hon’ble Court further advised that the Tribunal should bear in mind the caution administered by the Court in case of the Starto Electro Equipments Pvt. Ltd. vs. UOI 2015 (318) ELT 55
(Bom) and all such decisions rendered prior thereto. Why should there be a difference of opinion on factual matters? By some meaningful discussion, continuous dialogue and by not demonstrating unnecessary haste, disagreements and dissents can be avoided.

Aadhar Card Scheme – Right to Privacy – Judicial Discipline – View expressed by smaller benches without explaining reasons for not following pronouncements of larger Benches – Matter referred to larger Bench – Constitution of India Article 141.

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Justice K. S. Puttaswamy & Anr. vs. UOI & Ors. AIR 2015 SC 3081

The collection by the Govt. of biometric data of residents under Aadhar Card Scheme challenged to be violative of the right to privacy.

The Court directed that the Union of India shall give wide publicity in the electronic and print media including radio and television networks that it is not mandatory for a citizen to obtain an Aadhar card. The production of an Aadhar card will not be a condition for obtaining any benefits otherwise due to a citizen. The Unique Identification Number or the Aadhar card will not be used by the Govt. for any purpose other than the PDS Scheme and in particular for the purpose of distribution of food grains, etc. and cooking fuel, such as kerosene. The Aadhar card may also be used for the purpose of the LPG Distribution Scheme. The information about an individual obtained by the Unique Identification Authority of India while issuing an Aadhar card shall not be used for any other purpose, save as above or as may be directed by a Court for the purpose of criminal investigation.

The Hon’ble Court was of the opinion that the cases on hand raise far reaching questions of importance involving interpretation of the Constitution. What is at stake is the amplitude of the fundamental rights including that precious and inalienable right under Article 21. If the observations made in M. P. Sharma (AIR 1954 SC 300) and Kharak Singh (AIR 1963 SC 1295) are to be read literally and accepted as the law of this country, the fundamental rights guaranteed under the Constitution of India and more particularly right to liberty under Article 21 would be denuded of vigour and vitality. The Hon’ble Court was also of the opinion that the institutional integrity and judicial discipline require that pronouncement made by larger Benches of the Court cannot be ignored by the smaller Benches without appropriately explaining the reasons for not following the pronouncements made by such larger Benches. The Hon’ble Court was of the opinion that there appeared to be certain amount of apparent unresolved contradiction in the law declared by the Court.

New SEBI Listing Regulations – revised requirements of corporate governance, disclosures, etc.

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Background

SEBI has recently notified the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“the Listing Regulations”). They will primarily replace the Listing Agreement and certain related provisions. On the face of it, it may appear that the notification is old wine in a new bottle. A superficial review may even create an impression that the Listing Regulations make merely cosmetic/ aesthetic changes in that they organise into categories/ chapters the myriad of clauses that were messily placed in the Listing Agreement, being the result of random additions/deletions and endless amendments. However, a closer analysis reveals that there are several structural changes and new requirements/modifications. Primarily, the status of the provisions has been substantially elevated from a set of provisions that had a dubious legal status to a proper law with, as we will discuss later, severe consequences. The rights and obligations of various parties that were unclear and uncertain under the Listing Agreement are now clearer, well-defined and attributed directly and specifically. More important is the fact that the obligations of various persons such as the company, its directors, the Chief Financial Officer, Company Secretary, etc. and even the auditors and the Audit Committee have increased. The life of the already overburdened and underpaid independent directors will worsen further.

The new regulations are fairly lengthy, though this is also on account of the fact that they seek to cover the listing obligations of not just equity shares but also other types of securities. Still, the 111 page long regulations would need a deep study to understand their implications. In this article, some highlights are briefly discussed.

Nature of the Regulations

The Regulations largely compile, rewrite and re-organise at several places, the familiar Listing Agreement and certain related provisions, in the form of Regulations. The Listing Agreement primarily provide for certain obligations of companies whose securities have been listed on recognised stock exchanges. The requirements include disclosures of important developments in such companies, of periodic accounts, etc. The Listing Agreement is also the place where Clause 49 that covers the requirements relating to corporate governance are placed. There are several other requirements contained in other provisions. These are now gathered at one place in an organised manner in the new Listing Regulations. Thus, while the SEBI ICDR   Regulations pave the road to listing of securities of a company, the Listing Regulations
now provide for requirements of their continued listing.

A formal and very short Listing Agreement of course continues (which listed companies are required to execute) but the substantive provisions are now in the Listing Regulations. Further, the Listing Regulations provide for separate chapters for requirements in case of different type of listed securities.

Date when the regulations shall come into effect

The bulk of the regulations shall come into effect from 1st December 2015 (except, however, as will be seen later, for two sets of provisions that have come into effect immediately, i.e. from 2nd September 2015). This has given time for companies and others concerned to absorb the contents, changes and implications of the new
provisions.

More severe punishment for violations

The primary structural change is that, instead of the provisions being in the form of a listing agreement, which, at least conceptually, had a dubious legal status and hence implications, the Listing Regulations have a well recognised and well defined status and implications.

The Listing Agreement was of course not a mere private agreement where only the signing parties could act against each other. For example, section 23E of the Securities Contracts (Regulation) Act, 1956, provided for a stiff penalty for violation of listing conditions. The stock exchanges too ensured discipline and enforcement to considerable extent. Further, SEBI had direct control over the provisions. Nevertheless, the element of uncertainty remained. Moreover, the final recourse of contraventions of the Listing Agreement could, in theory, only be of terminating the Listing Agreement. This would mean delisting the shares in the present case which would obviously be counter productive as this would harm the shareholders for no fault of theirs. SEBI has of course been using its generic and wide powers to take action and pass fairly stringent orders. It has debarred directors, executives, etc. and generally taken penal action in various forms. However, this is not a happy situation. For one, such action is taken only in extreme cases. Further, the role and liability of various parties remains unclear.

Now that the provisions are in the form of regulations, there are clear penalties and other actions under the SEBI Act and the Listing Regulations. Parties such as directors, compliance officers, Auditors, Independent Directors, etc. are clearer on what their role is now.

Penalties are now specific and well defined. Penalties would be levied on specified parties, of defined amounts and as per specified transparent due legal process. It is clearer what the roles of the company (which is primary and generally comprehensive), the compliance officer (there are some provisions made for them directly), and the audit committee are.

Generally, as seen later, corporate governance provisions too have been elevated to status of law and the roles of individual parties or groups are now directly  defined.

Regulation 98 also provides specifically for various actions by the stock exchanges in case of contraventions of the Listing Regulations. These actions include levy  of fine, suspension of trading, etc. These actions are in addition to the penal and other actions under the SEBI Act. In many cases, there may be further action under the Companies Act, 2013 too.

Corporate governance now a law

Clause 49, as a legal term, is now history. Earlier, as a clause bearing that number, it was part of the Listing Agreement and thus had implications only as much as of the Listing Agreement. Now it is a specific component of the Listing Regulations.

While the requirements remain largely unchanged, considering that each requirement lays down what each person, committee, board, etc., has to do, the liability of parties is now specific and defined. These parties would now know what are the requirements statutorily expected of them and what are the consequences of non-compliance.

Chartered accountants and other professionals including auditors who are associated with listed companies in various ways will particularly need to pay heed to and understand the new provisions well.

Related party transactions

The requirements for approval, disclosure, etc. of related party transactions are largely carried over from Clause 49. The requirement of obtaining prior approval of the Audit Committee for all related party transactions continues. The relaxation for giving prior omnibus approval for certain types of recurring transactions as also for transactions up to a specified value under certain conditions also continues.

As earlier, material (as defined) related party transactions require approval of shareholders by way of a special resolution where related parties shall not vote. Two changes were expected. One was that the resolution required would be ordinary and not special. This change has been made and with immediate effect. Thus, now, only an ordinary resolution is required for  approval of material related party transactions. The other was that only the bar on voting on such resolutions should be on only those parties that are related for the purposes of the proposed transactions. This change has not materialised. All related parties are barred from voting at such resolution. The definition of related party transactions remains broader. To these and certain other extent, the requirements under the Regulations are different from the corresponding requirements under the Companies Act, 2013.

Disclosures of material developments

The new Regulations provide for substantially revised provisions for disclosures by companies. Investors and markets generally expect suo motu and prompt disclosure of developments by the company. However, there was uncertainty on what to report, when to report, who to report and how to report. Balance is required between sending a deluge of information where a few important things get hidden in a pile of information, and reporting arbitrarily selective aspects only at the last possible date. Balance is also required in reporting things too early and too late when rumours and leaks have already caused havoc to the markets.

The Regulations now provide for completely re-written requirements for disclosures of  material developments. They are divided broadly into two categories – disclosures of developments that are material as per certain specified guidelines and developments that are deemed to be material and hence to be reported. The stage at which the developments are to be disclosed has also been defined, and once that stage is reached, the requirement also is for prompt disclosure.

Of particular note are the deemed material items. For example, certain types of frauds are  deemed to be material developments irrespective of the amounts involved.

Obligations of the Board

The regulations now specify and define, even if largely general terms, the obligations and duties of the Board of Directors of a listed company. This is of course largely carried over from clause 49. However, again, considering that the requirements are now in the form of  regulations, they will have greater implications. They will need closer attention.

Accounts and financial Disclosures

The requirements of making periodic disclosure of results continue largely as earlier. This aspect would require greater study and analysis particularly by CFOs and Auditors.

Cessation of a person/group from the Promoter Group

Though relatively an infrequent happening, persons seeking to be excluded from the Promoter Group present not just a sensitive issue, but also remains uncertain in terms of legal provisions. For example, an individual or even a family/group may desire to be excluded from the Promoter Group. This may be because they no more hold partly or wholly any control or they wish to relinquish control. Being in control, even if it is joint, results in certain obligations which they wish to relinquish too, along with the control. At the same time, allowing such exclusion may result in persons having control or even a material connection being excluded from obligations. The Listing Regulations now contain fairly comprehensive and transparent requirements for permitting such exclusion. These requirements have come into effect from 2nd September 2015.

Conclusion

The lengthy Regulations provide for many things with far ranging implications that cannot be even highlighted in a short article. However, it is clear that the job of the board, director,  committees, compliance officer, etc. has increased substantially. While in the short term, the transition from the Listing Agreement to the isting Regulations may be smooth, in the longer term perhaps, as companies and others are regularly hauled up and penalised in various forms, the implications of the changes will be realised. It is becoming more and more difficult to exist as a listed company and to be associated with a listed company. In the longer term the question that will confront us is, whether and to whom it is financially and otherwise rewarding to be so?

Arbitration Law Amendments – Cuts Both Ways!

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Introduction

The Arbitration and Conciliation Act, 1996 (“the Act”) was enacted in 1996 to repeal and replace the Arbitration Act, 1940 and other ancillary Acts. It was considered a pathbreaking Act since, to a great extent, it institutionalised the forum of Arbitration in India and introduced various sweeping changes based on the UNCITRAL Model Law on International Commercial Arbitration and the UNCITRAL Conciliation Rules adopted by the United Nations Commission on International Trade Law (UNCITRAL). Arbitration was considered to be the saviour to a judiciary creaking from an alarming number of cases. It was considered to be a fast-track route to dispute resolution. However, the reality has been quite contrary.

Almost 20 years later, the Government felt that the Act requires urgent changes and since Parliament was not in session, it promulgated an Ordinance titled, The Arbitration and Conciliation (Amendment) Ordinance, 2015. This Ordinance was promulgated by the President on 23rd October, 2015 and is in force from that date. The Ordinance has  introduced several changes to the Act, which are intended to speed up the process and improve the quality of arbitration. Under the Constitution of India, an Ordinance must be laid before both the Houses of Parliament and shall cease to operate as an Ordinance after six weeks from the reassembly of Parliament. Thus, the Government must come out with an Amendment Act within this time or another Ordinance.

As is the case with several enactments, there is often a slip between the cup and the lip and the best of intent is set to naught! The Ordinance contains a few good amendments and a few not so good ones. Let us examine some crucial changes introduced by this Ordinance and how some of these could actually derail the process of arbitration!

Arbitrators’ Fees Capped

An extremely innovative concept introduced by the Ordinance is that of fixing the fees of the arbitrators. The High Court is empowered to frame Rules for the fees of the arbitrators after considering the rates specified in the Schedule to the Ordinance. The Schedule lays down model fees on an ad valorem basis with a cap on the maximum fees which can be charged. The sliding scale provides for a minimum fee of Rs.45,000 for a dispute in which the sum involved is up to Rs.5 lakh. The maximum slab is in case of a dispute in which the sum  involved is above Rs.20 crore, in which case the fees are Rs.19.87 lakh + 0.5% of the claim above Rs.20 crore. However, the maximum fees cannot exceed Rs.30 lakh. This is probably one of the few instances of a Central Enactment laying down fees. While the lawyers and other consultants appearing before the arbitrators can charge any amount of fees, the arbitrators are constrained by the Ordinance! Moreover, what happens if the arbitrators actually spend more time and effort in hearings, gathering evidences, etc., than the fees prescribed by the Ordinance? Would this in fact not reduce the supply of good arbitrators? Fees are a matter of demand and supply and commercial negotiation between the parties to the dispute and the arbitrators. One wonders where is the need for legislative intervention in this? Would this not disincentivise good arbitrators?

The Ordinance provides an escape route by stating that the limit on fees would not apply to international commercial arbitrations and those arbitrations which are as per the rules of an  arbitral institution. Thus, for instance, if parties to the dispute agree to hold the arbitration as per the Rules of the Indian Council of Arbitration, then the fee schedule prescribed by the Council would not apply.

No more Recusing oneself afterwards

The Ordinance seeks to lay down under what scenarios an arbitrator would be considered as having a conflict of interest scenario with the parties to the dispute. Thus, instead of allegations of conflict cropping up later on and the arbitrator recusing himself, the law upfront states what is a conflict.

Where there is existence of a direct or indirect past or present relationship of the arbitrator either with any of the parties to the dispute or in relation to the subject matter of the dispute, then he must disclose such interest, in writing, before accepting appointment. The interest could be financial, business, professional or any other kind which is likely to give rise to justifiable doubts as to his independence or impartiality.

While a good part of this was already contained in the Act, the Ordinance seeks to provide the grounds which shall guide in determining whether or not circumstances exist which give rise to justifiable doubts as to his independence or impartiality. A long list of 34 such circumstances has been given, classified under the following grounds:

  • Arbitrator’s relationship with the parties to the dispute or their counsel
  • Arbitrator’s relationship to the dispute
  • Arbitrator’s direct or indirect interest in the dispute
  • Previous services for one of the parties or other involvement in the case
  • Relationship between an arbitrator and another arbitrator
  • Relationship between an arbitrator and counsel
  • Relationship between an arbitrator and parties to the dispute or their affiliates
  • Other circumstances.

This specific list of circumstances would remove any ambiguity as to whether or not there is any conflict of interest in a given case. If the arbitrator is of the view that there exist  circumstances of the type specified in the Ordinance, then the format in which the disclosure is to be made has also been laid down.

Magical Time limit for completion

Just as in the fairy tale, Cinderella had a time limit of getting home by 12 midnight, an  arbitration award must now be made within a period of 12 months from the date of reference to the arbitral Tribunal! The date of reference is the date on which all the arbitrators have received written notice of their appointment. Thus, there is a maximum period of 12 months to dispose of the arbitration. If the parties consent, the 12 months period can be extended by a maximum further period of 6 months. Any extension beyond 6 months cannot be granted by the parties.

After this extended period of 18 months, only the Court would have powers to extend the period or else the mandate of the arbitrators would terminate. While the intent is to speed up the process, this may actually retard the process. Lobbing the ball back to the Court would be a step backwards.

While granting the extension, the Court may substitute one or all of the arbitrators and if such a substitution does take place, then the substituted arbitrators would be deemed to have been  appointed from inception and the proceedings would continue from the stage where they  ended before the earlier panel of arbitrators. Further, the new arbitrators would have deemed to have received the evidence and material already on record. Is this not an extremely strange position? What if all the arbitrators are replaced and all evidence / witnesses / submissions  were already heard by the earlier panel? The new panel would be expected to pronounce its award without examining the witnesses, without hearing the submissions once again, etc. They would have to rely solely on the papers before them. All the best to the new arbitrators for jumping on to a running train.

Carrot and Stick approach for Arbitrators

Another novel concept introduced is the success fee and penalty clause for arbitrators. If the arbitrators complete an arbitration within 6 months from the date of reference (instead of the available 12 months), then they shall be entitled to such additional fees as the parties decide. Thus, there is an incentive for completing the job earlier. The law also presents a stick to the arbitrators. If the Court extends the arbitration beyond 18 months but while doing so finds that the delay is attributable to the arbitrator’s fault, then it may reduce the arbitrator’s fees by a maximum of 5% for each month of delay. Thus, if the Court is of the view that  the entire delay over 12 months was due to the fault of the arbitrator, then it may deduct 5% * 6 = 30% of the fees! Who wants to be an arbitrator is going to be the name of the new game!

Fast Track Procedure

One good concept is that of a fast track arbitration. If the parties agree then they can opt for this instead of the regular procedure. In this case, there may be a sole arbitrator who shall only admit written submissions. There would not be any oral hearings unless all the parties so  request or unless the arbitrator considers it necessary for certain clarifications. Technical formalities may also be disposed of by the arbitrator. However, the award must be made  within a period of 6 months from the date of reference. The model fees and maximum fees would not apply in the case of a fast track procedure.

Award against Public Policy

One of the grounds for setting aside an arbitration award by a Court is, if it finds that the  award is in conflict with the public policy of India. The Act provided that this was a general phrase which could have several grounds. It only stated that an award made by fraud or induced by corruption would be one of them. This gave an open field to the parties to challenge the award, thereby delaying the dispute resolution process.

The Ordinance has come out with an exhaustive and restrictive meaning of the term ‘conflict with the public policy of India’ as a ground for challenging an award. Only where making of the award was induced or affected by fraud or corruption, or it is in contravention with the fundamental policy of Indian Law or is in conflict with the most basic notions of morality or justice, the award shall be treated as against the Public Policy of India.

Conclusion

Internationally, an arbitration is usually completed within a year (even though it may not be a legal binding to do so). In India, arbitrations are nefarious for lingering on. In this scenario, when the time limit is set by law, is it helpful? While the idea behind the Ordinance is a noble one, that of speeding up and improving the quality of arbitration so as to lessen the load of the judiciary, one wonders whether the pill may in fact be worse than the ill!

Is this a knee-jerk reaction to improving India’s ease of doing business ranking or is it a well-thought out longterm strategy is something which time will tell. Has the Government unwittingly unleashed a double-edged sword, one which would speed up the arbitration process but may also reduce the number of arbitrators? It would be worthwhile to remember that those who live by the sword, often perish by it!!

Will – Execution Proof – Both attesting witnesses not alive – Evidence Act should receive a wider purposive interpretation: Evidence Act Section 68, 69.

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C. G. Raveendran & Ors. vs. C. G. Gopi & Ors. AIR 2015 Kerala 250

The plaintiffs and defendants were the children of late Govindan and Bhanumathi. Govindan died on 28/8/1994 and Bhanumathi on 18/5/2004. The plaint schedule properties belonged to Govindan. He had constructed a building therein and was residing there with his family till his death.

According to the plaintiffs, after the death of Govindan, the right to the properties have devolved on the plaintiffs and the defendants equally and they were entitled to inherit. However, the plaintiffs came to know about a registered Will allegedly executed by Govindan.

It was contended that the Will was a fabricated one and Govindan had no occasion to execute such a Will. During the period of execution of the Will, Govindan was mentally ill and was undergoing treatment for partial paralysis. He had not executed the Will and was allegedly executed under suspicious circumstances. Hence the suit was filed seeking a declaration that the Will was null and void and for a consequential partition of the properties.

The Court below on an evaluation of the oral testimony on the side of the plaintiffs and the oral evidence on the side of the defendants held that Will was validly executed by Govindan.

The Hon’ble Court observed that the above evidence had to be evaluated to decide the genuineness of Will. It is pertinent to note that Will is registered. In the absence of any serious challenge regarding registration, it must be presumed that the Will was registered after complying with all the statutory formalities. Registration of a Will is a piece of evidence confirming its genuineness and can confer it a higher degree of sanctity. There seems to be a consensus in the judicial pronouncements that, though there is no requirement that Will should be registered, but if registered, it adds to its authenticity.

Section 68 of the Indian Evidence Act, provides that if a document is required by law to be attested, it shall not be used as evidence until one attesting witness at least has been called for the purpose of proving its execution. In the present case, the attesting witnesses are Parameswaran and Padmanabhan Nair. Parameswaran himself was the scribe. There is no legal bar in scribe himself being an attesting witness, provided he has actually seen the executant signing or affixing his mark or has received a personal acknowledgment from the executant and has consciously affixed his signature as an attesting witness, as a token of having witnessed the executant signing or affixing his mark. Evidence should prove that the scribe, apart from being so, had signed for the purpose of testifying to the signature of the executant and had the animo attestandi.

It is on record that both the attesting witnesses are no more alive. Hence, section 68 of the Indian Evidence Act cannot apply. The provision that governs the field can only be the section 69 of the Indian Evidence Act. It deals with a situation wherein no attesting witnesses can be found. Though the Statute prescribes that section 69 applies when the witness is not found, in the absence of any other provision dealing with cases wherein the presence of witnesses cannot be procured for various other reasons, like death of both attesting witness, out of jurisdiction, physical incapacity, insanity etc. Section 69 should apply and can be extended to such cases. Hence, the word “not found” occurring in section 69 of Evidence Act should receive a wider purposive interpretation than its literal meaning and should take in situation where the presence of the attesting witness cannot be procured. This view gets its support from Venkataramayya vs. Kamisetti Gattayya (AIR 1927 Madras 662) and Ponnuswami Goundan vs. Kalyanasundara Ayyar (AIR 1930 Madras 770).

It is settled that mode of proving a Will does not ordinarily differ from that of proving any other document except as to the special requirement of attestation prescribed by section 63 of Indian Succession Act. Section 69 imposes a twin fold duty on the propounder. It provides that if no such attesting witness can be found, it must be proved that attestation of one attesting witness at least is in his handwriting and also that the signature of the person executing the document is in the handwriting of that person. Hence, to rely on a Will propounded in a case covered by section 69 the propounder should prove i) that the attestation is in the handwriting of the attesting witness and ii) that the document was signed by the executant. Both the limbs will have to be cumulatively proved by the propounder. Evidently, the section demands proof of execution in addition to attestation and does not permit execution to be inferred from proof of attestation. However, section 69 presumes that once the handwriting of attesting witness is proved he has witnessed the execution of the document. The twin requirement of proving the signature and handwriting has to be in accordance with section 67 of the Indian Evidence Act.

Press Note No. 3 (2015 Series) dated March 2, 2015

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Review of Foreign Direct Investment (FDI ) Policy on Insurance Sector – amendment to ‘Consolidated FDI Policy Circular of 2014’

With immediate effect, Paragraph 6.2.17.7 of the Consolidated FDI Policy Circular of 2014 dated April 17, 2014 has been amended as follows: –



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DIPP, Ministry of Commerce & Industry, Government of India

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Clarification of Press Note No. 10 of 2014

DIPP has issued the following clarifications, in FAQ form, with regards to Press Note No. 10 of 2014 pertaining to FDI in construction & development projects. The clarifications are as under: –


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A. P. (DIR Series) Circular No. 83 dated March 11, 2015

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Notification No. FEMA.335/2015-RB dated February 4, 2015

Acquisition/transfer of immovable property – Prohibition on citizens of certain countries

Presently, citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan are not permitted acquire or transfer immovable property in India, other than lease not exceeding five years, without the prior permission of RBI.

This circular has expanded the list by including therein, from February 25, 2015, citizens of Hong Kong & Macau since they are Special Administrative Regions of China.

Hence, now citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Hong Kong or Macau are not permitted acquire or transfer immovable property in India, other than lease not exceeding five years, without the prior permission of RBI.

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A. P. (DIR Series) Circular No. 81 dated March 3, 2015

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Trade Credits for Imports into India – Review of all-in-cost ceiling

This circular states that the present all-in-cost ceiling for trade credits, as mentioned below, will continue till March 31, 2015: –

The all-in-cost ceiling will include arranger fee, upfront fee, management fee, handling / processing charges, out of pocket and legal expenses, if any.

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A. P. (DIR Series) Circular No. 93 dated April 1, 2015

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Export of Goods and Services – Project Exports

Presently, Exim Bank in participation with commercial banks in India can extend Buyer’s credit up to US $ 20 million to foreign buyers in connection with export of goods on deferred payment terms and turn key projects from India.

This circular has done away with the said limit of US $ 20 million. Hence, Exim Bank in participation with commercial banks in India can now extend Buyer’s credit without any limit to foreign buyers in connection with export of goods on deferred payment terms and turn key projects from India.

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A. P. (DIR Series) Circular No. 92 dated March 31, 2015

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Notification No. FEMA.339/2015-RB dated March 2, 2015, Operational guidelines on International Financial Services Centre (IFSC)

This circular states that a financial institution or a branch of a financial institution set up in an IFSC permitted/ recognised as such by the Government or a Regulatory Authority will be treated as person resident outside India and their transaction(s) with any person resident in India will be treated as a transaction between a resident and non-resident and will be subject to the provisions of Foreign Exchange Management Act, 1999 and the Rules /Regulations/Directions issued thereunder.

Further, subject to the provisions of section 1 (3) of Foreign Exchange Management Act, 1999, nothing contained in any other Regulations will apply to a financial institution or a branch of a financial institution set up in an IFSC unless there is some express and specific provision to that effect in the Foreign Exchange Management (International Financial Services Centre) Regulations 2015 or any other Regulation.

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A. P. (DIR Series) Circular No. 90 dated March 31, 2015

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Risk Management and Inter-bank Dealings: Revised Guidelines relating to participation of Residents in the Exchange Traded Currency Derivatives (ETCD) market

This circular has made the following changes in the guidelines relating to ETCD, as contained in Notification No. FEMA. 25/RB-2000 dated May 3, 2000 (Foreign Exchange Derivative Contracts) and A.P. (DIR Series) Circular No. 147 dated June 20, 2014, as under: –

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A. P. (DIR Series) Circular No. 85 dated March 18, 2015

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Non-Resident Deposits – Stat 5 and Stat 8 Returns – Discontinuation

This circular states that from March 2015 banks dealing in foreign exchange need not send Stat 5 and Stat 8 Returns (both hard and soft copies) to the Department of Statistics and Information Management, RBI.

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Powers to arrest – SEBI’s wide exercise curtailed by the Bombay High Court

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Background

a) In an earlier article in this column, certain recent amendments to the SEBI Act were pointed out. One amendment that was noteworthy was of the powers given to SEBI to arrest any person for having defaulted in paying certain dues to SEBI. The dues to SEBI could be of several types – on account of penalty, on account of amounts ordered to be disgorged or even on account of fees, etc. SEBI could arrest and send to prison such a defaulter. Such arrest did not even require a court order. A relatively junior official of SEBI could arrest and send such person to prison for such a period. However, this is subject to conditions on the lines of and indeed borrowed from the Incometax Act, 1961.

b) Recently, however, on 18th December 2014, SEBI exercised this power for the first time and arrested a defaulter and sentenced him to prison for six months. The arrested person had to file a writ petition and the Bombay High Court set aside this order and released him. He was in prison for more than two and a half months. As will be seen later, the power to arrest was exercised by misconstruing and misapplying the provisions, in an arbitrary manner and, as the Court held, quite illegally too. The only silver lining to this episode was that the pre-conditions for such arrest were duly highlighted by the Court and thus, in future cases, hopefully, these pre-conditions will be observed.

c) Let us discuss the law first, as amended, and thereafter the SEBI Order and then the decision of the Bombay High Court that set it aside.

2) The Law

a) SEBI collects dues from various persons on several accounts. It collects fees for registration, fees for carrying out activities under securities laws such as public issues, open offers, buybacks, etc. It also levies penalties. It disgorges ill-gotten gains. And so on. Some of such amounts are remitted to the Consolidated Fund of India i.e., to the central government. Most of the others are used by SEBI. A person from whom amounts are due on such specified accounts may default for various reasons. He may not have the money or he may have the money but avoids paying it. He may even transfer his assets to his relatives/benami persons or others to avoid recovery. SEBI has several powers to deal with such defaulters. It can attach assets of the defaulter and recover the dues. It can even prosecute such defaulters (which is totally different from the new power discussed here) in court which may sentence such person to jail. However, vide the Securities Laws (Amendment) Act, 2014, a fresh power was given to deal with such defaulters. Vide the newly inserted section 28A, a defaulter can be, inter alia, arrested and detained in jail. The relevant provisions of this section have been reproduced below (certain words are highlighted which need review since the Court relied on these words to release the arrested in the case under discussion):-

Recovery of amounts
28A. (1) If a person fails to pay the penalty imposed by the adjudicating officer or fails to comply with any direction of the Board for refund of monies or fails to comply with a direction of disgorgement order issued under section 11B or fails to pay any fees due to the Board, the Recovery Officer may draw up under his signature a statement in the specified form specifying the amount due from the person (such statement being hereafter in this Chapter referred to as certificate) and shall proceed to recover from such person the amount specified in the certificate by one or more of the following modes, namely:—

(a) attachment and sale of the person’s movable property;
(b) attachment of the person’s bank accounts;
(c) attachment and sale of the person’s immovable property;
(d) arrest of the person and his detention in prison;
(e) appointing a receiver for the management of the person’s movable and immovable properties, and for this purpose, the provisions of sections 220 to 227, 228A, 229, 232, the Second and Third Schedules to the Income-tax Act, 1961 and the Income-tax (Certificate Proceedings) Rules, 1962, as in force from time to time, in so far as may be, apply with necessary modifications as if the said provisions and the rules made thereunder were the provisions of this Act and referred to the amount due under this Act instead of to income-tax under the Income-tax Act, 1961.

…

(4) For the purposes of sub-sections (1), (2) and (3), the expression ‘‘Recovery Officer’’ means any officer of the Board who may be authorised, by general or special order in writing, to exercise the powers of a Recovery Officer.

b) As can be seen, the Recovery Officer exercises the powers under this Section. The Recovery Officer is any officer of SEBI who is authorised to act as such. In the present case, he was an Assistant General Manager.

3) SEBI order
a) The facts as stated in the SEBI Order are as follows. Certain penalties were levied against a person (“the Defaulter”) in respect of two companies where he was a non-executive Chairman. The cumulative amount was about Rs. 1.65 crore. The Defaulter failed to pay despite reminders. His bank accounts, etc. were attached but the amounts available were grossly insufficient. SEBI asked such Defaulter to submit a plan to pay such dues but he could not submit. He was finally asked to appear before the Recovery Officer to submit such a plan or be arrested. He appeared and could not either pay the dues nor submit a satisfactory plan. He was arrested u/s. 28A and sent to prison by the Recovery Officer for six months or till he paid the dues.

b) Interestingly, the provisions of Section 28A can be exercised irrespective of the nature of the dues. That is to say, the dues can be for having committed some malpractices or could even be dues on account of unpaid fees to SEBI.

c) The Defaulter filed a writ petition before the Bombay High Court.

4) Bombay High Court Order
a) In the Writ Petition before the Bombay High Court, an initial point was made that the Writ Petition was not maintainable since the Defaulter had a right of appeal to the Securities Appellate Tribunal. However, considering the facts of the case and precedents on this point, this point was rejected and the WP allowed.

b) The Court analysed the prerequisites for making an arrest u/s. 28A as clearly laid down in the section. It pointed out that the specified provisions of the Income-tax Act, 1961 (and specified Schedules/ Rules made thereunder) would apply. A review of such Schedule/Rules showed that it is a pre-requisite for arrest that at least one of two conditions should be satisfied. The Defaulter should have sought to obstruct the recovery by dishonestly transferring, concealing or removing his property. Alternatively, he should have refused or neglected to pay the whole or part of the dues despite having property to meet the dues. Apart from establishing such facts, the Recovery Officer should also record the reasons, etc. for the proposed arrest. The Court observed several things. Firstly, it was not shown at all that either of the two pre-conditions. Secondly, no inquiry was made giving a fair opportunity to the Defaulter to establish this. Finally, the reasons for arrest giving existence of these pre-conditions were not recorded. The reasons were sought to be put forth in the reply which obviously the Court found it to be too little and too late. The Court analysed Rule 73 to 77 of Second Schedule to the Income-tax Act, 1961 and made the following observations for setting aside the SEBI Order:-

23. A perusal of aforesaid relevant provision indicates that Part V of Second Schedule provides a detail procedure which is required to be complied with when the Tax Recovery Officer resorts to the mode of arrest and detention. Needless to state that the mode of arrest and detention though not a punitive action, is a drastic step which infringes upon the liberty of   a person. Hence, recourse to such mode has to be necessarily in strict compliance with the provisions stipulated in Part V of second Schedule.

28.    A bare reading of the notice and the impugned orders makes it abundantly clear that the power of arrest has not been exercised in the manner and for the circumstances provided for in Rule 73(1). It is to be noted that Rule 73(1) confers power of arrest  and  detention  only  in two situations i.e. when the Tax  Recovery  Officer is satisfied  that
(i)    the defaulter, with the object or effect of any obstructing the execution of the certificate, has dishonestly transferred, property or (ii) despite having means the defaulter, refuses or neglects to pay the dues. Rule 73(1) further mandates the Tax Recovery Officer to record in writing the reasons of his satisfaction.

29.    In the instant case, the Tax Recovery Officer had not recorded his satisfaction with reasons in writing, as regards the existence of two situations, which are specified in Clause (a) of Rule 73(1). The Tax Recovery Officer has not detained and arrested the petitioner on the ground that he had transferred, concealed or removed any part of his property. The respondent had stated in the affidavit that upon issuance of the attachment orders, none of the banks have reported any accounts in the name of the petitioner, except Punjab National Bank at Mira Road (E) branch and only an amount of Rs.5160.82 was recovered by the respondent Board. By these averments, the respondent has sought to justify the arrest. Needless to state that having failed to record the reasons as regards existence of the situation in clause (a), the respondent cannot rectify the lacuna by stating the reasons in the reply.

30.    It is also not the case of the Respondent Authority that the petitioner had failed to pay to dues despite having means to pay the arrears or some substantial part thereof. On the contrary, a bare perusal of the impugned order reveals that the petitioner was detained and arrested for non¬payment of dues and further for not giving a proposal of payment

32.    In the light of the aforesaid principles, the Tax Recovery could not have ordered detention of the petitioner solely on the ground that he had failed to pay an amount or give the proposal.

33.    The authority of the respondent had therefore not arrived at a satisfaction that the conditions specified in clause (a) and (b) of Rule 73(1) were satisfied and had further not complied with the mandate of Rule 73(1) of recording the reasons of satisfaction in writing. The absence of satisfaction as well as recording of reasons vitiates the exercise of power of arrest. We are, therefore, of the considered view that the detention and arrest is patently illegal and arbitrary.

c)    Thus,  the  defaulter  was  forthwith  released  from prison. however, he was ordered not to leave the country during pendency of the proceedings and his passport was retained with the EOW. The recovery Officer could pass a fresh order after due compliance of the procedures and establishment of the conditions as stated in the law.

5)    Concluding Comments
a)    The Court thus has confirmed the essential pre- requisites for making such an arrest u/s. 28a. Arrest of a defaulter merely for not having paid dues would thus not be possible even if such dues were on account penalty for misdeeds.

b)    Having said that,  some  other  provisions  of  the  act need to be noted since they too may result in imprisonment. Firstly, attention is invited to section 24(1) of the SeBi act which states that violation of any  of  the  provisions  of  the act,  regulations,  etc. may result in a fine or imprisonment upto 10 years. However, this would obviously require due prosecution proceedings before the Court, demonstrating to the Court that such violations deserve imprisonment, etc. there is also section 24(2) which states that if a person on whom a penalty has been levied fails to pay the same, he can be sentenced to imprisonment from one month to 10 years. Here too, this can only be after due prosecution proceedings before the jurisdictional Court.

c)    However, it is sad and curious that, with due respect, though the Court emphatically held that the arrest was arbitrary and illegal, the defaulter had to suffer more than two months in jail. But he was not awarded any compensation or even the costs of the legal proceedings.

Nominee vs. Will: The Tide Turns?

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Introduction
The problems of inheritance and succession are inevitable especially in a country like India where many businesses are still family owned or controlled. Many a times bitter succession battles have destroyed otherwise well established businesses.

A Will is the last wish of a deceased individual and it determines how his estate and assets are to be distributed. However, in several cases, the deceased has not only made a Will, but he has also made a nomination in respect of several of his assets.

Nomination is something which is extremely popular nowadays and is increasingly being used in co-operative housing societies, depository/demat accounts, mutual funds, Government bonds/securities, shares, bank accounts, etc. Nomination is something which is advisable in all cases even when the asset is held in joint names. Simply put, a nomination means that the owner of the asset has designated another person in his place after his death. A question which often arises is which is superior – the will or the nomination made by the deceased member. While the position was quite clear that a nominee was not superior to the legal heir, a judgment rendered in the context of shares in a company had taken a contrary view. A recent decision of the Bombay High Court suggests that the tide has turned, or has it?

Effect of Nomination
The legal position in this respect is crystal clear. Once a person dies, his interest stands transferred to the person nominated by him. Thus, a nomination is a facility to provide the society, company, depository, etc., with a face which whom it can deal with on the death of a person. On the death of the person and up to the execution of the estate, a legal vacuum is created. Nomination aims to plug this legal vacuum. A nomination is only a legal relationship created between the society, company, depository, bank, etc., and the nominee.

The nomination seeks to avoid any confusion in cases where the will has not been executed or where there are disputes between the heirs. It is only an interregnum between the death and the full administration of the estate of the deceased.

Which is Superior?
A nomination continues only up to and until such time as the will is executed. No sooner the will is executed, it takes precedence over the nomination. Nomination does not confer any permanent right upon the nominee nor does it create any beneficial right in his favour. Nomination transfers no beneficial interest to the nominee. A nominee is, for all purposes, a trustee of the property. He cannot claim precedence over the legatees mentioned in the will and take the bequests which the legatees are entitled to under the will.

The Supreme Court in the case of Sarbati Devi vs. Usha Devi, 55 Comp. Cases 214 (SC), had an occasion to examine this issue in the context of a nomination under a life insurance policy. The Court held, in the context of the Insurance Act, 1938, that a mere nomination made does not have the effect of conferring on the nominee any beneficial interest in the amount payable under the life insurance policy on the death of the assured. The nomination only indicates the hand which is authorised to receive the amount, on the payment of which the insurer gets a valid discharge of its liability under the policy. The amount, however, can be claimed by the heirs of the assured in accordance with the law of succession governing them.

The Supreme Court, once again in the case of Vishin Khanchandani vs. Vidya Khanchandani, 246 ITR 306 (SC), examined the effect of a nomination in respect of a National Savings Certificates. The issue here was whether the nominee of a National Savings Certificate can claim that he is entitled to the payment in exclusion to the other heirs. The Court examined the National Savings Certificate Act and various other provisions and held that, the nominee is only an administrative holder. Any amount paid to a nominee is part of the estate of the deceased which devolves upon all persons as per the succession law and the nominee must return the payment to those in whose favour the law creates a beneficial interest.

Again, in Shipra Sengupta vs. Mridul Sengupta, (2009) 10 SCC 680, the Supreme Court upheld the superiority of a legal heir as opposed to a nominee in the context of a nomination made under a Public Provident Fund.

The Supreme Court again reinforced its view on a nominee being a mere agent to receive proceeds under a life insurance policy in Challamma vs. Tilaga (2009) 9 SCC 299.

In Ramesh Chander Talwar vs. Devender Kumar Talwar, (2010) 10 SCC 671, the Supreme Court upheld the right of the legal heirs to receive the amount lying in the deceased’s bank deposit to the exclusion of the nominee.

In Gopal Vishnu Ghatnekar vs. Madhukar Vishnu Ghatnekar, (1982) 84 Bom LR 41, the Bombay High Court, observed, in the context of a nomination made in respect of a flat in a co-operative housing society, that the purpose of the nomination was to make certain the person with whom the Society has to deal and not to create interest in the nominee to the exclusion of those who in law will be entitled to the estate. The persons entitled to the estate of the deceased do not lose their right to the same. Society has no power, except provisionally and for a limited purpose to determine the disputes about who is the heir or legal representative, it, therefore, follows that the provision for transferring a share and interest to a nominee or to the heir or legal representative as will be decided by the Society was only meant to provide for interregnum between the death and the full administration of the estate and not for the purpose of conferring any permanent right on such a person to a property forming part of the estate of the deceased. The idea was to provide for a proper discharge to the Society without involving the Society into unnecessary litigation which may take place as a result of dispute between the heirs’ uncertainty as to who are the heirs or legal representatives. Even when a person was nominated or even when a person was recognised as an heir or a legal representative of the deceased member, the rights of the persons who were entitled to the estate or the interest of the deceased member by virtue of law governing succession were not lost and the nominee or the heir or legal representatives recognised by the Society held the share and interest of the deceased for disposal of the same in accordance with law. It was only as between the Society and the nominee or heir or legal representative that the relationship of the Society and its member were created and this relationship continued and subsisted only till the estate was administered either by the person entitled to administer the same or by the Court or the rights of the heirs or persons entitled to the estate were decided in the Court of law. Thereafter, the Society was bound to follow such decision.

The Bombay High Court reiterated its stand on a nominee being subordinate to a legal heir in its judgments in the cases of Nozer Gustad Commissariat vs. Central Bank of India, 1993 Mh LJ 228 and Antonio Joao Fernandes vs. Assistance Provident Fund Commissioner, 2010 (4) Bom. CR 208, both rendered in the context of provident fund dues. Decisions of the other High Courts which have taken similar views include, Leelawati Singh vs. State of Delhi, 1998 (75) DLT 694; Hardial Devi Ditta vs. Janki Das, AIR 1928 Lah 773; D Mohanavelu Mudaliar vs. Indian Insurance & Banking Corporation, AIR 1957 Mad 115; Shashikiran Ashok Parekh vs. Rajesh Agarwal, 2012 (4) MhLJ 370.

Thus,  the  legal  position  in  this  respect  is  very  clear. Nomination is only a legal relationship and not a permanent transfer of interest in favour of the nominee. If the nominee claims ownership of an asset, the beneficiary under the will can bring a suit against him and reclaim his rightful ownership.

Companies act – Nominee is superior
Section 109a of the Companies act, 1956, was added by the amendment act of 1999. Section 109a provided that any nomination made in respect of shares or debentures of a company, if made in the prescribed manner, shall, on the death of the shareholder/debenture holder, prevail over any law or any testamentary disposition, i.e., a will. thus,  in  case  of  shares  or  debentures  in  a  company, the nominee on the death of the shareholder/debenture holder, became entitled to all the rights to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner. In case the nominee is a minor, then the shareholder/debenture holder can appoint some other person who would be entitled to receive the shares/debentures, if the nominee dies during his minority. This position continues under the Companies act, 2013 in the form of section 72 of this act read with rule 19 of the Companies (Share Capital and debentures) rules, 2014. a similar position is contained in Bye Law

9.11 Made under the depositories act, 1996 which deals with nomination for securities held in a dematerialised format.

A Single judge of the Bombay high Court explained this proposition in the case of Harsha Nitin Kokate vs. The Saraswat Co-op. Bank Ltd, 112 (5) Bom. L.R. 2014. interpreting section 109a of the Companies act, 1956 and the depositories act, the Court ruled that the rights of a nominee to shares of a company would override the rights of heirs to whom property may be bequeathed. In other words, what one writes in one’s will would have no meaning if one has made a nomination on the shares in favour of someone other than the heir mentioned in the will. The high Court ruled that securities automatically get transferred in the name of the nominee upon the death of the holder of shares. the nominee is required to follow the  prescribed  procedure  in  the  Business  rules.  Upon the death of the holder of shares the nominee would be entitled to elect to be registered as a beneficiary owner by notifying the Bank along with a certified copy of the death certificate. The bank would be required to scrutinize the election and nomination of the nominee registered with it. Such nomination carries effect notwithstanding anything   contained   in   a   testamentary   disposition (i.e. Wills) or nominations made under any other law dealing with Securities. the last of the many nominations would be valid.

The Court referred to and noted the provisions of section 39 of insurance act and section 30 of the maharashtra Cooperative act also. it held that these are totally different from the Companies act. the key is the use of the word “vest” in the provisions of section 109a of the Companies act, 1956, which the court interpreted as giving ownership rights and not just custody rights as is the case for an insurance  policy  or  shares  of  a  housing  society.  the Bombay high Court distinguished the Supreme Court’s judgment in the case of Sarbati Devi vs. Usha Devi, 55 Comp. Cases 214 (SC) citing a difference in the language of the applicable law. Section 109a of the Companies act, 1956 provided that upon the death of a shareholder, the shares would “vest” in the nominee. A nominee became entitled to all the rights attached to the shares to the exclusion of all others regardless of anything stated in any  other  disposition,  testamentary  or  otherwise.  The Court concluded that the Legislature’s intent u/s.109a of the Companies act, 1956 and Bye Law 9.11 made under the depositories act, 1996 was very clear, i.e., to vest the property in the shares in the nominee alone.

A similar view was also endorsed by a Single judge of the delhi high Court in the case of Dayagen P. Ltd. vs. Rajendra Dorian Punj, 151 Comp. Cases 92 (Del).

This decision has caused a lot of heartburn since the entire succession law in the case of shares has been thrown for a toss. It may be noted that while the Companies    act deals with nomination in the case of physical shares the depositories act deals with nomination in the case   of demat accounts/shares held in dematerialised format. it is submitted that a Bye Law under the depositories   act does not carry the same force as a section of the Companies act. hence, it may be a moot point whether this distinction could in any manner salvage the situation?

A Twist in The Tale?
another  Single  judge  of  the  Bombay  high  Court,  very recently, had an occasion to consider the above provisions of the Companies act and the earlier decision of the Bombay  high  Court  in  jayanand  Jayant  Salgaonkar vs. Jayashree Jayant Salgaonkar and others, Notice of Motion No. 822/2014 in Suit No. 503/2014 decided on 31st March, 2015. The Bombay high Court after an exhaustive study of all the Supreme Court and Bombay high Court decisions on the subject of superiority of will / legal heirs over nomination, concluded as follows:

a)    The  earlier  decision  of  Harsha  Nitin  Kokate  vs. The Saraswat Co-op. Bank Ltd was rendered per incuriam, i.e., without reference to several binding Supreme Court and Bombay high Court decisions.

b)    It wrongly distinguished the Supreme Court’s decision in the case of Sarbati Devi vs. Usha Devi whereas the reality was that the ratio of that decision was applicable even under the Companies act, 1956.

c)    Neither the Companies act, 1956 nor the depositories act provide for the law of succession or transfer of property. They must be viewed as being sub-silentio (i.e., as being silent on) of the testamentary and other dispositive laws.

d)    If a nomination is held as supreme then it cannot be displaced even by a Will made subsequent to the nomination. this obviously cannot be the case.

e)    The nomination would even oust personal law, such as, mohammedan Law and become all-pervasive.

f)    The  nomination  under  the  Companies  act  is  not subject to the rigour of the indian Succession act in as much as it does not require witnesses as mandated under this act.  It  cannot  be  assailed  on  grounds  of importunity, fraud, coercion or undue influence. there  cannot  be  a  codicil  to  a  nomination.  In  short, a nomination, if held supreme, wholly defenestrates the indian Succession act. According to the judgment in harsha nitin Kokate, a nomination becomes a “Super-Will” one that has none of the defining traits of a proper Will.

g)    Thus,   a   nomination,   even   under   the   Companies act only  provides  the  company  or  the  depository  a quittance. A nominee only continues to hold the securities in trust and as a fiduciary for the legal heirs under Succession Law.

Legal Issues
The recent Bombay high Court judgment may come as great solace for those who were severely impacted by the judgment in the case of Harsha Nitin Kokate. However, it is humbly submitted that it also raises a few interesting legal issues?

Could  a Single judge hold the judgment of another Single judge of the same high Court to be per incuriam or would it have been more appropriate if this question had been referred to and decided by a larger Bench?

Kanga & Palkhivala, in their commentary, the Law and Practice  of  income  tax,  10th  edition,  Lexisnexis,  state that a single judge of a high Court cannot give a decision contrary to an earlier judgment of a single judge of the same high Court.

In CIT vs. BR Constructions, 202 ITR 222 (AP FB) it was held that a single judge cannot differ from the earlier judgments of co-ordinate jurisdiction merely  because  he holds a different view on the question of law for the reason that certainty and uniformity in the administration of justice is of paramount importance. But if the earlier judgment is erroneous or adherence to the rule of precedents results in manifest injustice, differing from an earlier judgment will be permissible. Further, a precedent ceases to be binding when it is inconsistent with the earlier decisions of the same rank or when it is sub silentio or when it is rendered per incuriam. The Court even held that though a judgment rendered per incuriam can be ignored yet when a Single judge doubts the correctness of an otherwise binding precedent, the appropriate course would be to refer the case to a division Bench for an authoritative pronouncement. It also referred to Salmond on jurisprudence which held that the mere fact that the earlier decision misconstrued a Statute is no ground for per incuriam.

A similar view has been taken by the division Bench of the Bombay high Court in CIT vs. Thana Electricity Supply Ltd, 202 ITR 727 (Bom) wherein the Court held that a single judge of a high Court is bound by the decision of another single judge of the same high Court. It would be  judicial  impropriety  to  ignore  that  decision.  judicial comity demands that a binding decision to which his attention had been drawn should neither be ignored nor overlooked. If he does not find himself in agreement with the same, the proper procedure is to refer the binding decision and direct the papers to be placed before the Chief justice to enable him to constitute a larger Bench to examine the question.  the Bombay high Court took this its view based on a Supreme Court decision in the case of Food Corporation of India vs. Yadav Engineer and Contractor AIR 1982 SC 1302.

Conclusion
While one would like to believe that the position as explained by the recent Bombay high Court decision is the correct legal position in law, it would be interesting to see whether this decision is challenged before a larger forum? one feels that we may not have heard the last on the issue of nomination versus legal heirs in the context of shares in a company!

Registration –Agreement to sell – Not required to be compulsorily registered: Registration Act, section 17(1A):

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Swarnendu Das Gupta vs. Smt. Sadhana Banerjee AIR 2015 Calcutta 46

The plaintiff filed a suit against the defendant and the plaintiff in such suit prayed that a decree be passed under Specific Relief Act directing the defendant to execute the sale deed in respect of the suit property in terms of the agreement for sale dated 26-04-2006 entered in between the plaintiff and the defendant. The plaintiff also prayed for a decree directing the defendant not to disturb the possession of the plaintiff from the suit property. The trial court, after hearing the parties and considering the evidence on record, dismissed the said suit and directed the defendant to refund the earnest money. The trial court dismissed the said suit mainly on the ground that the agreement for sale is not a registered instrument and therefore the plaintiff is debarred from getting any relief in the said suit. The plaintiff filed another Appeal. The learned District Judge affirmed the view of the learned Trial Court that since the said agreement for sale is not a registered instrument, the plaintiff is not entitled to get any relief by virtue of the agreement for sale dated 26-04- 2006. The learned First Appellate Court was of the view that since the said agreement for sale is not a registered document as per the provisions of section 17(1A) of the Registration Act, 1908, the plaintiff is not entitled to get any decree.

The Hon’ble High Court observed that a document which happens to be an agreement for sale does not by itself confer any right, title and/or interest in favour of the proposed transferee and it is only a document by which the parties entered into an agreement to create a further document which is called a deed of conveyance. There cannot be any dispute that such deed of conveyance is required to be compulsorily registered if the value of the immovable property is more than Rs. 100/- but since the agreement for sale does not create any such right, title and/or interest, there is no such provision in law which mandates that the said agreement for sale will also have to be registered excepting in cases where section 17(1A) of the Registration Act, 1908 applies. The provisions of the Registration Act, would also clearly indicate that an agreement for sale is not required to be compulsorily registered.

The Court further observed that, section 53A of the Transfer of Property Act stipulates that when a transferee has, in part performance of contract, taken possession of the property or any part thereof or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of contract and the transferee has performed or is willing to perform his part of the contract then in that event the transferor is debarred from enforcing against the transferee any right in respect of such property.

The plaintiff accordingly, gets a decree of specific performance of contract against the defendant/respondent in respect of the suit property in terms of the agreement for sale dated 26-04-2006 and the defendant was directed to execute an appropriate sale deed in favour of the plaintiff/ appellant in respect of the suit property and in terms of the said agreement for sale dated 26-04-2006.

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Partnership – Rights of outgoing partner – Firm continued its business – Retired partner cannot claim share in subsequent profits made by firm: Partnership Act, 1932 section 37.

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Mrs. Halima Bai vs. Sparkle Ads – Firm, Chennai, AIR 2015 Madras 58.

The case of the plaintiff is that the first defendant is the partnership firm comprising of four partners i.e. the plaintiff and defendant nos 2 to 4 by virtue of partnership deed dated 03-04-1992. The partnership firm was engaged in advertising business and allied matters. Each of the partner has contributed a sum of Rs. 10,000/- towards share capital and the partnership was one at will. While so, the plaintiff expressed her willingness to retire from the partnership firm and sent letter on 17-01-1994. The said letter was acknowledged by the defendants 2 to 4 by letter dated 24-01-1994, confirming that the plaintiff was deemed to have retired from the partnership firm with effect from 18-01-1994. Though the plaintiff retired from the partnership firm, the existing partners reconstituted the deed of partnership and carried on their business. It was contended by the plaintiff that the partnership firm did not settle her accounts on retirement despite several demands and that she demanded to settle all her share in respect of transactions from 03-04-1992 to 18-01-1994, till the date of settlement of her dues. The plaintiff also had given break-up of the amounts that she is entitled to from the partnership firm

The suit was contested by the defendants who are the other partners on the ground that the plaintiff was acting detrimental to the interest of the partnership firm. It was further contended that the suit was not maintainable as the plaintiff only retired voluntarily from the partnership firm and the partnership firm was not dissolved as alleged by her.

The Hon’ble Court observed that u/s. 37 of the Partnership Act, the court can grant relief to outgoing partner who has not been made a final settlement and the partnership is carrying out of the business with the surviving partners and the court has jurisdiction to grant such relief based on the findings of the fact. In the instant case plaintiff partner has categorically stated that she voluntarily resigned from the firm. Therefore, she cannot be expected to claim profits of the partnership firm subsequent to her exit as there was no contribution from her side. Share of the partner would be his/her proportion of the partnership assets after they have been all realised and converted into money, all the partnership debts and liabilities have been paid and discharged. Liability to pay arises when the partnership firm is dissolved and the legal existence is taken away. After voluntary resignation of partner from firm even presuming that immovable assets purchased from the plaintiffs participation in the firms as a partner and admittedly the partnership firm was continuing the business even after the exit of the plaintiff, the retired partner can only demand her share, be it an asset or liability based on the value on the date of her exit and she cannot claim profits of the firm.

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A. P. (DIR Series) Circular No. 79 dated February 18, 2015

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Guidelines on Import of Gold by Nominated Banks / Agencies This circular clarifies the operational aspects of the guidelines on import of gold consequent upon the withdrawal of 20:80 scheme as under: –

1. The obligation to export under the 20:80 scheme will continue to apply in respect of unutilised gold imported before November 28, 2014, i.e., the date of abolition of the 20:80 scheme.

2. Nominated banks are now permitted to import gold on consignment basis. All sale of gold domestically will, however, be against upfront payments. Banks are free to grant gold metal loans.

3. Star and Premier Trading Houses (STH / PTH) can import gold on DP basis as per entitlement without any end use restrictions.

4. While the import of gold coins and medallions will no longer be prohibited, pending further review, the restrictions on banks in selling gold coins and medallions are not being removed.

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A. P. (DIR Series) Circular No. 78 dated February 13, 2015

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Risk Management and Inter Bank Dealings: Foreign Currency (FCY) – INR Swaps

Presently, eligible residents who have entered into FCY-INR swaps to hedge their exchange rate and / or interest rate risk exposure arising out of long-term foreign currency borrowing or to transform long-term INR borrowing into foreign currency liability are not permitted to rebook or reenter into the swap once it is cancelled.

This circular permits residents borrowing in foreign currency to re-enter into a fresh FCY-INR swap to hedge the underlying after the expiry of the tenor of the original swap contract that had been cancelled, in cases where the underlying is still surviving.

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A. P. (DIR Series) Circular No. 77 dated February 12, 2015

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Foreign Direct Investment – Reporting under FDI Scheme on the e-Biz platform

This circular states that on and from February 19, 2015 recipients of FDI can now file the following returns using the e-Biz portal with RBI: –

1. Advance Remittance Form (ARF) – used by the companies to report the foreign direct investment (FDI) inflow to RBI.

2. FCGPR Form – which a company submits to RBI for reporting the issue of eligible instruments to the overseas investor against the above mentioned FDI inflow.

This online reporting on the e-Biz platform is an additional facility provided to Indian companies to undertake their ARF and FCGPR reporting and the manual system of reporting will also continue till further notice.

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A. P. (DIR Series) Circular No. 76 dated February 12, 2015

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Foreign Exchange Management Act, 1999 – Import of Goods into India

This circular states that importers are henceforth not required to submit Form A-1 to their banks at the time of making payments to their overseas suppliers for imports into India. However, banks need to obtain all the requisite details from the importers so as to satisfy themselves about the bonafides of the transactions before effecting the remittance.

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A. P. (DIR Series) Circular No. 74 dated February 9, 2015

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Delay in Utilization of Advance Received for Exports

This circular requires banks to: –
1. Follow up with their exporter customers to ensure that export performance (shipments in case of export of goods), in cases where advances have been received for exports from overseas buyers, are completed within the stipulated time period.
2. Undertake proper due diligence so as to ensure compliance with KYC and AML guidelines so that only bonafide export advances flow into India. Doubtful cases and instances of chronic defaulters must be referred to Directorate of Enforcement (DoE) for further investigation.
3. Submit a quarterly statement indicating details of doubtful cases and chronic defaulters (as per Annex) to the concerned Regional Offices of RBI within 21 days from the end of each quarter.

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A. P. (DIR Series) Circular No. 73 dated February 6, 2015

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Foreign investment in India by Foreign Portfolio Investors This circular clarifies the queries received by RBI with respect to investment by Foreign Portfolio Investors (FPI). The queries and the respective clarifications are as under: –

a. Query: The applicability of the directions to investment by FPIs in commercial papers (CPs). Clarification: In terms of the aforesaid directions, any fresh investments shall be permitted in any type of debt instrument in India with a minimum residual maturity of three years. Accordingly, FPIs shall not be allowed to make any further investment in CPs.
b. Query: The applicability of these guidelines on debt instruments having maturity of three years and over but with optionality clause of less than three years. Clarification: FPIs shall not be allowed to make any further investments in debt instruments having minimum initial / residual maturity of three years with optionality clause exercisable within three years.
c. Query: The applicability of these guidelines on amortised debt instruments having average maturity of three years and above. Clarification: FPIs shall be permitted to invest in amortised debt instruments provided the duration of the instrument is three years and above.

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A. P. (DIR Series) Circular No. 72 dated February 5, 2015

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Foreign investment in India by Foreign Portfolio Investors

This circular permits, with immediate effect, Foreign Portfolio Investors (FPI) to invest in government securities the coupons received by them on their existing investments in government securities. These investments will be outside the current limit of US $ 30 billion available for investments by FPI in government securities.

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A. P. (DIR Series) Circular No. 71 dated February 3, 2015

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Foreign investment in India by Foreign Portfolio Investors

This circular clarifies that, with immediate effect, in case of investment by Foreign Portfolio Investors (FPI): –

1. All future investments within the limit for investment in corporate bonds will have to be in corporate bonds with a minimum residual maturity of three years.

2. All future investments against the limits vacated when the current investment runs off either through sale or redemption, will have to be in corporate bonds with a minimum residual maturity of three years.

3. No further investment can be made in liquid and money market mutual fund schemes.

4. There will be no lock-in period and FPI can sell the securities (including those that are presently held with less than three years residual maturity) to domestic investors.

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A. P. (DIR Series) Circular No. 70 dated February 2, 2015

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Notification No.FEMA.334/2015-RB dated January 9, 2015, Foreign Direct Investment in Pharmaceuticals sector – Clarification

This circular states that in terms of Press Note No.2 (2015 Series) dated January 6, 2015 a special carve out has been made for medical devices. As a result: –

a. 100% FDI is permitted in the manufacture of medical devices.
b. Conditions applicable to both green field as well as brown field projects in the Pharmaceuticals Sector will not be applicable to FDI in manufacture of medical devices.

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Coparcenary Property – Right of daughters – Daughter born prior to 9-9-2005 has right to file suit for partition: Hindu Succession Act section 6-

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Babu Dagadau Awari vs. Baby W/o Namdeo Lagad & Ors AIR 2015 (NOC) 446 (Bom) (HC)

The suit was filed by respondent No. 1 – Smt. Baby for partition of Hindu joint family properties and for possession of her share from the properties. The suit was filed in respect of four agricultural lands and three house properties.

The applicant/defendant No. 1 is the father of plaintiff. Defendant Nos. 2 to 4 are also daughters of present applicant. It was contended by the plaintiff that the suit properties are the ancestral properties though they are in the hands of defendant No.1. It was contended that, in view of amendment made in Hindu Succession Act, the plaintiff needs to be treated as coparcener along with defendant No. 1 and other defendants and she has right to claim partition and possession of her share.

The Court relied on the following observations made by this Court in case of Vaishali Satish Ganorkar and Anr. vs. Satish Keshaorao Ganorkar & Ors (2012) (3) Mh. L.J. 669 “14. It may be mentioned, therefore, that ipso facto upon the passing of the Amendment Act all the daughters of a coparcener in a co-parcenary or a joint HUF do not become coparceners. The daughters who are born after such dates would certainly be coparceners by virtue of birth, but for a daughter who was born prior to the coming into force of the Amendment Act she would be a coparcener only upon a devolution of interest in coparcenary property taking place.”

Thus, the Court held that plaintiff has right to file suit for relief of partition in respect of co-parcenary properties though she was born prior to 09-09-2005 and the trial Court had not committed any error in rejecting the application filed by the applicant. In the result, the application stands dismissed.

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Appeal – Abatement– Death of defendant during pendency of appeal – Failure to bring his legal representative on record – Appeal would abate against deceased defendant CPC, C.22 R. 4

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Naveen Shanker Lokure vs. Nascimento Milgares Pereira & Ors AIR 2015 (NOC) 156 (Bom) (HC)

The original plaintiffs namely Jose Francisco Pereira and his wife Ana Francisca Dias had filed the said suit for a declaration that they were exclusive owners in possession of the property allegedly purchased by the defendants no. 1 and 2 namely Shankar Krishnappa Lokure and Shivagundappa Krishnappa Lokure from the defendant no. 3, Aniquinha Maria Apolonia Dias.

By judgment and order dated 29/04/1999, the said suit was dismissed. Plaintiffs filed Regular Civil Appeal No. 70/1999 against the judgment and decree of the trial Judge.

The original defendant no. 3 had died during the pendency of the suit and her legal representatives, namely Mrs. Catherina Ana Dias, along with other legal representatives were brought on record, in the said suit. However, the legal representative Mrs. Catherina Ana Dias had also expired during the pendency of the suit on 23/09/1994. However, her heirs were not brought on record. However, since the husband of the said Mrs. Catherina, namely Francisco Rosario Dias was already on record, there was no abatement of the suit.

In the Regular Civil Appeal No. 70/1999, the deceased Mrs. Catherina Dias was, however, impleaded as the respondent no. 7, as if she was alive. During the pendency of the said Regular Civil Appeal, the husband of the said deceased Catherina Dias, namely Francisco Rosario Dias impleaded as respondent no. 6, died on 01/02/2002. The legal representatives of the deceased Francisco Rosario Dias were not brought on record, in the said Regular Civil Appeal No. 70/1999. Thus the Regular Civil Appeal No. 70/1999, has been decided against two dead persons.

The learned Senior Counsel for the plaintiffs submits that the plaintiffs were not aware of the death of the said parties. In the circumstances above, it appears that in the Regular Civil Appeal No. 70/1999, the decree is passed in ignorance of death of two of the defendants/respondents, the respondent no. 7 having died during the pendency of the suit and the respondent no. 6 having died during the pendency of the said appeal, due to which the appeal had abated against the dead persons.

The High Court observed that in Second Appeal against such a decree, the court cannot itself set aside the abatement nor can it affirm the decree passed by the lower appellate Court. The proper course in such a case is to set aside the ineffective decree passed by the lower appellate Court and remand the case to the court where abatement has taken place leaving the parties to take necessary steps to have the effect of abatement set aside if they so desire and if they can satisfy the Court that parties are entitled to get the abatement set aside under law.

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Appeal High Court – Stricture against Department – Direction to replace advocates in old matters – Otherwise High Court would dispose old matters in their absence

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Commissioner of Central Excise, Thane II vs. Milton Polyplas (I) P. Ltd. (2015) 318 ELT 47 (Bom.)(HC)

In the Central Excise Appeals, the Hon’ble Court noted that the system of filing of Appeals and arguing them has undergone a drastic change. Now, each Commissionerate exercises discretion and chooses to engage an Advocate from a list of Advocates, for representing them. Any such Advocate practicing in this Court and authorised by the concerned Commissionerate to file the Appeal, keeps track of the same and argues it. The vakalatnama to act, appear and plead on behalf of these Commissioners located at various places, thus emanates from the said Commissionerates. At several Commissioners’ offices, there is a legal cell headed by an Assistant Commissioner level officer and either he or the staff of such cell keeps track of the cases pertaining to that Commissionerate, in addition to the Advocate engaged by that Commissionerate.

The Court observed that on several occasions, there is no indication as to who will argue the Appeals on behalf of the Commissioners. It was informed that some nodal officers were present in Court. However, the court cannot take note of their presence. The court is concerned with the Advocates, who have been engaged and authorised to argue cases.

The Advocates regularly appearing before the court informed the Bench that the concerned Commissionerate has not taken any decision as to who should replace one Mr. T. C. Kaushik and thereafter argue the Appeal.

The Hon’ble Court further remarked that when complaints are made, that old matters are not being taken up and given priority, then, firstly the Revenue/State should put its house in order. There are many old matters pending and for more than 10 years that have serious revenue implications. In the circumstances, the court directed the registry to send a copy of this order to the Office of the Chief Commissioner, Central Excise and Customs of each Commissionerate. The Court further observed that the high level officers may apply their mind so as to enable the Court to take up the old Appeals for hearing and disposal. Immediate steps should be taken to replace the old Advocates or else the court will be constrained to dispose off the matters in their absence.

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A. P. (DIR Series) Circular No. 68 dated January 27, 2015

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Anti-Money Laundering (AML) standards/ Combating the Financing of Terrorism (CFT) Standards – Money changing activities

This circular states that the FATF has updated its Statement on the subject and document ‘Improving Global AML/CFT Compliance: on-going process’ on October 24, 2014. Authorized Persons and their agents/franchisees can access the statement/document on the following URLs : http://www.fatf-gafi.org/documents/documents/ fatf-compliance-oct-2014.html & http://www.fatf-gafi. org/topics/high-riskandnon-cooperativejurisdictions/ documents/public-statement-oct2014.html.

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A. P. (DIR Series) Circular No. 67 dated January 28, 2015

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Anti-Money Laundering (AML) standards/ Combating the Financing of Terrorism (CFT) Standards – Cross Border Inward Remittance under Money Transfer Service Scheme

This circular states that the FATF has updated its Statement on the subject and document ‘Improving Global AML/CFT Compliance: on-going process’ on October 24, 2014. Indian Agents and their sub-agents can access the statement / document on the following URLs : http:// www.fatf-gafi.org/documents/documents/fatf-complianceoct- 2014.html & http://www.fatf-gafi.org/topics/high-riskandnoncooperativejurisdictions/ documents/public-statementoct2014. html.

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A. P. (DIR Series) Circular No. 64 dated January 23, 2015

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External Commercial Borrowings (ECB) Policy – Simplification of Procedure

This circular has made the following changes in ECB procedures both under Automatic Route as well as Approval Route with immediate effect: –

1. Banks can now allow: –
a. Changes / modifications (irrespective of the number of occasions) in the draw-down and repayment schedules of the ECB whether associated with change in the average maturity period or not and / or with changes (increase / decrease) in the all-in-cost.
b. Reduction in the amount of ECB (irrespective of the number of occasions) along with any changes in draw-down and repayment schedules, average maturity period and all-in-cost.
c. Increase in all-in-cost of ECB, irrespective of the number of occasions.

However, banks have to ensure that: –
a. The revised average maturity period and / or allin- cost is / are in conformity with the applicable ceilings / guidelines.
b. The changes are effected during the tenure of the ECB.
c. If the lender is an overseas branch / subsidiary of an Indian bank, the changes will be subject to the applicable prudential norms.

2. Banks can also permit : –
a. Changes in the name of the lender of ECB after satisfying themselves with the bonafides of the transactions and ensuring that the ECB continues to be in compliance with applicable guidelines.
b. Cases requiring transfer of the ECB from one company to another on account of re-organisation at the borrower’s level in the form of merger/ demerger/amalgamation/acquisition duly as per the applicable laws/rules after satisfying themselves that the company acquiring the ECB is an eligible borrower and ECB continues to be in compliance with applicable guidelines.

These changes have to reported to RBI within 7 days of the change taking place in Form 83 and also highlighted in the covering letter. Also, these changes have to be reflected in the ECB 2 returns.

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A. P. (DIR Series) Circular No. 95 dated April 17, 2015

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Foreign Direct Investment (FDI) – Reporting under FDI Scheme on the e-Biz platform

This circular provides details of the financial aspects necessary for using the Virtual Private Network (VPN) accounts obtained from National Informatics Centre (NIC) by banks for accessing the e-Biz portal of the Government of India. This e-Biz portal is to be used for reporting of Advanced Remittance Form and FCGPR Form under the FDI scheme.

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A. P. (DIR Series) Circular No. 94 dated April 8, 2015

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Notification No. FEMA.340/2015-RB dated March 3, 2015 Press Note No. 3 (2015 Series) dated March 2, 2015 Foreign Direct Investment (FDI) in India – Review of FDI policy – Sector Specific conditions – Insurance sector

With immediate effect, Paragraph 6.2.17.7 of the Consolidated FDI Policy Circular of 2014 dated April 17, 2014 has been amended as follows: –

Consequential changes have been made in Paragraph 6.2.17.2.2(4)(i)(c) of the Consolidated FDI Policy Circular of 2014 dated April 17, 2014 as under: –

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SEBI to govern commodity contracts too – implications of this Finance Bill proposal

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A long awaited & major change proposed in the Finance Bill 2015, is the merger of law relating to commodity contracts with that of securities contracts. Even the regulatory bodies governing both types of transactions will be merged. Thus, Forward Contracts Regulation Act, 1952 (FCRA) is effectively to be merged with the SEBI Act and Forward Markets Commission to be merged with SEBI. At a first glance, the amendments proposed sound superficial. After all, the definitions of commodity derivatives, commodity contracts, etc. are almost the same under the proposed new scheme, and what is permitted and banned is also similar. So, is it old wine in a new bottle? However, on closer reading, one finds that the changes in law and its implications on commodity trading would be quite significant.

Background
It is interesting to see that SEBI and Securities Laws generally, relatively late-comers to financial markets, saw development in leaps and bounds. Securities Laws developed generally and specifically. Elaborate – perhaps too elaborate in places; law and systems have been put into place. These include regulations, a sophisticated intelligence gathering mechanism, a relatively transparent investigation, adjudicating and enforcement system, etc. In comparison, the law relating to commodity contracts, put into place more than six decades earlier, looked almost ancient. This is despite having huge quantity and volumes in commodity trading.

The turnover on commodity markets is huge, even with the existing relatively rudimentary regulatory structure. The turnover on national commodity exchanges was nearly Rs. 1.80 crore crore during 2013. That is nearly half the turnover on equity markets.

The objective of commodity markets may be different from equity markets. The crop grower, for example, looks up to plan and even hedge his produce, decide what he will produce, what he will sell, when he will sell, what he will store, etc. The buyer too looks at it to decide his output pricing, his product mix, what and how much he will buy and when, how much he will store, etc.

However, perhaps one another reason for the hesitation in making major changes in law was the sensitivity to commodity trading since food crops also happened to be a significant part of commodity trading volumes. Speculation, price manipulation, hoarding, etc, was feared to play havoc to livelihood of farmers and consumers. However, finally, the realisation seems to have sunk in that the answer to that is not keeping hands off, or worse, a relatively poor set of ancient regulations under an ill-equipped regulatory body. The better recourse is to modernise and update the law. Or, as the law makers have chosen, merge it with a body that already has much expertise and infrastructure in a field that is in many ways quite similar to commodity contracts.

The recent massive scam in National Spot Exchange Limited exposed this regulatory gap like never before. What was even more interesting is that many of the players here were also brokers, investors, etc. who operated in the securities markets as well. The practices followed in the spot exchange were also similar. The only difference was that the rules of the game and the regulatory bodies were different. The scam and the subsequent unfolding of facts later showed how inadequate were the law and the systems.

Existing Law
The existing law relating to commodity derivatives was mainly contained in Forward Contracts Regulation Act (FCRA) and rules made thereunder. The governing body is Forward Markets Commission (FMC). FCRA itself has not seen many changes, the last change in 1970 (contrast that with the continuous amendments over the years in SEBI Act). However, significant details are given the Rules, Circulars, Notifications, etc. issued under that Act. Major amendments were sought to be made to give FMC more powers and include several provisions in law that were similar to provisions in Securities Laws. However, the changes could not be finally put in place.

In the existing FCRA, terms like forward contract, ready delivery contract, goods, options, ready delivery contract, etc, are defined. Commodity exchanges regulate the sale and purchase of “goods” and there is a system & criteria for their recognition/registration by the FMC/Central Government. There is a ban/restriction on forward contracts for which the object is to route them through the exchanges. Though drafted in a fairly broad way, there are brief clauses that prohibit making of false statements relating to forward contracts, price manipulation in forward contracts, etc. and provide for their punishment by way of forfeiture, fines and prosecution.

Broadly, the essence and scheme is similar with the Securities Laws such as SEBI Act, Securities Contracts (Regulation) Act (SCRA), and related laws. What is also apparent is the nature of commonality between commodity contracts/derivatives and contracts in securities. The system, the nature of contracts, and even the mathematical sophistication involved in their valuation are quite similar. It makes sense, therefore, that a body having such expertise governs both. The proposal in the 2008/2010 proposed amendments was to create a parallel body and law for commodities that would be quite similar to that under securities laws. Having said that, there are important differences too, warranting special treatment for commodity contracts, which will be discussed later.

Proposals under the Finance Bill, 2015
Part II and III of the Finance Bill, 2015 propose many changes. These are, as will be seen later, merely enabling and do not immediately bring about the change. The changes will come into effect from a date to be notified. The FCRA is sought to be repealed. FMC will be merged with SEBI. The SEBI Act and SCRA will be amended to include certain definitions relating to commodity contracts/ derivatives. Existing commodity markets/associations will become at par with stock exchanges. And so on.

However, it will be a full year before which they will come into effect, and maybe even longer. During this period, SEBI is expected to develop the necessary regulatory base specific to commodity contracts, adapt if needed some of existing law and systems, get the commodity markets/associations change their bye laws and systems to the extent needed similar to existing stock exchanges, etc.

Implications for the law
Clearly, the next one year (and I expect it will be more than a year considering the huge task ahead) would be very busy for SEBI and the commodity regulators/associations. SEBI may appoint one or more Committees to look into the matter and suggest appropriate regulations and/or modification in existing regulations for commodity markets. Model bye laws and similar provisions for commodity markets may be developed and existing commodity associations would be asked to change their bye laws or adapt their existing bye laws, etc. It is possible that considering some specialised aspects of commodity markets, a separate department may be formed.

There are many similarities between commodity contracts and contracts in securities. There are ready delivery contracts for commodities that are treated with less regulations just like spot delivery transactions for securities. The forward contracts and their valuation too have substantial mathematical and structural similarities. Their manipulations too have similarities.

However, there are substantial differences too. Securities are different from commodities in many ways. Commodities are mined, grown, processed, etc. they may have seasonal variation and limited or periodical supplies. they may be renewable or they may be not. they are eventually meant to be usually consumed. Commodities fall into numerous categories and their producers and consumers often fall into very distinct and non-homogenous categories. Many of these differences may eventually need to be reflected into not just the law regulating them but even in the structuring of their contracts. At the same time, considering that most commodities already have a track record of trading and existing well accepted contracts as well as their regulation, the process would not be so much from scratch. In most cases, it may be aligning to a large or small extent the existing contracts and systems into the new scheme. Still the job ahead is large.

The existing regulatory scheme for securities markets are tailor made for capital market operators/intermediaries. there are regulations for companies and listing, intermediaries like brokers/merchant bankers, etc, for mutual funds/alternate investment funds, etc. While there are some lessons to be learnt from these regulations, it is quite clear that commodity market specific regulations would have to be formulated for entities operating there.

Existing regulations for control of malpractices and/or for ensuring fairness are also substantially specific/unique to securities.  The  takeover  regulations  for  example  would have  no  relevance  for  commodity  markets.  the  insider trading regulations too may have very little commonality, if at all, with commodity markets (though curiously the earlier Bills did make provisions for insider trading). Similarly, buyback regulations, corporate governance, etc. would not have relevance. however, the regulations relating to unfair, fraudulent, manipulative practices may be quite relevant though it would need substantial adaptation for commodity markets. perhaps relatively sophisticated and directly applicable  set  of  regulations  would  be  the  regulations relating to adjudication and punishment of violations. The system for investigation, issuing show cause notices, giving a fair hearing, applying certain  well  accepted  principles for levy of penalty or other adverse actions ought to be substantially and directly applied o commodity markets too. So would the regulations relating to settlement by consent orders and compounding.

Implications for Chartered Accountants and other Professionals
This change offers both a new challenge and opportunity for Chartered accountants. Securities laws have welcomed the services offered by Chartered accountants in several ways. Be it audits, advisory, valuation, inspection and investigation, Chartered accountants have the requisite skills and expertise to provide these services. Commodity contracts and markets are likely to become more developed as well as more complex in laws. CAS will have an active role to play in their audits, in valuation, in tax and advisory, in compliance, reporting, and so on.

Conclusion
One might be tempted to argue that SEBI has not wholly removed malpractices in securities markets, even though it has over the years become very powerful. Insider trading  is said to be rampant, price manipulation and scams keep occurring, Satyam happened despite some of the best legal and corporate governance practices in place, etc. So question is while the most recent move will put a very large new market under SEBI it will inevitably make the law very complex. However, clearly, there have been substantial changes  in securities laws whose benefits, tangible or intangible, are  being  seen.  The  number  of  cases  where  violations have been detected and penalties levied is increasing. as perhaps a mark of the sturdiness of the investigation and adjudication process, as all of the law, the decisions of SeBi that are overturned on appeal are also lesser. Thus, in the short term as well as the long term, it would be fair to expect a similar improvement in commodity markets. Eventually, we ought to also see a developed law relating to commodity contracts/markets.

Stamp Duty Ready Reckoner

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Introduction Stamp duty is a significant cost which must be reckoned while entering into an immovable property transaction. Stamp duty is also the second most important source of revenue for the Maharashtra Government. The Maharashtra Government earns a revenue of around Rs. 20,000 crore from stamp duty, second only to VAT . Maharashtra has the distinction of covering maximum instruments within the ambit of the stamp duty net.

Stamp Duty in Maharashtra is leviable on every instrument (not transaction) mentioned in Schedule I to the Maharashtra Stamp Act, 1958 (“the Act”) at the rates mentioned in that Schedule. An Instrument as defined under the Act includes every document by which any right or liability is created, transferred, limited, extended, extinguished or recorded.

Under the Act, stamp duty on instruments relating to immovable property may be levied on any one of the following three basis :

the Fair Market Value of the property;

the Consideration mentioned in the instrument; or

the Area of the property involved.

Duty on certain instruments is on the basis of consideration recorded in the instrument or market value of property, whichever is higher. The term “market value” is defined under the Act to mean the higher of :

the price which the property covered by the instrument would have fetched if sold in an open market on the date of execution of the instrument; or

the consideration as stated in the instrument. The instruments where stamp duty is levied on the higher of the consideration or Fair Market Value are as follows:
Conveyance
Lease Deed
Gift deed
Transfer of lease
Development Rights Agreement
Power of Attorney granted for consideration and authorising to sell an immovable property
Power of Attorney which is for development rights
Trust deed
Partition deed
Release deed
Partnership deed – if the capital contribution is brought in by way of property
Dissolution/retirement deed – if a partner who did not bring in a property takes it on dissolution/retirement
Settlement deed
Instrument of Exchange of property

Section 32A of the Act read with Rule 4 of Bombay Stamp (Determination of True Market Value of Property) Rules, 1995 empowers the Joint Director of Town Planning and Valuation to prepare an Annual Statement of Average Rates of market value for different types of immovable properties situated in every tahsil, municipal corporation or local body area. Pursuant to this, the Joint Director of Town Planning and Valuation prepares an Annual Statement of Average Rates of market value for different types of immovable properties situated in every tahsil, municipal corporation or local body area. This Statement is prepared for a Calendar Year, i.e., 1st January to 31st December of every year and it remains in force for the entire year. The Statement is popularly known as the “Ready Reckoner”. While working out the Average Rates of land and buildings for the Ready Reckoner, the concerned officers are required to take into account the established principles of valuation and any other details that they deem necessary.

Hence, the Ready Reckoner is applicable for the valuation of immovable properties in case of certain instruments.

Ready Reckoner
The Ready Reckoner for Mumbai city divides Mumbai City/Suburbs into various `Village’ numbers and Names. Each Village is further sub-divided into Zones & Sub-Zones. Each Sub-Zone has different Cadastral/City Survey Numbers for various properties.

The Reckoner gives the market values for 5 different types of properties, namely:

Shops/Commercial
Offices
Industrial Property
Residential Property
Developed Land

There are 9 steps to using the Ready Reckoner which are as follows :

(i) F ind the Village Number and Village Name in which the property is located
(ii) A scertain the Zone and the Sub-Zone
(iii) F ind out the CTS No. of the property
(iv) D etermine the type of property, e.g., Residential, Office, etc.
(v) Calculate the Built-up Area of the Flat/Office.
(vi) F ind out the Market Value for the type of Property
(vii) A scertain if there are any Special Factors as prescribed in the Reckoner
(viii) M ake the prescribed Adjustments to the Market Value
(ix) T he Market Value of the Property for Stamp Duty purposes = Adjusted Fair Market Value Rate * Builtup Area of the Property

It is essential to note that the fair market values given in the Ready Reckoner are per square metre of Built-up Area. Hence, the area of the flat must also be converted from square feet to square metre and must be expressed in terms of the Built-up Area. The Reckoner calculates the Built-up Area as Carpet Area * 1.20. The Carpet Area in common parlance means the wall-to-wall area of the flat, whereas the Built-up Area also includes the area of the walls. In addition, there is the concept of Super Builtup /Saleable/Loading Area which is very popular amongst the Builders. It means the Built-up Area plus the pro-rata area for common facilities such as lift, lobby, staircase, passage, etc. It is very important to bear in mind that the stamp duty valuation is neither on the basis of the carpet area nor on the basis of the saleable/super builtup area. It is the built-up area alone which is relevant for this purpose. The conversion rate from sq. metre to sq. feet is 1 Sq. Mtr. = 10.764 Sq. Ft. The Maharashtra Flat Ownership Agreement Act, 1963 now makes it mandatory to mention the carpet area in the Agreement. Hence, arriving at the built-up area is a factor of 20% over the carpet area. However, if the built-up area is mentioned in the Agreement, then that alone must be considered. In cases where only saleable area is mentioned, it may be worthwhile to obtain a Certificate of the Carpet Area from a valuer or from the Municipal Tax Bills.

One of the Special Factors on account of which an adjustment is to be made is whether the building in which the property is located has a lift. Depending upon the number of floors in the building and the fact whether or not the building has a lift, an increase or decrease must be made in the value of the property.

Another adjustment is to be made on account of depreciation. The Reckoner prescribes different depreciation rates based on the age of the property. The lowest rate is Nil for a 2 year old structure and the highest depreciation rate is 70% for a structure which is 60 years old or more. Depreciation is calculated on the adjusted fair market value of the property as given in the Reckoner. The stamp authorities insist upon the proof of the age of the building before allowing the claim of depreciation. Some of the proofs relied upon are the Building Occupation Certificate (OC), Municipal Assessment, etc.

The example given below illustrates the method of calculating the fair market value of a residential flat by using the Ready Reckoner. The facts are as follows :

(i) R esidential Flat at Nepean Sea Road
(ii) The Carpet Area of the flat is 1,800 sq. ft.
(iii) T he Building was constructed in 1976 (38 years old) and it has 15 Floors.
(iv) The Agreement Value of the flat is Rs. 10.50 crore and the stamp duty on the basis of the Agreement Value @ 5% comes to Rs. 52.50 lakh.

The  fair  market  value  calculation  would  be  done  as under :
Village name and number : malabar hill & Khambala hill – no. 7
Zone/Sub-zone : 7/61 CTS no. of plot – 1/ 600
Built-up area of flat : carpet area 1,800×1.2  = 2,160 sq.ft
= 2,160/10.764 = 200 sq. mtr.
Built-up area rate/sq. mtr. : Rs. 8,50,100 depreciation as per table : 40%
add for lift : 10%
Basic   rate   +   10%   for   lift   (-)   40%   depreciation   : rs. 5,61,066 area (sq.mtr)    : 200 sq. mtr.
Value as per reckoner : Rs. 11.22  crore agreement Value    : Rs. 10.50 crore
Value for levying duty – higher of two Values:  Rs. 11.22 crore
Stamp duty on reckoner Value    : Rs. 56.10 lakh
Stamp duty on agreement Value    : Rs. 52.50 lakh
higher Stamp duty due to reckoner :Rs. 3.60 lakh

Closed garages or parking spaces under stilts are valued at 25% of the rate applicable to flats in that zone. Open (to sky) parking spaces are valued at a rate equal to 40% of developed land rate in that zone.

The  ready  reckoner  also  lays  down  the  method  of valuation of tenanted property. the accepted method of valuation  is  the  rent  Capitalisation  method.  there  are two methods of valuation depending upon whether the tenanted  area  is  less  than  the  fSi  available  or  equal to  or  more  than  the  FSI available.  Further,  in  case  the tenants are given any alternative accommodation, then an adjustment is required to be made for the same.  For instance, where tenanted area is equal to/more than FSI available, the valuation of the property is 112 times the monthly rent. however, this concessional valuation method is only available in case of those properties where there is documentary evidence of tenancy for 5 years or more  or  at  least  since  30th  march  2000.  The  tenancy proofs  considered  are  ration  Card,  tenancy  receipt, municipal tax Bills in name of tenant, telephone bills, etc.

The  ready  reckoner  Values  may  give  absurd  results in the event there is a fall in the property values in a particular  year.  For  instance,  under  the  current  ready Reckoner the value of all Office premises in a certain area at  nariman  point  is  Rs.  48,120  per  square  foot.  While some buildings may be able to command such prices, not all buildings and within them not all offices can get such an astronomical price!

Of late, there is a new trend in the reckoner. the same CTS  no.  appears  in  two  different  zones  of  the  same village with different rates for the same CTS no. to give an example, in the Colaba division, there is one CTS no. which has a rate of Rs. 6,13,100/square metre and also a rate of Rs. 3,44,700 per square metre, i.e., a variation of more than 170%! there are several such duplications in the reckoner. What does one do in such a scenario – adopt the lower of the two rates? the registrar’s answer is very clear – adopt the higher of the two rates!!

The average increase in the rates in the 2015 reckoner over the 2014 is 10%. thus, while the State Government has brought down the stamp duty rates to a maximum of 5%, it is increasing the reckoner rates every year.

Valuation of Development Agreements
A recent feature in the Ready Reckoner is a specific valuation  mechanism  for  development   agreements  or DAS. under a DA, a land owner grants a right to a developer to enter upon his land and develop the same. the  consideration  for  the  same  may  consist  of  one  or more or a combination of the following modes:

(a)    DA for Money – where the consideration paid by the developer is money. In this case, the valuation for stamp duty is straight forward since it is akin to  a  transfer  of  land  and  the  reckoner  rates  for developed land would be applicable.

(b)    DA for Area Sharing – where the consideration by the developer consists of built up area in the property under development. thus, under this case, the land owner would give a da of certain portion of the land retaining the balance area. on this balance area, the developer would carry out a construction for the owner. In this case, the valuation for stamp duty gets complicated. In cases of da with area Sharing, one question which always arose when working out the land owner’s taxation was that, how should the consideration be valued? Some decisions have held that the cost of construction of the building on the owner’s portion of the land should be treated as  the sale consideration – NS Nagaraj[TS-744- ITAT-2014 (Bang)].

The  Bombay  high  Court,  in  cases  of  Prabha  Laxman Ghate vs. Sub Registrar and Collector of Stamps, AIR 2004 Bom. 267 and Chandrakant B. Nanekar vs. State of Maharashtra, PIL No. 54 of 2011, has held that in a da with Area Sharing where flats are constructed by the developer on the owner’s land area, it is clear that there is no transfer of property or interest in property by the owner in favour of the developer. All that is provided is that the developer shall develop the property and reserve for the owner certain flats on the said property. The owner, therefore, continues to be the owner of the flats, which are reserved for him on his own land. Therefore, there was no question of the owner being called upon to pay stamp duty on such flats. The State Government has issued a Circular dated 1st March 2014 to the same effect.

accordingly, in the case of a da with area Sharing, the reckoner now provides for a valuation mechanism which adopts the higher of the following two values as the valuation:

(i)    Construction cost of land owner’s area; plus monetary consideration, if any, to the owner. in case any deposit is paid to the owner, then interest on the same must be considered @ 10% p.a. or a higher rate, if expressly provided in the DA.

or

(ii)    Area for which da given to developer * rate for developed land under the reckoner

In  working  out  the  above  values,  fungible  FSI  allowed under  the  development  Control  regulations  should  be added and fungible FSI premium payable for the same should be reduced. further, development fees payable by the developer to the BMC should be added in valuing the construction cost of land owner’s area.

Further, if the developer were to retain any flats/offices/ shops for his own personal use under a da, then from the market value of such premises based on the reckoner, the cost of construction  of  the  new  premises  would  be reduced. only the balance would be leviable with stamp duty.

(c)    DA for Revenue Sharing – where the consideration to the owner consists of a share in the revenue earned by the developer from selling the property. Under this case, the land owner would give a DA  for the entire land and receive a share of the gross revenue. In this case, the valuation for stamp duty also gets complicated and is explained below.

In the case of a DA with revenue Sharing, the reckoner provides for a valuation mechanism which adopts the higher of the following two values as the valuation:

(i)    Owner’s share as per allowable use as on date as per today’s selling price * 0.85; and monetary consideration, if any, to the owner.  In case  any deposit is paid to the owner, then interest on the same must be considered @ 10% p.a. or a higher rate, if expressly provided in the DA.

or

(ii)    Full area for which DA given to developer * rate for developed land under the reckoner.

Importance of Stamp Duty valuation
The  Stamp  duty  valuation  of  an  immovable  property  is increasingly becoming important also as a reference point under various other laws:

(a)    Section 50C of the income-tax act states that if the sale consideration  received for transfer of a land  or building or both, held as a capital asset, is less than the value adopted for payment of stamp duty, then the value adopted would be deemed to be   the sale consideration. in this context, the decision of the Kolkata itat in the case of Chandra bhan Agarwal, [2012] 21 taxmann.com 133 (Kol. iTAT) rendered in the context of fair market value u/s. 50C is very appropriate to our case:

“….The expression ‘fair market value’, in relation to any immovable property transferred, means the price the immovable property would ordinarily fetch on sale in the open market on the date of execution of the instrument of transfer of such property. The fair market value is the best price which vendor can reasonably obtain in the circumstances of the particular case and what is required to be done  for the ascertainment of such market value is to ascertain the price which a willing, reasonable and prudent purchaser would pay for the property. In ascertaining that, all factors having any depressing or appreciative effect on the value of the property have to be taken into account ….. The value of    a property cannot be stated in an abstract form and it varies from time to time and can only be stated with reference to so many factors, i.e., the locality, situation, general appearance in the area, availability of shopping and marketing facilities, condition of public ways and transportation, availability of utilities, and many other things. …….
The provisions of section 50C, in the present context, state the  fair  market  value  and  value  is estimation of a probable price of the property, i.e., the deeming fiction. The deemed value is to be ascertained and for that, as discussed above, section 50C has postulated certain conditions. In the instant case, the fair market value estimated by DVO has been challenged as DVO’s report has no basis, because it has not discussed any  of the factors, such as locality, situation, general appearance in the area, availability of shopping and marketing facilities, conditions of public ways and transportation, availability of utilities etc. and etc. The DVO’s report is a cryptic one, and the assessment is based on value as assessed by Registrar and that also on the basis of additional stamp duty asked for. …………..  In this case,  the DVO has not ascertained any market value which a willing, reasonable and prudent purchaser would pay for this property. Even the DVO has not considered the factors having any depressing or appreciative effect on the value of the property.”

Thus,  the  ITAT  has  very  clearly  stated  that  even  the valuation must consider all value depressing factors.

(b)    Similarly, section 43Ca of the income-tax act provides that if the sale consideration received for transfer of a land or building or both, held as stock- in-trade, is less than the value adopted for payment of stamp duty, then the value adopted would be deemed to be the sale consideration.

(c)    If an individual or an huf gets any immovable property without consideration, the stamp duty value of which exceeds Rs. 50,000 then the stamp duty value would be treated as his income u/s. 56(2). Similarly, if he buys any immovable property for a consideration which is lower than the stamp duty valuation by Rs. 50,000 or more, then the difference would be treated as the income of the buyer.

(d)    The  maharashtra  Vat act  levies  Vat  for  builders under the Composition Scheme @ 1% of the value adopted for payment of stamp duty or the agreement value, whichever is higher.

(e)    The property tax is levied based on the Stamp duty ready reckoner Valuation.

(f)    The final nail in the coffin is the Fungible FSI Premium payable to the BMC under the development Control regulations.  It is calculated as a percentage of the reckoner Value of the property.

Thus,  the  reckoner  value  is  becoming  an  increasingly important source of revenue not just for the Stamp Office but also for other revenue departments.  it is one arrow which Kills Six Sparrows!

Conclusion
Several Supreme Court and high Court decisions have held  that  the  ready  reckoner  Valuation  is  not  binding on the assessees and it is at best a prima facie guideline for  valuation.  inspite  of  that  the  registration authorities insist  upon   following  the  reckoner  with  the  result  that the property buyer has no option but to pay or litigate. an added consequence of this is now that the property seller could also end up paying tax on deemed income in respect of the property sold by him. hence, the reckoner is a very dangerous sword in the hands of the State Government which needs to be wielded with great discretion or else   it runs the risk of playing havoc in property transactions. the decision of the allahabad high Court in the case of Praveen Kumar Jain [TS-10-HC-2015(All)] against steep and  arbitrary  increases  in  the  Stamp  duty  reckoner values is an eye opener in this respect:

31.    The steep and mechanical increase or decrease in circle rates makes the life dearer. In a country where more than 35% population is below the poverty line, the power conferred by Stamp Act to provide circle rate for the purpose of minimum evaluation of property to ascertain stamp duty increases the living cost where the citizen    is the ultimate sufferer. In a welfare society, the District Magistrate or the Collector does not have got power to discharge their obligation mechanically without assigning reason, more so where the citizens have to pay from their pocket with regard to sale and purchase of property.

32.    In a welfare State, the Government is supposed to act or work in a just and fair manner and people should not be burdened to pay stamp duty by increase of circle rate every year mechanically. It should not be forgotten that the essential requisite for the levy of stamp duty by the State is the existence of an instrument evidencing a transaction by the citizens. The transaction is convened to the instrument whereby property is transferred. The provision does not seem to confer a power to increase stamp  duty  mechanically  to  generate  revenue   by  the State.

33.    Once a circle rate is provided after making necessary exercise in pursuance to Rules (supra), there appears to be no reason to revise it mechanically, that too without taking note of the ground realities and the poverty ridden society. …………
Life should not be made overburdened by swift change of law/circle rate to generate fund without utilising the available resources honestly with fairness to the last penny. Moreover, the purpose of Stamp Act does not seem to generate revenue as regular source of revenue like tax statutes and other alike enactments.

Decision must be conscious keeping in  view  the ground financial capacity/problem of the commoners or lower and middle class of society who constitute the bulk of the country.

….To sum up, while issuing the circular or order in pursuance to Stamp Act read with 1997 Rules(supra) framed thereunder, it shall be obligatory on the part of the Collector/District Magistrate to assign reason and do necessary exercise in view of Rule 4 read with Rule 5 of the Rules to ascertain necessity to increase or decrease circle rate. Since the impugned order does not contain any reference to the exercise done with reference to Rule 4 read with Rule 5, it does not seem to be sustainable and violative of statutory mandate.

34.    It appears that the Collectors/District Magistrates all over the State changed the circle rates mechanically without taking a note of the legal proposition discussed hereinabove, which does not seem to be justified.  It shall be appropriate that the Chief Secretary/Principal Secretary, Revenue should circulate the present judgment to all the District Magistrates/Collectors for future guidance during the course of revision of circle rates. Henceforth, circle rate shall not be revised except keeping in view the observation made in the body of present judgment.”

In conclusion, we may repeat the words of india’s former prime minister Dr. Manmohan Singh:

“I think as far as black money in real estate is concerned, unfortunately that is a reality and one way out of this would be to lower the stamp duties,…… stamp duties in the country are a big obstacle to cleaning the mess with regard to transactions in real estate…”

Is anybody listening?

Procedure of Enquiry (Continued) – Part III Shrikrishna

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Procedure of Enquiry (Continued) – Part III Shrikrishna

(S) — Oh Arjun. You are coming just now? I was about to leave.

A — Sorry. I was held up in the income tax office. S — So late in the evening? Surprising! Government officers have become so sincere?

A — N o. This is the result of not working sincerely when they should have worked. Now scrutiny assessments are getting timebarred. So they make us dance!

S — But that is upto 31st of March. Isn’t it?

A — Y es. But sometimes some ‘special work’ remains. That needs to be completed in April.

S — A nyway. You wanted to know something about disciplinary proceedings.

A — Y es. That my friend has sent a reply to the Institute. I mean, to Director-Discipline.

S — N ow, as I told you, it will be sent to the complainant. He will write a rejoinder. After that, the disciplinary directorate will decide whether the respondent – that means your friend – is prima facie guilty or not.

A — T hat much you told me last time. I want to know how the enquiry is conducted.

S — See, if you are prima facie guilty, you are again given an opportunity to submit your explanation to the prima facie opinion. Then you are called for enquiry.

A — I s it always at Delhi? S — I t depends. Usually the Disciplinary Committee (‘DC’) or Board of Discipline (‘BOD’) holds a camp of one or two days in all major cities by rotation.

A — Y ou mean, they go to various places with all the records?

S — Y es. Mumbai, Ahmedabad, Chennai, Bengaluru, Kolkata etc. They carry all the records. Their staff members also travel with the members of DC or BOD.

A — O h!

S — T he record they carry is massive! Nothing is left in the regional offices. It is totally centralised.

A — O K. How do they hold an enquiry?

S — See. If it is a First Schedule offence, it is before BOD.

A — Who are on BOD?

S — P resident, another Central Council Member (CCM) and a Government nominee. Two members form a quorum.

A — And DC?

S — D C deals with offences covered under Second Schedule or when there are offences under both the Schedules. I t consists of 5 members. President, 2 CCMs and 2 Government nominees. Quorum is of three. But at least one Government nominee’s presence is a must. That is not so for BOD.

A — Complainant is also present?

S — Yes. He and his counsel also, if any.

A — But what if complainant does not come?

S — Still, the enquiry is conducted.

A — Do they give adjournments?

S — Y es. But only once! You cannot repeatedly seek time unlike your tax proceedings.

A — R espondent also can take a counsel?

S — O f course, yes. He can be a lawyer or a CA or a CS or ICWA member.

A — What do they ask?

S — Firstly, all the parties present are asked to identify themselves. E verything is tape recorded. You have to speak into the mike.

A — O h! Everything is in English?

S — Y es. But sometimes, parties do not know English; or cannot speak in English. Then they can speak in Hindi or another language, which needs to be translated.

A — I see.

S — T hen, Complainant and Respondent are put on oath. The BOD and DC have the powers of a Civil Court. So they can administer oath. The complainant is asked to read out the charges. The Committee asks questions to the complainant to define the charges.

A — A nd what if the complainant is not there?

S — T hen, the Administration does that job.

A — T hen?

S — T hen the Respondent is asked whether he has understood the charges. After that, he is asked whether he pleads guilty or he denies the charges and would like to defend himself.

A — O bviously, he will try to defend himself. S — Sometimes, the guilt is so patent and self-evident that it is pointless to defend. The BOD or DC members appreciate if you candidly accept the guilt. That helps in softening the punishment.

A — T ell me the punishments again. You had told me once, but I forgot.

S — F or First Schedule item, the punishment is one or more of the following three: A reprimand or fine not exceeding Rs. 1 lakh and/or suspension of membership for a maximum period of 3 months.

A — A nd for Second Schedule offence?

S — A gain one or more of the three. A reprimand or maximum fine upto Rs. 5 lakh, and/or suspension of membership for any length of time.

A — O h! My God!

S — A rjun, now I am in a bit of a hurry. I will explain the further part when we meet next.

A — A s you please, Lord!

S — Tathaastu !

NOTE: This dialogue is based on the procedural rules contained in Chartered Accountants (Procedure of Investigations of Professional and other misconduct and conduct of cases) Rules, 2007 published in official Gazette of India dated February 28, 2007 (‘Enquiry Rules’).

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Stay on Recovery – Appeal filed before first Appellate Authority – Stay Application pending – Recovery of the amount by attaching the bank account not justified: Central Excise Act, 1944.

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Patel Engineering Ltd. vs. UOI 2015 (315) ELT 533 (Bom.)

The
Revenue proceeded to recover the entire amount by attaching the bank
account towards demand on account of service tax and penalty even though
the stay application was pending.

The grievance of the
Petitioner is that though an appeal has been filed before the
Commissioner of Central Excise (Appeals) against an order of
adjudication and even the stay application was pending, the Revenue
proceeded to recover the entire amount by attaching the bank account.
This action was purportedly taken in pursuance of a circular dated 1st
January 2013 of the Central Board of Central Excise and Customs.

The
Court observed that the circular has been considered and has been dealt
with in a judgment of this Court in Larsen & Toubro Limited vs.
Union of India (2013) (288) ELT 481 (Bom) wherein the court observed as
under:

“….The impugned circular dated 1 January 2013 mandating
the initiation of recovery proceedings thirty days after the filing of
an appeal, if no stay is granted, cannot be applied to an assessee who
has filed an application for stay, which has remained pending for
reasons beyond the control of the assessee. Where however, an
application for stay has remained pending for more than a reasonable
period, for reasons having a bearing on the default or the improper
conduct of an assessee, recovery proceedings can well be initiated as
explained in the earlier part of the judgment…..”

The court
further observed that there was no reason or justification on the part
of appellate authority to keep the stay application pending and take
recourse to coercive remedies under the law.

The law laid by the
Court on the interpretation of the circular of the Central Board of
Central Excise and Customs would bind all authorities who are subject to
the jurisdiction of this Court. In this case, we are of the view that
the court directed the appeal which has been filed by the Petitioner, to
be disposed of expeditiously by the Commissioner of Central Excise
(Appeals) within a period of four weeks of the date on which an
authenticated copy of this order is produced on the record.

The
Court further directed that henceforth the controlling authority shall
issue a circular to all the authorities within his jurisdiction that the
directions contained in the judgment of this Court in Larsen &
Toubro Limited (supra) shall be duly observed.

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Document not compulsorily registerable– Irrevocable Power of attorney – Relating to transfer of immovable property is liable for compulsory registration- Registration Act, 1908, section 17(1)(g).

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Jai Kumar vs. Hanuman & Ors. AIR 2015 Rajasthan 24 The petitioner plaintiff Jai Kumar through his power of attorney holder brother Yogesh Chandra filed a suit for declaration and permanent injunction against the respondent defendant. When during the course of statement by the power of attorney holder Yogesh Chandra the power of attorney given by the plaintiff – Jai Kumar was sought to be exhibited, an objection was raised that the power of attorney was neither registered nor the same bear requisite stamp duty and therefore, the same was inadmissible in evidence.

In reply, it was contended that the document was not required to be registered and as the power of attorney was executed at Qatar before the Indian Embassy and requisite fee amounting to 75 Qatari Riyals was paid, the same was sufficient in terms of sections 32 and 33 of the Indian Registration Act, 1908 (`the Act’).

The trial court came to the conclusion that the power of attorney was required to be compulsorily registered u/s. 17(1)(g) of the Act and as the same was not registered, u/s. 49 of the Act, the same was inadmissible.

The Hon’ble Court observed that a bare look at the said provision reveals that the power of attorney relating to transfer of immovable property should be `irrevocable’ for the same to be liable for compulsory registration.

The power of attorney nowhere indicates that the same was irrevocable. The requirement of applicability for provision of section 17(1)(g) of the Act, i.e. the power of attorney must be irrevocable, not being present in the document, it cannot be said that the same was compulsorily registerable.

The trial court without considering the said aspect has presumed the power of attorney as irrevocable, which presumption on face of it is incorrect and as such the said finding cannot be sustained.

So far as the objection raised by learned counsel for the respondent regarding deficient stamp duty is concerned, the submission has substance. The document and the receipt alongwith the document, does not indicate payment of any stamp duty on the said power of attorney. The amount of 75 Qatari Riyals said to have been paid by the plaintiff Jai Kumar cannot be said to be a payment of stamp duty.

Even otherwise, under the provisions of section 20 of the Stamp Act, even if a stamp duty has been paid in another State and the document is brought within Rajasthan, the document is chargeable with the difference of duty in case the duty to be paid is higher and the duty should have been already paid on the document `in India’.

In that view of the matter, even if, any payment has been made by the Petitioner at Qatar, which though cannot be termed as payment of stamp duty, and the Power of Attorney is liable to payment of stamp duty under article 44 of the Schedule attached to the Stamp Act.

The document was, therefore, liable to be dealt with by the trial court u/s. 39 read with sections 37 and 42 of the Stamp Act for determination and payment of deficient stamp duty.

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Probate of Will – Will though not probated, that does not prevent vesting of property of deceased in executor-Succession Act, 1925 section 211,213.

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In the case of Subodh Gopal Bose, AIR 2015 Calcutta 27

One Subodh Gopal Bose, was the owner of substantial properties, both movable and immovable. He died on 1st August, 1975 after having made and published his last will and Testament dated 8th July 1975 leaving behind as his only legal heirs, his wife Kamala Bose, and four daughters. Who are the beneficiaries under the said Will and Testament? Kamala Bose expired in 1977. Gita Dutta, one of the daughters, expired in June 2012. The present petition has been filed by Dipak Sarkar in his capacity as the executor of the will and Testament dated 28th April 2012 made and published by Gita Dutta. Application for grant of probate of the said will of Gita Dutta is still pending.

Vesting of property of deceased in executor does not take place as a result of probate. On the executor accepting his office, the property vests in him and the executor derives his title from the Will and becomes the representative of the deceased even without obtaining probate. The grant of probate does not give title to the executor. It just makes his title certain. U/s. 213 of the Indian Succession Act, the grant of probate is not a condition precedent to the filing of a suit in order to claim a right as an executor under the Will. The vesting of right is enough for the executor to represent the estate in a legal proceeding. The right of action in respect of personal property of the testator vests in the executor on the death of the testator. S/s. 211 and 213 of the said Act have different areas of operation. Even if the will is not probated that does not prevent the vesting of the property of the deceased in the executor and consequently, any right of action to represent the estate of the executor can be initiated even before the grant of probate.

The present petitioner has made this application in his capacity as executor of the last will and Testament of Gita Dutta. However, no Court of competent jurisdiction has granted probate of such will as yet although application for such probate may be pending. As such, the present petitioner cannot exercise any right as executor of the will of late Gita Dutta.

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Precedent – Judicial Discipline – Conflicting decisions by CESTAT Benches – Appropriate Course for the second Bench is to refer the matter to the Larger Bench: Central Excise Act, 1944.

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CCE, Mumbai vs. Mahindra and Mahindra Ltd. 2015 (315) ELT 161 (SC)

There is a conflict of opinion between two Benches of the Customs, Excise and Service Tax Appellate Tribunal.

Since two Benches of the same strength of Members have taken two conflicting views, that judicial discipline requires that instead of disagreeing with the view taken by the First Bench, the appropriate course for the second Bench would have been to refer the matter to a Larger Bench. This is the basic requirement of judicial discipline. Since this has not been done, the orders were set aside and remand both the appeals back to the Tribunal and directly the President to constitute a larger bench of three Members to decide the issue.

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Co-operative Societies – Charge on immovable property of Member borrowing loan – Society to get charge recorded in record of rights: Maharashtra Co-op Societies Act, 1961, section 48.

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Gajanan Eknath Sonan Kar vs. Shegaon Shri Agrasen Co-op. Credit Society Ltd. Buldana & Anr. AIR 2015 (NOC) 163 (Bom.)

The appellant plaintiff purchased, admeasuring 2 acres by registered sale deed dated 19-04-2002 from Raju Gopikisan Rathi. Before purchasing the property, he had ascertained, by all known methods, the saleable interest of the vendor. He had verified 7/12 extract when he purchased the land in the year 2001-02 but there was no charge mentioned in the said 7/12 extract. The vendor Raju Gopikisan Rathi on 17-06-2002, i.e. after the execution of sale deed in favour of appellant, mortgaged the said property with respondent No.1 Credit Co-op. Society, which granted him loan by mortgage of the said property without verifying whether he had sold the property to the appellant. Raju Rathi was member of respondent No.1 Credit Co-op. Society since he obtained the loan but the appellant had no concern with the said society. Obviously, because he had purchased it even before it was mortgaged. The appellant plaintiff issued a notice on 27-08-2012 u/s.164 of the MCS Act and filed suit on 10-09-2012, i.e. before the expiry of two months period for perpetual injunction u/s. 38 of the Specific Relief Act against respondent No. 1 Society and claimed injunction against Society for attachment of suit property. Respondent No. 1 Society, i.e. defendant No.1 therein, filed an application with a prayer to dismiss the suit for non compliance of section 164 of the MCS Act. The application was heard and the trial Judge allowed the said application and dismissed the suit.

The Hon’ble Court observed that it is thus clear from the above facts that the mortgage was made two months after the sale deed was executed and actually mutuated on 25- 11-2003 in the revenue records. Therefore, the appellant was not at all aware about the future course of action which Raju Rathi had decided to adopt after execution of sale deed. He is, therefore, at all not concerned with the mortgage made with the respondent No. 1 Credit Society. What is relevant is the entry of charge and the date thereof in the revenue record of the Govt. and not in the office of the society. At any rate, mere filing of application for loan on 14-12-2001 cannot be said to be charge u/s. 48 and Rule 48(5) of the Act and the Rules.

A careful reading of section 48 of the MCS Act and Rule 48 of the Rules framed thereunder, establishes that for knowledge to the people at large about the charge over immovable property or for claiming protection of section 48 of the Act, it would be mandatory for the society to get the charge on immovable property created or recorded in the record of rights maintained by the village officers of the village where the property is situated. Sub-rule 5 clearly says that if such charge is shown in the record of rights the same shall be treated as a reasonable notice of such charge created u/s. 48. Therefore, unless and until there is compliance of these two provisions, namely section 48 and Rule 48(5), the people at large cannot be expected to know about the charge, if any, on immovable property. In other words, if a society wants to claim protection or benefit of section 48 of the MCS Act, the same can be obtained only from the date the charge is actually recorded in the record of rights and not otherwise. I hold that provisions of section 48 and Rule 48(5) are mandatory in nature for a cooperative society if a cooperative society wants to claim benefit/protection of the said provisions.

It is well settled legal position of interpretation that when a similar expression is used in different places in a statute, it carries the same meaning unless contrary intention is disclosed. The institution of the suit claiming perpetual injunction to protect the civil right of the appellant qua the suit property cannot be said to be either an `act’ touching the business of the society even for that matter, `dispute’ touching the business of the society. It must always be construed that the `act’ touching the business of the society means `legal’ act for attracting the provision of section 164 of the Act. The act of the society in mortgaging the suit property which was already sold to the appellant who was not even a member of the society cannot fall in the definition of section 164 of the Act. Therefore, the provisions of section 164 will have no application in addition because the plaintiff wants to exercise his independent civil right.

The Respondent No. 1 Society is unnecessarily harassing the appellant/plaintiff without even bothering to look that the fault clearly lay with the respondent No. 1 Society in not taking the search report in respect of execution of sale deed in favour of the appellant on 19-04-2002 as against the charge being recorded in the revenue records on the suit property on 25-11-2003 for the first time. The respondent No.1 society is not at all justified in harassing the appellant when he has innocently and bona fidely and with all care, caution and circumspection purchased the suit property. Respondent No.1 should be saddled with exemplary costs payable to the appellant in the sum of Rs.10,000/-.

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A. P. (DIR Series) Circular No. 63 dated January 22, 2015

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Notification No. FEMA331/2014-RB dated December 16, 2014] Export and Import of Indian Currency

This circular now permits individuals from India visiting Nepal or Bhutan to carry currency notes of Rs. 500 and / or Rs.1,000 denominations, up to Rs. 25,000.

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A. P. (DIR Series) Circular No. 101 dated May 14, 2015

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Export of Goods and Services- Declaration of Exports of Goods/Software

This circular states that in case of exports through the EDI ports declaration of export of Goods/Software in the SDF is not to be made as the necessary details are included in the Shipping Bill format.

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A. P. (DIR Series) Circular No. 98 dated May 14, 2015

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Foreign Currency (Non-Resident) Account (Banks) (FCNR (B)) Scheme

This circular clarifies that A2 Form is not required to be filled at the time of remittance of FCNR (B) funds. Also, to ensure hassle free remittance of funds to the account holder, banks, with the help of technology, will have to devise better alternatives/methods for ensuring bonafides of the transaction and not insist on physical presence of the account holder.

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DIPP – Circular F. No. 5(1)/2015-FC-1 dated the 12th May, 2015

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Consolidated FDI Policy

The DIPP has released the Consolidated FDI Policy on May 12, 2015. This circular subsumes and supersedes all Press Notes / Press Releases / Clarifications / Circulars issued by DIPP, which were in force as on May 11, 2015 and reflects the FDI Policy as on May 12, 2015. However, Press Note 4 of 2015, dated April 24, 2015, regarding policy on foreign investment in pension sector, will remain effective. This Circular will take effect from May 12, 2015 and will remain in force until superseded in totality or in part thereof.

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A. P. (DIR Series) Circular No. 97 dated April 30, 2015

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Merchanting Trade to Nepal and Bhutan

This circular states that, since Nepal & Bhutan are land locked countries, goods consigned to the importers of Nepal and Bhutan from third countries under merchanting trade from India would qualify as traffic-in-transit, if the goods are otherwise compliant with the provisions of the India-Nepal Treaty of Transit and Indo-Bhutan Treaty of Transit respectively.

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DIPP Press Note No. 5 (2015 Series) dated April 27, 2015

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Streamlining the Procedure for issue of Industrial Licenses

Presently, the initial validity of Industrial License for Defence Sector is 3 years, extendable to 7 years.

This circular has increased the initial validity of Industrial License in the Defence Sector to 7 years, further extendable up to 3 years. This change will be applicable to all existing as well as future Licenses.

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Given below are the highlights of certain RBI Circulars, 2 DIPP Press Notes and 1 DIPP Circular

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DIPP Press Note No. 4 (2015 Series) dated April 24, 2015

Policy on Foreign Investment in the Pension Sector – addition of paragraph 6.2.17.9 of Consolidated FDI Policy Circular of 2014’

This Press Note states that the Government has decided, with immediate effect, Foreign Direct Investment in the Pension Sector as under: –


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A. P. (DIR Series) Circular No. 56 dated 6th January, 2015

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Non-resident guarantee for non-fund based facilities entered between two resident entities

Presently, general permission has been granted to nonresidents to issue guarantee for non-funded facilities such as Letters of Credit/guarantees/Letters of Undertaking (LoU)/Letter of Comfort (LoC) entered between two persons resident in India.

This circular clarifies that resident entities that are subsidiaries of multinational companies can also hedge their foreign currency exposure through permissible derivative contracts entered into with a bank in India on the strength of guarantee issued by its non-resident group entity.

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A. P. (DIR Series) Circular No. 55 dated 1st January, 2015

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Security for External Commercial Borrowings

This circular now permits banks, after obtaining a NOCfrom the existing lenders in India, to allow creation of charge on immovable assets, movable assets, financial securities and issue of corporate and/or personal guarantees in favour of overseas lender/security trustee, to secure the External Commercial Borrowings (ECB) raised /to be raised by the borrower, if: –

(i) The underlying ECB is in compliance with the ECB guidelines.
(ii) There exists a security clause in the Loan Agreement requiring the ECB borrower to create a charge, in favour of overseas lender/security trustee, on immovable assets/movable assets/financial securities and/ or issuance of corporate and/or personal guarantee.
(iii) T he security must be co-terminating with underlying ECB. Specific conditions in each case are as under: –

(a) Creation of Charge on immovable assets:

i. Such security will be subject to provisions contained in the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000.
ii. The permission is not be construed as a permission to acquire immovable asset (property) in India, by the overseas lender/security trustee.
iii. In the event of enforcement/invocation of the charge, the immovable asset/property will have to be sold only to a person resident in India and the sale proceeds will be repatriated to liquidate the outstanding ECB. (b) Creation of Charge on Movable Assets The claim of the lender, in case of enforcement / invocation of the charge, is restricted to the outstanding claim against the ECB. Encumbered movable assets can also be taken out of the country.

(c) Creation of Charge over Financial Securities

i. Pledge of shares of the borrowing company held by the promoters as well as in domestic associate companies of the borrower is permitted.
ii. Pledge on other financial securities, viz. bonds and debentures, Government Securities, Government Savings Certificates, deposit receipts of securities and units of the Unit Trust of India or of any mutual funds, standing in the name of ECB borrower/promoter is also be permitted.
iii. Security interest over all current and future loan assets and all current assets including cash and cash equivalents, including Rupee accounts of the borrower with banks in India, standing in the name of the borrower/promoter, can be used as security for ECB.
iv. Rupee accounts of the borrower/promoter can also be in the form of escrow arrangement or debt service reserve account.
iii. In case of invocation of pledge, transfer of financial securities will be in accordance with the FDI/FII policy including provisions relating to sectoral cap and pricing as contained in the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.

(d) Issue of Corporate or Personal Guarantee

i. Board Resolution for the issue of corporate guarantee has to be obtained from the company issuing the guarantee.
ii. Specific requests from individuals to issue personal guarantee indicating details of the ECB must be obtained.
iii. This is subject to provisions contained in the Foreign Exchange Management (Guarantees) Regulations, 2000.

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A. P. (DIR Series) Circular No. 54 dated 29th December , 2014

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Notification No. FEMA .322/2014-RB dated 14th
October, 2014 Overseas Direct Investments by Indian Party –
Rationalisation/Liberalisation

This circular provides as under: –

(i) Creation of charge on shares of JV/WOS/step down subsidiary (SDS) in favour of domestic/overseas lender

Bankscan
now, subject to certain conditions, permit creation of charge/pledge on
the shares of the JV/WOS/ SDS (irrespective of the level) of an Indian
party in favour of a domestic or overseas lender for securing the funded
and/or non-funded facility to be availed of by the Indian party or by
its group companies/sister concerns/associate concerns or by any of its
JV/WOS/SDS (irrespective of the level) under the automatic route.

(ii) Creation of charge on the domestic assets in favour of overseas lenders to the JV/WOS/step down subsidiary

Banks
can now (previously, prior permission of RBI was required for the
same), subject to certain conditions, permit creation of charge (by way
of pledge, hypothecation, mortgage, or otherwise) on the domestic assets
of an Indian party (or its group companies/sister concerns /associate
concerns including the individual promoters/ directors) in favour of an
overseas lender for securing the funded and/or non-funded facility to be
availed of by the JV/WOS/SDS (irrespective of the level) of the Indian
party under the automatic route. However, the domestic assets of the
borrower on which charge is being created must not be securitised and
pledge of shares of an Indian company, if any, must be in compliance
with FEMA provisions /regulations as well as FDI Policy.

(iii) Creation of charge on overseas assets in favour of domestic lender

Banks
can now (previously, prior permission of RBI was required for the
same), subject to certain conditions, permit creation of charge (by way
of hypothecation, mortgage, or otherwise) on the overseas assets
(excluding the shares) of the JV/WOS/SDS (irrespective of the level) of
an Indian party in favour of a domestic lender for securing the funded
and/or non-funded facility to be availed of by the Indian party or by
its group companies/sister concerns /associate concerns or by any of its
overseas JV/WOS/ SDS (irrespective of the level) under the automatic
route. However, the overseas assets of the borrower on which charge is
being created must not be securitised.

Some of the condtions that are applicable to the above 3 cases are: –

i)
The period of charge, if not specified upfront, must be co-terminus
with the period of end use (like loan or other facility) for which
charge has been created.
ii) The loan/facility availed by the
JV/WOS/SDS from the domestic/overseas lender must be utilised only for
its core business activities overseas and not for investing back in
India in any manner whatsoever.
iii) A certificate from the
Statutory Auditors’ of the Indian party, to the effect that the
loan/facility availed by the JV /WOS/SDS has not been utilised for
direct or indirect investments in India, must be obtained and kept by
the designated Bank.

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SEBI Uncovers Massive Tax Evasion In Certain Stock Market Transactions

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Background
SEBI has recently passed
three orders that not only have important implications for securities
markets, but also to the parties under the Income-tax law. These are in
the case of First Financial Services Limited (“First Financial”),
Radford Global Limited (both orders dated 19th December 2014) and Moryo
Industries Limited (dated 4th December 2014). Simply stated, SEBI has
alleged that certain people used the three listed companies to carry out
price manipulation with the objective of creating bogus long term
capital gains so as to evade income-tax. It has also been reported in
Business Standard dated 29th December 2014 that about 100 such companies
are being investigated with the potential amount of such bogus gains to
be about Rs. 20,000 crore. The orders are interim in nature and have
for now debarred the parties from accessing the capital markets and
dealing in securities.

This article discusses the orders and
considers broad tax implications. The allegations and findings in the
three cases are similar and hence only Order in case of First Financial –
has been discussed.

The statements in the orders are
allegations and there are no final findings as of now. However, in this
article, for the sake of simplicity, it has been assumed that the
statements/allegations in such orders are true, though later some of the
challenges that would be faced are highlighted.

Allegations in the orders
SEBI
found a pattern of events in the three companies. To summarise, each of
the three companies made a preferential allotment of shares to select
persons. The shares so allotted were locked in for one year in
accordance with the law relating to such preferential issues. This
period of one year also coincided with the provisions of tax laws that
made gains after such period to be generally exempt from tax. During
this period of one year, SEBI found that the prices of the shares of the
companies on the stock markets were systematically increased by a group
of persons connected with the companies. This increase was by concerted
trading within their group at successively higher prices. The increase
in the price was manifold. For example, SEBI found in First Financial’s
case, the price of the shares increased from Rs. 5 to Rs. 263 in 114
trading days. And further increased to a peak of Rs. 296. The trading
volumes also increased astronomically.

Soon after the lock in
period of one year ended, the preferential allottees started selling the
shares. SEBI found that many of the buyers were linked to the people
who participated in the earlier transactions that helped increase the
price. The allottees made gains that were usually in crores of rupees
for each such allottee.

SEBI noted that while the preferential
allotment were made at a premium, the companies did not have operations
or profitability that would warrant (warranted) such premium.

During
the course of investigation, SEBI attempted to physically trace one of
the companies and its operations. It observed that it could not trace
even its offices at the reported addresses. It also noted that the
companies had stated that the issue of shares under preferential
allotment was for certain stated business purposes. However, the
companies did not use the monies raised for such purposes.

What
is more, in many cases, the amount paid by the preferential allottees
was returned by way of advances directly or indirectly to such
allottees.

SEBI held that there was concerted violation of
several provisions of the SEBI Act and the SEBI (Prohibition of
Fraudulent and Unfair Trade Practices relating to Securities Market)
Regulations, 2003. SEBI thus alleged fraud, price manipulation, unfair
practices, etc. by the Company, its promoters, certain named parties and
the allottees.

Based on such findings, it made an interim and
ex-parte Order prohibiting such persons from accessing the securities
markets and also prohibited them from dealing in securities. An
opportunity was given to the parties to present their case before SEBI
within the specified time.

SEBI alleges that object was tax evasion
SEBI
has repeatedly alleged that the object of the chain of acts was evasion
of income-tax. Further, it has referred matter to concerned
authorities. The following statements of SEBI are relevant:-

“From
the above facts and circumstances it can reasonably be inferred that
the preferential allottees acting in concert with First Financial group
have misused the stock exchange system to generate fictitious long term
capital gains (“LTCG”) so as to convert their unaccounted income into
accounted one with no payment of taxes as LTCG is tax exempt. I prima
facie find that the above modus operandi helped the concerned entities
to pay a lower rate of tax on account of LTCG and helped them to show
the source of this income to be from legitimate source i.e. stock
market. “

“I prima facie find that First Financial group and
allottees used securities market system to artificially increase volume
and price of the scrip for making illegal gains to and to convert
ill-gotten gains into genuine one.”

“….while SEBI would investigate into the probable violations of the securities laws, the
matter may also be referred to other law enforcement agencies such as
Income Tax Department, Enforcement Directorate and Financial
Intelligence Unit for necessary action at their end as may be deemed
appropriate by them.”
(emphasis supplied)

Violation of securities laws for tax evasion
While
the objective of the exercise, as SEBI alleges, is tax evasion, the
concern of SEBI arises because this involves abuse of the capital market
for achieving such objects. The following remarks of SEBI make this
clear:-

“I am of the considered view that the schemes, plan,
device and artifice employed in this case, apart from being a possible
case of money laundering or tax evasion which could be seen by the
concerned law enforcement agencies separately, is prima facie also a
fraud in the securities market in as much as it involves manipulative
transactions in securities and misuse of the securities market. The
manipulation in the traded volume and price of the scrip by a group of
connected entities has the potential to induce gullible and genuine
investors to trade in the scrip and harm them.”

“SEBI strives to
safeguard the interests of a genuine investor in the Indian securities
market. The acts of artificially increasing the price of scrip misleads
investors and the fundamental tenets of market integrity get violated
with impunity due for such acts. Under the facts and circumstances of
this case, I prima facie find that the acts and omissions of First
Financial group and allottees as described above is inimical to the
interests of participants in the securities market. Therefore, allowing
the entities that are prima facie found to be involved in such
fraudulent, unfair and manipulative transactions to continue to operate
in the market would shake the confidence of the investors in the
securities market.”

“Unless prevented, they may use the stock ex-change mechanism in the same manner as discussed hereinabove for the purposes of their dubious plans as prima facie found in this case. In my view, the stock exchange system cannot be permitted to be used for any unlawful/forbidden activities. Considering these facts and the indulgence of a listed company in such a fraudulent scheme, plan, device and artifice as prima facie found in this case, I am convinced that this is a fit case where, pending investigation, effective and expeditious ?preventive and remedial action is required to be taken by way of ad interim exparte in order to protect the interests of investors and preserve the safety and integrity of the market.”

(emphasis supplied)

    Further implications

Much will depend on what further findings are made in the investigations. As of now, while the findings are substantial, many of them are circumstantial. Further, they do not implicate all the parties in the same manner.

The profits made, as per the orders, aggregate to nearly Rs. 650 crore for these three companies. It appears that the sales of the shares took place in the financial year ended 31st March 2013. Thus, it is very likely that the parties would have already filed their income-tax returns and claimed benefit of exemption for the profits such long term capital gains. If the transactions are held to be bo-gus, then not only it is possible that the amounts may be subject to full tax, but there could be levy of interest and penalty. It is possible that there may be prosecution too. Even the parties who are alleged to be indirectly involved in such cases may be acted against for participating in the alleged conspiracy of tax evasion.

However, much will also depend on the final findings not just of SEBI but of the income-tax department. It would also have to be seen what is the final outcome of the proceedings before SEBI. In case some or all of the findings against some or all of the persons are found to be false, these may also have impact on the tax proceedings.

It is likely that there would be prolonged proceedings pursuant to such orders. It is possible that appeals before the Securities Appellate Tribunal and/or the Courts may be made by the parties concerned. There would also be completion of investigation and final orders passed by SEBI. These orders could then be the subject of further appeals.

Presently, SEBI has made certain interim orders of prohibition to the parties concerned. However, SEBI will certainly pass more comprehensive orders after completion of investigation. While one will have to wait and see the nature of the orders passed, the powers of SEBI, as amended and enhanced from time to time, are quite comprehensive and elaborate.

The following are some of the powers that SEBI has:-
Power to debar the parties concerned generally from accessing the capital markets for a specified period of time.

    Power to prohibit the parties concerned from dealing in securities for a specified period of time.
    Power to levy penalty on the parties. This could be upto 3 times the amounts involved.
    It is even conceivable that SEBI may disgorge the amounts of profits made.
    Power to suspend/cancel the registration of intermedi-aries involved.
    Power to prosecute the wrong doers.

It has several other powers too. The various powers of SEBI that have been increased from time-to-time would not only be in full display, but be tested before the courts.

    Conclusion

The findings of SEBI, if found true, can have far reaching effects. The scope of the orders is quite broad and large amounts are involved. At the same time, considering the complexities involved, it is also likely that the proceedings before SEBI and income-tax department could take a long.

Concerns about use of capital markets for tax evasion purposes have been often expressed even before there was concessional treatment of tax of gains. These orders establish that regulatory and investigating agencies are active and effective in implementing the law in the interest of good governance.

Is Bombay a Bay?

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Synopsis This Article examines the recent decisions which have held that parts of Mumbai city are a bay. This has opened up parts of the city for development, since the Coastal Regulation Zone (CRZ) Rules are less stringent in bay areas.

Introduction
Quick Quiz – Does Bombay (apologies for using the old name) as BOMBAY rhyme with BAY .

Interestingly, while the name tends to suggest that ‘Bombay’ is a bay, it actually is an island. History has it that Bombay originally comprised of seven islands under the Portuguese Rule, which were given in dowry to an English prince on his marriage with a portuguese Princess. One of these 7 islands was Mahim island. Paradoxically, this very island has a central role to play in this discussion on a bay!

A spate of recent decisions of the Bombay High Court have held that parts of the island city are actually bays. While this distinction may seem semantic at first, it has a great repercussion for the city’s developer community. What it does is to open up a goldmine for developers, that too on the waterfront. The Coastal Regulation Zone or CRZ restriction in bays is substantially lower as compared to other places. Let us examine this decision and why environmentalists consider it to be a real bolt from the blue!

CRZ Notification
The Ministry of Environment and Forests has issued the Coastal Regulation Zone Notification to protect coastal lines and regulate activities in these areas. In a country like India, and more so in a city like Mumbai, which has a very long coastal line, regulations dealing with protection of this very valuable natural resource have an important role to play. The Ministry had originally notified the CRZ Guidelines in 1991 vide Notification No. S.O. 114 (E) dated 19th February 1991. These were amended and updated from time to time to arrive at the latest Coastal Regulation Notification 2011 issued on 6th January 2011.

Keeping in mind the special needs of Mumbai, several concessions have been provided to CRZ areas within Mumbai.

According to this Notification, the following areas are declared as CRZ:

(i) the land area from High Tide Line (HTL) to 500 mts on the landward side along the seafront. The term HTL means the line on the land up to which the highest water line reaches during the spring tide and so demarcated. HTL will be demarcated within one year from the date of issue of the 2011 notification.

(ii) the land area between HTL to 100 mts or width of the creek whichever is less on the landward side along the tidal influenced water bodies (i.e, bays, rivers, creeks, etc. that are connected to the sea and are influenced by tides).

The significance of declaring an area as CRZ is that the Notification imposes various restrictions on the setting up and expansion of industries, operations or processes, etc., in such areas. The Notification classifies various areas into CRZ-I, CRZ-II, CRZ-III, CRZ-IV, etc. The severity of the CRZ Regulations goes on decreasing as the classification increases.

Hence, maximum construction is not possible in CRZI while in CRZ-IV, those activities impugning on the sea and tidal influenced water bodies are regulated except for traditional fishing and related activities undertaken by local communities. CRZ-IV area is defined as the water area from the Low Tide Line to 12 nautical miles on the seaward side and the water area of the tidal influenced water body from the mouth of the water body at the sea up to the influence of the tide, which is measured as 5 parts per 1,000 during the driest season of the year.

A bay is defined in common parlance as “a body of water forming an indentation of the shoreline, larger than acove but smaller than a gulf”.

Mahim is a Bay
In the case of Hoary Realty Ltd vs. MCGM, WP No. 2383/2014 Order dated 7th October, 2014, the Bombay High Court faced a peculiar issue of, whether a certain plot of land in Mahim fell within the purview of the CRZ area? The issue was whether Mahim was a bay area?

The developer obtained a Certificate from an Institute of Remote Sensing at Chennai which certified that only 7% of the plot area fell within the CRZ IV area as a bay and the balance was not within the purview of CRZ. This Institute is one of the premier bodies in India in the areas of Remote Sensing, Geographical Information System and Large Scale Mapping. Thus, the Institute certified that Mahim was a bay and not a sea shore.

Hence, according to the developer, since only 7% fell within the 100 meters restriction for a bay, it could construct on the balance 93% of the plot which fell outside CRZ. It also obtained a certificate from the National Hydrographer Office which certified that Mahim is considered as a bay and is so depicted on the Official Navigational Chart of the National Hydrographer Office. Accordingly, the developer prayed for relief to carry on construction on the area not within the purview of CRZ.

The Bombay High Court upheld the classification contended by the developer and held that the area was in Mahim which was indeed a bay. Only 7% of the plot fell within the purview of CRZ IV and hence, for this portion, there was a restriction of 100 meters from the High Tide Line. Had it not been a bay, the restriction would have been 500 meters from the High Tide Line. The High Court also relied on the National Hydrographer’s Chart. The MCGM argued that the New Coastal Zone Management Plan was under preparation and hence, it was not possible to sanction the development. This argument was rejected by the High Court. Finally, the Court directed the Municipal Corporation to issue a clearance certificate based on the Certificate obtained by the developer as to how much was within CRZ.

The Maharashtra Coastal Zone Management Authority preferred a Special Leave Petition before the Supreme Court against this decision. However, the MCGM’s SLP was dismissed by the Supreme Court on 19th November, 2014. Thus, the High Court’s ruling is binding now on the Maharashtra Coastal Zone Management Authority as well as the Municipal Corporation of Greater Mumbai.

Bhuleshwar and Bandra join the Club
Buoyed by the decision of the above Bombay High Court and the rejection of the SLP, developers have started knocking the doors of the High Court for similar relief in other parts of the city. The Bombay High Court in the case of Marine Drive Hospitality & Realty P Ltd vs. MCZMA, WP No. 3127/2014 Order dated 17th December, 2014 and Om Metals Consortium vs. MCZMA, WP No. 3152/2014 Order dated 18th December, 2014 had an occasion to consider similar issues. The Court held in Orders similar to the one in Hoary, that Bhuleshwar as well as Bandra (West) were bays. It once again held that the water body at Mahim Bay (Bandra reclamation to Prabhadevi) / Back Bay (Governor House to Colaba) was a bay! Accordingly, it allowed construction on the area outside the 100 meters purview, which in the Bhuleshwar case was an area of about 1 lakh sq. feet while in the Bandra case it was a slum redevelopment project of around 6 lakh sq. ft.

Impact of the Rulings
Development within the bay area can be done with a higher FSI of 3 which was till now allowed only for hotels. Now with the Rulings opening up the area for other development also, developers can develop more lucrative residential complexes. Since these projects would be waterfront projects one can do the math and compute the benefits to the developers.

It
may be noted that the ratio of this decision could also be used in other
coastal parts of India, such as, Goa, Gujarat, Karnataka, etc. The Eastern Coast of India could be the biggest beneficiary
since it abuts the “Bay” of Bengal! In short, this decision could be a game
changer for the realty sector. Certain Press Reports indicate that the
Maharashtra Government is planning to request the Ministry of Environment and
Forests to suitably amend the CRZ Notification to deal with this new phenomenon
of construction in bays. Till such time as the Centre amends this
Notification, the High Court Rulings will prevail.

 

  
Conclusion

 

While the pros and cons of these decisions are
being hot-ly debated by developers and environmentalists only time would tell
what impact they have had on the development of Mumbai and other coastal areas.
However, they high-light one important learning ~ don’t judge a book by its
cover! Outward appearances are often deceiving ~ what appears to be a shore
could turn out to be a bay, keeping all environmentalists at bay (pun
intended)!

Precedent – Circulars – Binding on Revenue – Implied overruling – Earlier ruling of smaller Bench held, stands overruled if a subsequent larger bench lays down law to the contrary: Constitution of India Article 141:

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Union of India & Ors vs. Arviva Industries India Ltd & Ors. (2014) 3 SCC 159

The Hon’ble Court held that the circulars issued by the Central Board of Excise and Customs are binding on the Department and the Department cannot be permitted to urge that the circulars issued by the Board are not binding on it. The Court in a series of decisions has held that the circulars issued u/s. 119 of the I.T. Act 1961 and section 37-B of the Central Excise Act, 1944 are binding on the Revenue.

However, a slightly different approach was taken by this Court in Hindustan Aeronautics Ltd. vs. CIT (2000) 5 SCC 365 by two learned Judges which runs counter to the earlier decisions. The view taken in Hindustan Aeronautics Ltd. (supra) being contrary to the subsequent decision of the Constitution Bench of this Court in CCE vs. Dhiren Chemical Inds. (2002) 254 ITR 554 / (2002) 2 SCC 127, cannot be taken to be good law. Earlier ruling of Smaller Bench held stands over rule if a subsequent larger bench lays down law to the contrary.

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Legal representatives of deceased – Scope – Corporate body or Collective entity when may claim compensation as legal representative – Motor Vehicles Act, 1988, S/s. 166, 168 and 173:

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Montfort Brothers of St. Gabriel & ANR. vs. United India Insurance Company Ltd. & ANR. (2014) 3 SCC 394

Appellant 1 is a charitable society registered under the Societies Registration Act, 1960. It runs various institutions as a constituent unit of Catholic Church. Its members after joining the appellant Society renounce the world and are known as ‘Brothers’. Such ‘Brothers’ sever all relations with their natural families and are bound by the constitution of the Society.

One ‘Brother’ of the Society, namely, Alex Chandy Thomas was a Director-cum-Head master of St. Peter High School and he died in a motor accident. The accident was between a Jeep driven by the deceased and a Maruti Gypsy covered by insurance policy issued by the respondent Insurance Company. At the time of death the deceased was aged 34 years and was drawing monthly salary of Rs. 4,190/-. The claim petition was filed before M.A.C.T., by Appellant No. 2 on being duly authorised by the Appellant No.1 the society. The owner of the Gypsy vehicle stated in his written statement that vehicle was duly insured and hence liability, if any, was upon the Insurance Company.

The respondent-Insurance Company also filed a written statement and thereby raised various objections to the claim. But it was clear from the written statement that it never raised the issue that since the deceased was a ‘Brother’ and therefore without any family or heir, the appellant could not file claim petition for want of locus standi. The issue no.1 regarding maintainability of claim petition was not pressed by the respondents. The Tribunal awarded a compensation of Rs. 2,52,000/- in favour of the claimant and against the opposite parties with a direction to the insurer to deposit Rs. 2,27,000/- with the Tribunal as Rs. 25,000/- had already been deposited as interim compensation. The Tribunal also permitted interest at the rate of 12% per annum, but from the date of judgment passed in MACT case.

Instead of preferring appeal against the order of the Tribunal, the respondent-Company preferred a writ petition under Article 226 of the Constitution of India before the Gauhati High Court and by the impugned order under appeal, the High Court allowed the aforesaid writ petition ex-parte, and held the judgment and order of the learned Tribunal to be invalid and incompetent being in favour of person/persons who according to the High court were not competent to claim compensation under the Motor Vehicle Act.

The Hon’ble Court observed that the issue as to who is a legal representative or its agent is basically an issue of fact and may be decided one way or the other dependent upon the facts of a particular case. But as a legal proposition it is undeniable that a person claiming to be a legal representative has the locus to maintain an application for compensation u/s. 166 of the Act, either directly or through any agent, subject to result of a dispute raised by the other side on this issue.

The Court observed that Tribunal had relied on the decision of FB judgement of Patna High Court in Sudama Devi vs. Jogendra Choudhary AIR 1987 Pat 239 wherein it was held that term `legal representative’ is wide enough to include even “intermeddlers” with the estate of a deceased. Further, the proceeding before Motor Accidents Claims Tribunal being summary in nature, unless there is evidence before Claims Tribunal in support of such pleading that the claimant is not a legal representative and therefore the claim petition is liable to be dismissed as not maintainable, no such plea can be raised at a subsequent stage and that too through a writ petition. Accordingly the order of High Court was set aside.

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Frivolous Litigation – State as a Litigant/party – Expenses to be paid personally by officials concerned:

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Haryana Dairy Development Co-op Federation Ltd. vs. Jagdish Lal; (2014) 3 SCC 156 (SC)

In the instant case, an amount of Rs. 8,724/- was to be paid to the Respondent employee as reimbursement of his medical claim. The Petitioner Haryana Dairy Development Cooperative Federation Limited filed a SLP before Supreme Court. The Court deprecated such practice of the petitioner corporation treating the litigation as a luxury. The corporation must have spent on amount for filing this petition in excess of the amount due to the respondent.

The Law Commission of India in its 155th report has observed that what further aggravates the position is the number of pending litigations relating to trivial matters or petty claims, some of which has been hanging for more than 15 years. It hardly needs mention that in many such cases money spent on litigation is far in excess of the stakes involved.

The court directed that the expenses of the litigation shall be incurred by the Managing Director personally who has signed affidavit in support of the petition and it shall not be taken from the Federation.

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Apology – Disturbing remarks/statement made by counsel for petitioner against Supreme Court Bench – Apology for such statement accepted – Constitution of India, Article 129:

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Manohar Lal Sharma vs. Principal Secretary & Ors. (2014) 3 SCC 172

The matters were posted in view of the following statement of Mr. Prashant Bhushan that appeared in the weekly news magazine Outlook, 18-11-2013 (Vol. LIII, No. 45):

“I can only speculate. The Bench is possible hesitant about taking action against the highest law officer of the Govt. who is appearing before them everyday. Perhaps they are meeting him socially and you do tend to be a little diffident in cases involving such people.”

The above statement was made by Mr. Prashant Bhushan to the question that was put to him – “But why didn’t the court pull him up then? Why was it so indulgent ?

Mr. Prashant Bhushan states that he has the highest regard for the Supreme Court. He also tenders apology for his statement published in the weekly news magazine referred to above. In view of the matter, the court observed that nothing further deserves to be done with regard to this aspect.

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Aligning Human Capital for sustained growth of Professional Service Firms

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One of the least focused functional aspects of
running a professional service firm (“PSF”) is human resources. We call
it human capital within PSF’s. This includes the Partners, the
Principals or Directors, the Senior Managers, the Managers going on to
the associates and interns. This also includes the admin and other
non-billing staff in the PSF.

The challenge has always been to
recognise that PSF’s can grow well and scale up enough only and only if
the human capital is in alignment. This recognition comes to most firms
very late in their life span; sometimes so late that not enough course
corrections can be made. Most good firms that have succeeded and grown
over decades have done a remarkably great job at aligning their human
capital.

It is therefore, required of PSF leaders to understand the dynamics of human capital early in the growth curve of the PSF.

This picture outlines the various stakeholders that draw on an individual’s time:

Let
us analyse the dynamics of human capital engagement for each of the
stakeholders, starting with the PSF’s internal team members – i.e., the
individual himself: 1. The self: Internal teams are the most critical
asset of any PSF. It is all about managing the human capital responsibly
and effectively.

A few questions to ask and examine of each individual team member are:

Who is this professional?
How did he come into being in to our firm?
What are his aspirations?
What
drives him? Is there a conflict in his thought process, his goals and
career aspirations? Will he be a Partner in the firm in a few years? Is
he a good mentor and a team player? Is he a good fit for the firm
currently?

The above are some of the hard questions that a PSF
needs to answer. If the responses to some of the above are not very
encouraging for the firm, then it is clear that the human capital is not
optimally aligned and PSFs have a lot of work to do to bring about an
alignment. The individual within the internal team needs to be
understood, mentored, coached and encouraged to give his or best. His
working style is irrelevant, beyond a point. His weaknesses can be
corrected to a point; but the focus of the PSF should be to “make his
strengths productive” to the firm. It is far more effective to recognise
an individual’s strengths and make it work for him, his team and the
firm, as opposed to trying to constantly correct his weaknesses. Peter
Drucker exhorted this proposition and articulated that people work best
when their strengths are aligned to the needs of the firm. The challenge
for a Partner in the PSF to identify the strengths of his internal team
members and make this happen.

The professional – an individual within a PSF:
It
is incumbent upon the professional to be the best that he can be in the
environs of a PSF. For that to happen, the professional has to learn to
“Manage himself”. Managing oneself is a very critical aspect of
effectiveness and alignment. Unless a professional learns to manage
himself, the team dynamics and client delivery is never going to be
optimum. Managing oneself is all about knowing thy time, assigning
priorities and taking responsibilities for action. A professional is a
manager, akin to an executive in a business, who is required to make
effective decisions, conform to an execution framework, focus on
priorities, have a growth orientation, think with a solution mindset and
multitask between production and management.

The individual has
to have a strong sense of affinity to the society, his family, his
friends, his work colleagues and his clients. It is these interpersonal
relationships and their dynamics, which largely influence the way the
individual conducts himself. Thus, managing oneself is a starting step
in aligning human capital.

2. Teams
Individuals in
PSF’s need to be effective in teams, this would mean being collaborative
in teams, sharing knowledge with the team members, generating a spirit
of camaraderie and sportsmanship and having a congenial disposition on a
day-to-day basis.

Teams get most influenced by team dynamics.
E.g.: If the senior most member in the team cannot set the tone, he will
quickly lose respect. Similarly, someone who is technically brilliant
as a professional will still not be the favourite of the team if he does
not learn to be a go-getter and a real team player. Being technically
brilliant does not mean that they should be intellectually arrogant. In
fact, if these technically brilliant people are also respectful to their
peers and have an intrinsic habit of sharing their knowledge and
expertise, it will go a long way in creating successful future leaders
in their respective firms.

Sharing of ones’ knowledge is
critical to have the team come up to terms with the thought process of
the team leader. This, in other words, assumes that over a period of
time, each professional in the team will get upgraded to a level of
knowledge which will help them converse with their senior team members
and their clients with equal ease. It is also imperative on the team
members themselves to have a constant quest for learning and upgrading
themselves. And, in that they have somebody to look up to in terms of
the team leader, the technically superior member amongst them, who’s
depth of knowledge is a vital resource for the firm to access. The
question then is – Is the congeniality quotient in the team at a level
that permits such free and fair exchange of knowledge? To be in
alignment, PSF’s have to get this rolling, ensure that teams work in a
spirit of sharing and caring, have tremendous respect and affinity to
each and other and for their firm, and truly care for the growth of the
firm and their peers within the firm.

3. Clients
Professionals
have their foremost duty to solving client’s problems and servicing
client efficiency. PSF’s have to create an environment and pursue a
culture where professional respect each and every client and clients
feel that the teams are responsive to their problems and challenges on a
continuous and sustained basis. This needs hard selling of the concept
of “client comes first”.

As the great Mahatma Gandhi eloquently
put it “We exist because of our clients”; “The customer is not an
interruption of our work; he’s the purpose of it”.

Professionals
have to have a mindset of solving problems and challenges of clients.
To be in a continuous frame of mind of being a solution provider needs
reiteration of this tenet and at a deeper level “a connect” with the
client. The Partner concerned does not really have to sell his
expertise; all he needs to do is to engage into a conversation with the
client and understand the client.

This includes the following:
If
you want to win a client’s confidence, give him the chance to talk to
you, person to person, about his needs and his expectations. Make it
easy and comfortable for the clients to share his secrets. In short, if
you really want the client’s business, talk to the client and have a
conversation, make him feel that you are using normal language and not
“corporate speak”. Both parties should engage into a conversation, it
cannot be a monologue.

It’s about a mindset of joint problem
solving, not about trying to win or prevail. Finally, its about allowing
people with different views to learn from each other.

If teams
can achieve this dynamic with their clients and if they work hard at
doing this consistently, the PSF would have created and aligned its
human to create a winning client base.

4. Market

Partners and managers and everybody in between, have to be focused on the markets.

    Where is the profession heading?

    Would our services be relevant, three years from now and seven years from now?

    What do we need to do today to continuously adapt to the marketplace?

    Is there a better way of doing what we do?

What are the trends in the market place that the professional can see and that helps him to think about generating more opportunities for his firm?

What can he do about it? In capital markets, they say that the market is a great leveler; one can extend this to professional service market and say that the market is very discerning and will choose the most appropriate service player for its requirements.

Often, what is perceived is the truth. E.g.: If a lawyer provides very high-end technical solutions, he is perceived to be an expert with a very busy schedule with very little time to spend. This preconception comes because of a perception. Perceptions take long to create but can dissipate very quickly. Thus, a PSF should make sure that what Partners say and do is relevant to his chosen segment of clients and stays that way on a continuous basis. A PSF would than be omnipresent in the Market and would be aligned for faster growth.

    Regulators

Professionals have to be trained to deal with the entire regulatory ecosystem. We have in our day-to-day existence, a need to deal with various set of regulators, authorities, governmental agencies and the likes. This would include the regulator of the profession; Example: the Bar Council for the Lawyers, The Institute of Chartered Accountants for the Accountants etc. This would also include the revenue authorities, the courts, the justice delivery system, the administration in the state and all departments thereto.

The Chambers and associations, who influence policy making, the public representatives who make the laws, and a wide gamut of people who form the servicing (internal) team of these constituents also deal with Regulators constantly. And professionals need to learn to deal with the Chambers and Associations too.

Professionals need to have skill-sets to deal with them differently, as these are not clients. Some of these are watchdogs, some of them are policy makers and the others are policy implementers. The most successful firms have aligned their human capital to a point where a group of professional within the firm deals with each one of them effectively. This needs lots of training and high quality communication skills that work with bureaucrats and a deep understanding of policy formation.

The best firms thrive in such an ecosystem by having specific people earmarked to deal with this breed – the Regulators.

    Peers

PSF’s constantly have a cliental pressure to benchmark themselves with their peers; especially when it comes to the relative size of the firm, the size of the team, the infrastructure, the quality of the delivery, the timeliness and responsiveness and the professional fees/compensation for the engagements.

In this context, the most compared resource is the quality of human capital. That is the biggest differentiator between the good firms and the better and the best firms, as it is partners and managers who are the touch point of the firm and the face of the firm across the ecosystem. The quality of delivery is also a reflection of the level of training, the level of knowledge base, the expertise of the firm and therefore its unique positioning in the marketplace and all of this ties in to the human capital of the firm.

Most successful firms have been growing primarily because relative to their peers, they have done a great job at mentoring their teams.

And most successful firms have been successful because they have been constantly aligning their human capital to the firm’s growth trajectory.

Gift – Immovable property – Donor had reserved the right to enjoy the property during her life time did not affect the validity of the gift deed. – Transfer of Property Act, Section 122 & 123, 126.

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Renikuntla Rajamma (Dead) by LR vs. K. Sarwanamma; (2014) 9 SCC 445.

The appellant, a Hindu woman, executed a registered gift deed in respect of an immovable property in favour of the respondent reserving to herself the right to retain possession and to receive rents of the property during her lifetime. The gift was accepted by the respondent. But subsequently the appellant revoked the gift deed by a revocation deed. The respondent filed a suit assailing the revocation deed and seeking a declaration that the same was invalid and void ab initio. The trial court found that the appellant defendant had failed to prove that the gift deed set up by the respondent plaintiff was vitiated by fraud or undue influence or that it was a sham or nominal document. The gift, according to the trial court, had been validly made and accepted by the respondent plaintiff, hence, was irrevocable in nature. It was also held that since the appellant donor had taken no steps to assail the gift made by her for more than 12 years, the same was voluntary in nature and free from any undue influence, misrepresentation or suspicion. The fact that the appellant donor had reserved the right to enjoy the property during her lifetime did not affect the validity of the deed. Accordingly, the suit was decreed. The first appellate court and the High Court in second appeal concurred with the findings of the trial court.

The Hon’ble Court observed that sections 124 to 129 deal with matters like gift of existing and future property, gift made to several persons of whom one does not accept, suspension and revocation of a gift, and onerous gifts including effect of non-acceptance by the donee of any obligation arising thereunder. Section 123 calearly provides that a gift of immovable property can be made by a registered instrument signed by or on behalf of the donor and attested by at least two witnesses. When read with section 122 of the Act, a gift made by a registered instrument duly signed by or on behalf of the donor and attested by at least two witnesses is valid, if the same is accepted by or on behalf of the donee. That such acceptance must be given during the life time of the donor and while he is still capable of giving is evident from a plain reading of section 122 of the Act. A conjoint reading of sections 122 and 123 of the Act makes it abundantly clear that “transfer of possession” of the property covered by the registered instrument of the gift duly signed by the donor and attested as required is not a sine qua non for the making of a valid gift under the provisions of Transfer of Property Act, 1882.

The Court further observed that section 123 of the T.P. Act is in two parts. The first part deals with gifts of immovable property while the second part deals with gifts of movable property. Insofar as the gifts of immovable property are concerned, ssection 123 makes transfer by a registered instrument mandatory. This is evident from the use of word “transfer must be effected” used by Parliament in so far as immovable property is concerned. In contradistinction to that requirement the second part of section 123 dealing with gifts of movable property, simply requires that gift of movable property may be effected either by a registered instrument signed as aforesaid or “by delivery”. The difference in the two provisions lies in the fact that in so far as the transfer of movable property by way of gift is concerned the same can be effected by a registered instrument or by delivery. Such transfer in the case of immovable property no doubt requires a registered instrument but the provision does not make delivery of possession of the immovable property gifted as an additional requirement for the gift to be valid and effective. If the intention of the legislature was to make delivery of possession of the property gifted also as a condition precedent for a valid gift, the provision could and indeed would have specifically said so. Absence of any such requirement can only lead to the conclusion that delivery of possession is not an essential prerequisite for the making of a valid gift in the case of immovable property.

In the present case, the execution of registered gift deed and its attestation by two witnesses is not in dispute. It has also been concurrently held that the donee had accepted the gift. The recitals in the gift deed also prove transfer of absolute title in the gifted property from the donor to the donee. What is retained is only the right to use the property during the lifetime of the donor which does not in any way affect the transfer of ownership in favour of the donee by the donor.

There is indeed no provision in law that ownership in property cannot be gifted without transfer of possession of such property. As noticed earlier, section 123 does not make the delivery of possession of the gifted property essential for validity of a gift.

The High Court was in that view perfectly justified in refusing to interfere with the decree passed in favour of the donee. The appeal was hereby dismissed.

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A. P. (DIR Series) Circular No. 40 dated 21st November, 2014

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Release of Foreign Exchange for Haj/Umrah pilgrimage

This circular permits persons going on Haj/Umrah pilgrimage to carry the entire BTQ entitlement in cash/up to the cash limit specified by the Haj Committee of India.

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A. P. (DIR Series) Circular No. 39 dated 21st November, 2014

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External Commercial Borrowings (ECB) Policy – Parking of ECB proceeds

Presently, persons who have availed ECB have to immediately bring into India, for credit to their Rupee accounts with banks in India, ECB proceeds meant for Rupee expenditure in India for permitted end uses.

This circular permits a person who has availed ECB to park ECB proceeds (both under the automatic and approval routes) in term deposits with a bank in India for a maximum period of six months, subject to the under mentioned terms and conditions, pending utilisation for permitted end uses.

i. The applicable guidelines with respect to eligible borrower, recognised lender, average maturity period, all-incost, permitted end uses, etc. have been complied with.
ii. No charge in any form can be created on such term deposits i.e. to say that the term deposits should be kept unencumbered during their currency.

iii. Such term deposits must be exclusively in the name of the borrower.

iv. Such term deposits must be available for liquidation as and when required.

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A. P. (DIR Series) Circular No. 38 dated 20th November, 2014

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Notification No. FEMA.321/2014-RB dated 26th September, 2014 Acquisition/Transfer of Immovable property – Payment of taxes

This circular clarifies that all transactions involving acquisition of immovable property in India by NRI/PIO/Non- Residents are subject to the applicable tax laws in India.

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A. P. (DIR Series) Circular No. 37 dated 20th November, 2014

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Export of Goods/Software/Services – Period of Realisation and Repatriation of Export Proceeds – For exporters including Units in SEZs, Status Holder Exporters, EOUs, Units in EHTPs, STPs and BTPs

This circular states that all exporters, including Units in SEZ, Status Holder Exporters, EOU, Units in EHTP, STP & BTP, must uniformly realize and repatriate export proceeds with respect to export of goods/services/software within a period of 9 months from the date of export. However, in the case of exports made to warehouses established outside India, the period for realisation and repatriaton of export proceeds will continue to be 15 months from the date of export.

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SEBI Regulations 2014 on Share Based Benefits – important changes over the ESOPs Guidelines

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Background
SEBI has notified the SEBI
(Share Based Employee Benefits) Regulations 2014 (“the Regulations”) on
28th October 2014. They replace the SEBI (Employee Stock Option Scheme
and Employee Stock Purchase Scheme) Guidelines, 1999 (“the Guidelines”).
The Regulations come into force from that date. However, a transition
period has been given for certain specific matters as also generally to
bring all existing Schemes in conformity with the new Regulations.

The
new Regulations, though they have many amendments, are in many ways
similar in structure with the earlier Guidelines. However, the
Regulations now have far wider reach in three major aspects. Firstly,
they now specifically also cover share-based benefits such as Stock
Appreciation Rights. This is also made clear by the title of the
Regulations that now refers to generically sharebased employee benefits
other than stock options in place of Stock Options and Stock Purchase
schemes. Secondly, instead of providing specifically for how stock
options and share purchase schemes should be accounted for, the
Regulations essentially provide that the accounting shall be carried out
as per the Guidance Note/Accounting Standards of the Institute of
Chartered Accountants of India.

Thirdly, now, the Regulations
specifically provide for dealing in shares by schemes for employees
other than Schemes for stock options/share purchase. The earlier
Guidelines were more or less silent on this. As will be seen later, it
was found that many such schemes dealt in shares of the Company. The
concern was whether these were misused for various purposes. Now the
Regulations specifically recognise and permit, subject to conditions and
restrictions, purchase and otherwise dealing in shares of the Company.

Finally, the change in the legal status of the law from Guidelines to Regulations also has important implications.

These are discussed in detail hereafter.

Eligible employees
The
definition of employees has been modified. Employees of associate
companies (as defined in section 2(6) of the Companies Act, 2013) are
also eligible to such Schemes. Independent Directors are now
specifically ineligible. The conditions under which nominee directors of
institutions may be eligible have been made more elaborate.

Regulations specifically cover SARs
The
Guidelines did cover a form of Stock Appreciation Rights (SARs) but
this was indirect, and of a particular form only. They focused more on
stock option and share purchase schemes. Now, the Regulations provide
specifically for Schemes of SARs.

SARs provide for rights for
being paid for appreciation in the price of the shares. An employee
would thus be given a right to be paid for the increase in the value of
the shares from the date when the right was granted to the date when he
choses to exercise the SAR. The Regulations provide that he can choose
to be paid for the appreciation either in the form of cash or shares.

The
erstwhile Guidelines too did provide for cashless exercise of stock
options. This involved allotment of shares which would be handed over to
a stockbroker. The stock broker would then sell the shares. Of the sale
proceeds, the exercise price would be retained by the Company and the
appreciation paid to the employee.

The Regulations provide for
payment of appreciation directly by the Company without allotting any
shares. However, such appreciation can also be paid in the form of
shares.

The other features of SARs are similar to stock option/
share purchase schemes. There has to be a waiting period of one year
before exercise of the SARs.

General Employee Benefits Scheme (GEBS) and Retirement Benefit Schemes (RBS)
Two
new categories of Schemes have been now specifically covered. However,
such schemes are covered only if they deal or are intended to deal in
the shares of the company that they are required to comply with the
Regulations.

Such Schemes shall not hold more than 10% of their
assets as per the last audited balance sheet in the form of shares of
the Company. For this purpose, the book value or market value or fair
value of the assets is considered, whichever is the lowest.

To which Schemes are the Regulations applicable?
The
Guidelines applied to schemes set up by companies for issue of stock
options and share purchase. It was not clear whether other schemes that
also dealt in shares were also covered. It was seen that there were
Schemes that were for the benefit of the Company but were not apparently
controlled by the Company or its Promoters but also dealt in the shares
of the Company. Under what circumstances would such Schemes be
regulated? The Regulations now have specific provisions to deal with
this.

Firstly, they apply to Schemes of stock options, share
purchase, SARs, general employee benefits schemes and retirement benefit
schemes. Such Schemes should involve dealing in the shares of the
Company, directly or indirectly. Further, the Scheme should have a link
with the Company in any of the following ways:-

(i) the Scheme is set up by the Company or any other company in its group (the term group is widely defined); or
(ii) the Scheme is funded or guaranteed by the Company or any other company in its group; or
(iii) the Scheme is controlled or managed by the Company or any other company in its group.

The
Company of course needs to be a listed company. Thus, companies would
be free to set up Schemes for benefit of employees and the employees
themselves are free to set up such Schemes without being regulated by
SEBI. However, if they deal in the shares of the Company and are
connected with the company in any of the specified manner, then they
will need to comply with the provisions.

Dealing in shares by share based benefits Schemes
As
stated earlier, it was observed by SEBI that several Schemes were set
up apparently for the benefit of employees but dealt in the shares of
the company. They apparently were not connected with the company. They
held shares of the Company that were often acquired from the secondary
market. There were legitimate concerns that the object of such Schemes
was more to carry out illegitimate objects such as surreptitious holding
shares on behalf of the Promoters, carry out insider trading or price
manipulation, give market support to price at time of fall, etc. This
was of even more concern when funds of the Company were directly or
indirectly used.

SEBI did issue certain directions to require
control this aspect. However, it seems that it was also realised that
there may be legitimate reasons why certain Schemes may be required to
hold shares of the Company. The Regulations now provide for more
transparency and clarity. Such Schemes are now allowed to deal in shares
subject to certain restrictions and disclosures.Existing Schemes
holding shares are also required to comply after completion of a
transition period.

In case it is desired that share acquisition
be carried out through secondary acquisition or gift of shares, then
such Schemes should be administered through a Trust. There are certain
restrictions over appointment of Trustees to such Trusts. Further, in
such cases, specific and separate approval of the shareholders by way of
a special resolution is required to set up such Schemes.

SEBI lays down limits upto which the trusts administering such Schemes may hold shares. Stock options, share purchase and Sars may not hold shares more than 5% of the share capital of the Company in the year prior to which approval of the shareholders is obtained (as expanded by bonus/rights issues made later). For general benefits and retirement benefits Schemes, the maximum holding is 2%. however, all such Schemes put together cannot hold more than 5% shares. Such limits will not apply in case of gift of shares by the Promoters or other shareholders or where these are acquired by way of a fresh issue of shares.

The   yearly   cap   on   acquisition   of   shares   through secondary market by the trust is set at 2% of the paid up share capital as at the end of the preceding financial year.

In any case, the number of shares acquired through secondary market purchases cannot exceed the grant  of benefits in the form of stock options/share purchase/ Sars. If there are such excess holdings, they will need   to be appropriated within a reasonable period but not beyond the end of the following financial year. There is also generally a lock in period of six months, except for certain specified manner of disposal.

The trustees  of  such trusts  are  prohibited  from  voting on such shares. This will ensure that such shares are not acquired for supplementing the voting power of the Promoters/management.

Further,  the  holding  by  such trusts  will  not  be  counted as part of public holding. Companies would thus be required to maintain the minimum public holding as required by law.

Approval   of   Shareholders Broadly, the requirement of approval of shareholders for such Schemes remain the same as under the Guidelines, i.e., approval should be by way of a special resolution. However, separate approval shall be obtained in certain cases such as permitting acquisition of shares from the secondary market, grant of options etc. to employees of subsidiary/holding/associate companies, etc.

Accounting for stock options, etc.
Accounting for discount on issue of stock options, etc. has always  been  a  controversial  issue. the  Guidelines  had provided in fair detail how such discount should be computed and accounted. Companies were required to follow such accounting as a pre-condition for issue of stock options, etc. at a price they chose to determine. However,   it was seen that the accounting provisions were not very detailed particularly to cover the wide variety of such schemes in practice. Further, the accounting method created areas of potential difference between what was recommended by accounting bodies. The Regulations have now simplified the provisions. The accounting for such schemes shall be as per the Guidance note of ICAI or accounting Standards as may be prescribed by from time to time by the ICAI.

The  Guidance  note  of  the  ICAI  on accounting  for  employee Share Based payments covers such accounting requirements.

Transition Period
Companies that have existing Schemes are required to comply with the regulations within one year. Trusts holding shares in excess of the limits specified in the Regulations are required to bring down the holding in five years.

Regulations vs. Guidelines
The erstwhile Guidelines had, at best, dubious sanctity as an enforceable law. Several earlier important provisions relating to securities markets were in the form of Guidelines. It was uncertain to a large extent whether they could be enforced, whether acts/omissions in violation of law could make the transactions void and above all, whether SEBI could initiate adverse measures in the form of adverse directions, penalties and prosecutions against the parties.

As will be discussed later, it appeared that certain Schemes involved dealing in shares and it was felt that these dealing in shares were for purposes other than purely for benefit of employees. It may have been difficult to enforce the Guidelines or punish any violations in such cases.

Issue of the regulations cures these defects. Thus, this is an important change of the provisions relating to share-based benefits.

This  trend  of  changing  Guidelines  into  regulations  is seen in other areas as well and it is expected soon for the provisions in regard to corporate governance.

Conclusion
The  regulations,  while  not  overhauling  the  provisions relating to share-based benefits substantially, do make important changes, remove certain possibilities for abuse align the provisions with the new Companies act, 2013.

Part D: Ethics & Governance & Accountability

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Good Governance Day:
The government has announced that it will celebrate former Prime Minister Vajpayee’s birthday on 25th December as ‘Sushasan Diwas’ or ‘Good Governance Day’.

HRD Ministry is keen to celebrate 25th December as good governance day to mark the birthdays of A. B. Vajpayee and Madan Mohan Malaviya.

• Promise of Better Governance:
The fact that BJP regime is in power because of the promises they have made to provide better governance is a good sign for it puts pressure on the system to make a visible difference. The Modi government has embarked on an ambitious project – the attempt is to move from a mental model of governance being about dispensing resources to one that actively seeks outcomes, but this needs an ability to convert programmes into measurable and repeatable actions on the ground. This will need a dramatic overhaul of the administrative infrastructures, and its understanding of the nature of power. It might be relatively easier to ring in the big changes, but the real challenge might lie in the everyday experience of governance. Boring, predictable governance is the need of the hour but to deliver that what we need are sweeping administrative reforms. Other more glamorous reforms will be rendered meaningless without fixing the nuts and bolts of governance.

[Santosh Desai in the Times of India dated December 15]

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Co-operative Society- Right of Membership- Society has the right to refuse membership.

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Bandra Owners Court Co-op. Housing Society Ltd. vs. The Divisional Jt. Reg. of Co-op. Societies Mumbai, W.P. No. 1011/2010, dated 3/2/1015 (Bom.)(HC).

The Petitioner-Society is a Tenant Cooperative Society, as contemplated under Rule 10 of the Maharashtra Cooperative Societies Rules, 1961. The Respondent No. 5 applied for the transfer of shares and suit flat from the name of Respondent Nos. 3 and 4th members of the Petitioner Society on 24th January 2004. Respondent No. 3 was the Director of Respondent No. 5 and also the Secretary of Petitioner Society. The Society refused the said transfer for want of sufficient stamp and registration. The Society never accepted the payment on behalf of Respondent No. 5, and even through Respondent Nos. 3 and 4, and communicated their inability to transfer the suit flat. The Application filed by Respondent No. 5, was therefore rejected and the flat remained, so also the membership, in the name of Respondent Nos. 3 and 4. The Society returned the amount paid to it. Respondent Nos. 6 and 7, on 15th August 2008, filed an Application for transfer of the suit flat and shares from Respondent No. 5 to them. On 26th August 2008, the same was rejected as Respondent No. 5 was not the owner of the suit flat in the above background. Respondent Nos. 6 and 7, therefore, invoked section 23(1) of MCS Act, 1960 before the Deputy Registrar of Cooperative Societies on 13th April, 2009. The Registrar directed that they be admitted as members in respect of the suit shares and the suit flat. The Petitioner Society therefore, preferred a Revision Application and challenged the above order. Respondent No.1 the Divisional Joint Registrar by impugned order dated 15th December 2009, rejected the Revision Application, therefore, the Writ Petition was filed by the Society.

The Hon’ble Court observed that the MCS Act and Rules made there under makes provisions for members and membership and various classes of the same and the procedure to be followed for getting such membership. Mere filing of Application for getting membership is not sufficient. The Society is governed and run by the byelaws, which is basic requirement to consider to grant and/or refuse such membership. Normally, the Society, needs to grant membership if all other requisite elements and/or qualifications are satisfied. Even for rejection, the Society must give sufficient reason and/or must show the grounds for such refusal of admission. In the present case, for the above stated case, the Society refused to accept the membership Application.

The basic scheme and procedure so prescribed under the MCS Act referring to “Member”/”Membership”. Section 2(19)(a) provides the concept of “member”. The concept “deemed member” as provided in sections 22(2) and 23 is not defined. Section 22(2) deals with the members who became members and section 23 provides a procedure for open membership. For deciding the membership issue, the aspect of restriction on transfer or charge of share or interest, as contemplated u/s. 29 is also relevant, so also to maintain the register of members as contemplated u/s. 38 of the MCS Act. Rule 38 of the byelaws provides that the Society needs to follow the byelaws, which binds the Society, as well as, its members. Rule 19 deals with the conditions before admission for the membership. This also provides the detailed procedure to be followed by all the parties. Rule 24 deals with the procedure for transfer of shares, as no transfer of shares shall be effective unless the condition so provided under the Rules and the Act are fulfilled.

Thus for transfer of membership and/or shares, the concerned parties need to follow the various procedure and the supporting material and documents. The Society needs to apply its mind to the law, as well as, the related record before granting and/or refusing admission. The statutory Authorities are also under obligation to consider this, if the Society refused the membership and/or any challenge is made to grant such admission. These, are essential elements before considering the rival case, as well as, the contentions at every stage of admission of members and/or granting membership.

Merely because someone has claimed membership, a Society is not under obligation to grant the same. The lawful occupation, their rights, title and interest in the property, permissible transfer of shares and/or property and/or interest as per the byelaws and all related aspects, just cannot be overlooked by the concerned parties, including the Society, as well as, the Registrar/Authorities.

The Society having refused to grant admission with reasoned order, the interference by the Respondent Authority in the present facts and circumstances of the case and specifically by not giving the reasons in support of their reversal order as contemplated and by overlooking the provisions and procedures of the orders passed by the Authorities are unsustainable, therefore, required to be interfered with.

Thus, the Hon’ble Court held that the fact that Respondent Nos. 6 and 7 have purchased the property and are in occupation of the same since 2008; their entitlement based upon the said transaction and/or related agreements need to be reconsidered in accordance with law by the concerned Authorities afresh, by giving full opportunity to all the parties concerned. Further, the jurisdiction of Registrar u/s. 23, though nowhere contemplated to determine the validity and/or legality of the documents, which are executed in favour of the parties, but still the basic elements as contemplated under the scheme and the provisions as referred above, right from the byelaws of the Society, need to be looked into before granting and/ or refusing membership. The serious issue of validity and/ or legality of the documents may be the matter of trial and/ or inquiry before the appropriate forum, but that itself is not sufficient to deny the membership, if all requirements are prima facie satisfied.

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Advocate – Relationship between the Advocate and the client depends upon the trust between the parties – When the client wants to engage another Counsel, the earlier Lawyer has got no option, except to recuse himself from the case – Advocates Act section 30.

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S. Diwakar vs. Dy. Registrar, High Court of Madras, Chennai & Anr AIR 2015 (NOC) 300 (Mad.). The appellant is a Party-in-Person and practising Advocate.

The appellant was the counsel for the 2nd respondent in a matter before the Magistrate Court. The 2nd respondent for the reasons known to him substituted the appellant with some other counsel. The subsequent counsel had filed his vakalatanama in the matter. The appellant sent a letter to the 2nd Respondent stating that his action is against the rule of law. The said letter was followed by filing Writ Petition before the High Court. The appellant submitted that his fundamental right to practice as a Lawyer has been infringed. The learned Metropolitan Magistrate ought not to have noted the change of vakalath filed without following the required procedure.

The Hon’ble Court observed that during the proceedings, a vakalath had been filed on behalf of the second respondent by another Advocate. Admittedly, the consent of the appellant had not been obtained.

The relationship between the Advocate and the client is strictly professional. It depends upon the trust between the parties. The legal profession is not only a service but also a calling. Therefore, when the client wants to engage another counsel, the earlier Lawyer has got no option, except to recuse himself from the case. Acting as a Lawyer to a client is different from any other disputes inter se including the payment of fees etc.

The Court further observed that the any fundamental right of the appellant has not been infringed. It is not as if the appellant has been debarred from doing his profession. It is purely a personal dispute between the appellant on the one hand and the second respondent on the other hand. It is not the case of the appellant that the vakalatanama has not been signed by the second respondent. On the contrary, it is the case of the appellant that the learned X Metropolitan Magistrate, ought to have conducted an enquiry as the change of vakalatanama has been filed without obtaining his consent. Assuming, that the permission of the court is required that aspect, at the best, can be termed as a procedural one. The duty of the Magistrate is to conduct the case before him and not to resolve the inter se between the Lawyer and the party. The Petition was accordingly dismissed.

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Basics of Board Evaluation

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Introduction
In a typical public
company, the ownership and control are separated and the shareholders
extensively rely on the Board of Directors to represent their interests.
Whilst the Board of Directors is not running the company on a day-today
basis, which is the responsibility of the management, its involvement
in the form of timely decisions, guidance, direction and oversight plays
a key role in the effective functioning of the company. The way in
which the Board discharges its duties would go a long way in defining
the governance model of the company. These aspects underscore the fact
that the Board must, in addition to reviewing the performance of the
organisation and the management, also review its own performance to make
sure they are doing their duty diligently and effectively. Behavioural
psychologists and organisational learning experts agree that people and
organisations cannot learn without feedback. No matter how good a Board
is, it is bound to get better if it is reviewed intelligently. In view
of the importance attached to the Board, the Indian Companies Act, 2013
requires the evaluation of the performance of the board to add value to
the stakeholders and corporates.

Legal Requirement
The
Companies Act, 2013 has recognised the long felt need for having a
structured process for evaluation of the performance of the Board of
Directors. Section 178(2) of the Companies Act, 2013 mandates that the
Nomination and Remuneration Committee constituted by the Board shall
carry out an evaluation of the performance of every Director. In
addition, the Code for Independent Directors mandates that the
Independent Directors of a Company shall hold at least one meeting, in
which the performance of the non-independent directors and the Board as a
whole, shall be reviewed. Further, the quality, quantity and timeliness
of the flow of information between the Management and the Board shall
be evaluated. The performance of the independent directors shall also be
done by the entire Board excluding the director being evaluated. Based
on such evaluation, the Board’s report shall contain a statement
indicating the manner of evaluation and the conclusions thereof.

Evaluation Process
Typically,
the performance evaluation of the Board would be on the basis of a
benchmark which could be decided upfront and used for the purpose of
this exercise. The evaluation can also be carried out on specific
matters relating to each committee and those which would apply only at a
Board level as well.

With respect to the evaluation of the
individual directors, the performance evaluation could be done on the
basis of the following macro aspects:

-Allocated Roles and Responsibilities
-Strategic Thinking
-Risk Management
-Core Governance and Compliance Management
-Independence & Ethics
-Corporate Culture
-Compliance with the Code of Conduct of Directors
-Industry/Entity Knowledge
-Talent Management
-Leadership Style
-Unbiased Approach
-Effectiveness of Decision Making
-Entity Performance

In addition, the following specific aspects could also be considered for performance evaluation:

-Attendance and contribution to the meetings
-Application of financial/technical/legal/treasury/other expertise on specific matters
-Quality of debate
-Extent of communications with executive management
-Relationship with other Board members
-Personal eminence and the reputation
-Quality of the feedback provided to the management

The
Act does not stipulate the timing or the period for evaluation of the
Board. Hence, a company could either decide to do the evaluation on an
annual basis similar to the policy followed for its employees or deal
with it by having any other review period on a systematic basis. Each
company needs to assess the specific aspects applicable to it and then
consider the frequency/ periodicity of the evaluation. The review could
be done at a pre-determined frequency or could be performed on an “as
needed” basis. The “as needed” approach may work in situations where the
Board has a clear policy on the triggers that would prompt an
evaluation. However, in situations where such guidelines are not
available, then it is possible that the need for performance evaluation
may be overlooked. Performing the evaluation on an annual basis is the
most common frequency as this in line with the annual planning cycle
and, therefore, useful in adapting the performance expectations with the
strategic needs of the organisation. However, a predictable frequency
could result in the evaluation becoming mundane and routine.

On
an overall level, the performance evaluation should be an ongoing
process and not just an annual event. One of the best practices is to
devise other mechanisms in addition to the annual review to ensure
ongoing performance improvement. Irrespective of the period chosen, the
same may be followed in letter and spirit and on a consistent basis.

Attributes
of a Successful Governance Oversight Model Identifying an appropriate
governance oversight model is the basic starting point for having a
robust evaluation platform. All the subsequent activities will be driven
by this. In general, a successful governance oversight model should
encompass the following attributes:

-Competence – skills required for the Board to effectively execute its responsibilities
-Understands corporate governance and its application to Board structure, operations, processes, and procedures
-Understands the organisation, its businesses, and underlying drivers
-Has relevant, recent experience in the industry, adjacent industries and markets, or competitors
-Has knowledge of the interests and priorities of stakeholders
-Process – processes required for the Board to both understand and properly oversee the activities of the entity
-Understands the risks inherent in the organization’s governance programmes
-Selects qualified, independent Board members, aligning overall Board composition with the organization’s strategy
-Establishes and periodically reaffirms Board leadership
-Establishes and ensures compliance with Board operating principles and governance policies
-Designs and implements a committee structure that complements and enhances the work of the Board
-Assesses and continually improves the Board, its leaders, and committees
-Engages with stakeholders
-Oversees public disclosures related to Board operations
-Information – information required by the Board adequate to support effective oversight and decision making
-Receives verbal and/or written feedback and development plans resulting from periodic assessments
-Receives Board governance documents and related tools (e.g., Board calendars, planning tools) for review and improvement
-Receives thought leadership or continuing education related to Board governance developments
-Behaviour – Board’s behaviour to support and reinforce strong oversight
-Displays ownership and commitment to governance excellence and continuous improvement
-Creates a culture of collaboration, engagement, and healthy tension among Board members
-Holds Board members accountable for their behaviour.

Techniques of Evaluation
The
evaluation can be done by using qualitative techniques such as
interviews, feedbacks, etc. or through quantitative techniques such as
surveys, scorecards, questionnaires etc. A typical questionnaire/
scorecard would cover the aspects indicated under “what will be
evaluated?” and in particular the following aspects:
–
Composition and Quality
-Understanding the business and risks
-Process and procedures
–    Oversight of the financial reporting process and internal controls
–    assessing related party transactions
–    understanding competitive landscape
–    understanding risks relating to management override, including significant judgements, assumptions and estimates.
–    fair compensation.
–    Communication with employees, vendors and customers
–    adequacy and effectiveness of Board initiated/ monitored mechanisms such as Code of Conduct, Whistle Blower Policy, PTR, CSR Policy, etc.
–    oversight of the audit function
–    ethics and compliance
–    monitoring activities
–    Strategy effectiveness
–    management relationship
–    Succession Planning & training.

Further,   this   could   be   done   through   face   to   face discussions, telephonic conversations, e-mails, web based scoring modules etc. Irrespective of the evaluation technique used, due care should be taken in documenting the process and the conclusions reached.

The next step in the process is to decide who will perform the evaluation – whether internally (by the nomination and remuneration Committee) or using specialist consultants or external experts. the decision regarding the same will need to be taken after considering the following factors:
–    autonomy of the Board
–    Board Culture and dynamics
–    Confidentiality
–    Perception of Bias
–    need for transparency and objectivity
–    Skills and experience of Performing evaluations
–    time and Cost.

The  general  process  to  be  followed  could  be  to  obtain the self-evaluation from the individual directors about the individual and also about the Board which forms the basis for an independent evaluation by the designated person/ committee/authority.

Evaluation Feedback
The  feedback  to  the  Board  could  be  provided  not  only by the members of the Board, but to make it more transparent and comprehensive, the participant base could be extended to cover the internal and external stakeholders  as  well.  Typically,  the  internal  participants who could be consulted for obtaining the feedback on the performance of the Board could be the CEO and other key managerial personnel who interact with the Board on various matters. Similarly, the external participants could range from the shareholders, key customers & suppliers, internal & external auditors. Whilst the internal participant could provide a more specific feedback, the external participants could provide a general feedback about the company/culture which would reflect the performance of the Board.

The  Board  should  agree  upfront  the  required  actions that it can take to improve governance. the performance assessment of the Board would typically be discussed by the Board collectively. With respect to the performance assessment of the individual director, generally the same will be discussed by the Chairman of the Board with the concerned member/director. The practice of releasing the summary of the results of the Board’s performance to the entire organisation is also considered as one of the best practices in connection with the Board evaluation process worldwide.

Whilst section 134 (3)(o) of the Companies act, 2013 requires only a statement indicating the manner in which the formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors and the results of the individual evaluation, distribution of the results of the evaluation to stakeholders would be decided by each company based on various factors including the governance model followed, expectations, complexities, culture etc. Irrespective of the method adopted and the regulatory provisions, the Board should keep in mind that the process of performance evaluation, providing the required feedback and the extent of sharing such feedback with others would reflect its commitment to the entire governance process!

Conclusion
Performance evaluation is very important for the Board for not only in meeting the regulatory requirement but also in setting the right tone at the top. This is one of the key mechanisms for the Board to demonstrate its commitment to continuing improvement. It would be a great value multiplier tool for the company, directors and all those stakeholders who will be impacted by the functioning of the company.

When the Board recognises the importance of this process and attributes sanctity and importance to this process, and implements it with all vigour, this would help in building a sound corporate structure which can avert governance failures. Whilst the process is new to india, the experience gained in implementation would help Indian corporates in fine-tuning it on a continuous basis.

Release vs. Gift

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Synopsis
Is there a difference between an instrument of release and a gift? Do the legal implications, tax and stamp duty consequences change depending on the phraseology used to describe the instrument? This Article examines some such issues in relation to immovable property transactions.

Introduction
“A Rose by any Other Name Smells as Sweet!” Could the above Shakespearean proverb be applied also to a transfer of property by a release or a gift? The answer is yes and no! A release and a gift are both species of transfers of property. However, there is a difference in law between the two. While the ultimate implication of both is that property is transferred (normally without consideration) but the law treats treats the two on a different footing. Let us look at the key differences and some similarities between the two.

Gift
A Gift is a specie of transfer of property with which almost all individuals, especially in India, are familiar. It is, from time immemorial, one of the most famous (and often infamous) modes of transferring movable as well as immovable property. The revenue and the legislation often frown upon the concept of gifts. The amendments in section 56(2) of the Income tax Act are testimony to this.

The Transfer of Property Act, 1882, which deals, mainly, with immovable property and also contains some provisions dealing with movable property, defines the term “Gift”. The Act also lays down some substantive and procedural provisions for constituting a valid gift. This Act defines a gift as a transfer of certain existing movable or immovable property made voluntarily and without consideration, by one person, called the Donor to another, called the Donee, and accepted by or on behalf of the Donee. The important characteristics of a Gift are:

(a) Gift is one of the modes of transfer of property.
(b) A gift can be of immovable or movable property.
(c) T he gift must be voluntary, i.e., without any coercion, fraud, undue influence.
(d) I t must be without any consideration from the Donee to the Donor.
(e) A person cannot make a Gift to himself, there must be a Donor and a Donee.
(f) T he Gift must be accepted by the Donee during the Donee’s lifetime.
(g) I t could be conditional.

Gift of an immovable property must be by way of a Gift Deed in writing which is executed by the Donor and the Deed must be registered under the Registration Act. Further, it must be attested by two or more witnesses. Thus, any gift of immovable property which is not registered would be invalid. Gifts requiring registration are subjected to stamp duty which is levied on the value of the property gifted.

Release
While we are all too familiar with the concept of gift, let us understand what is meant by a release. A release is much larger than a gift and could take various forms. For instance, if a release is made for consideration it would be tantamount to a conveyance while if it was made without consideration it would amount to a gift. What then is a release? Simply put, a release means renunciation of right in property by one co-owner in favour of another co-owner. Thus, the essential ingredient of a release is that both the transferor and transferee must be existing co-owners in the property. In a release the transferee would never be a stranger but would always be one who has an existing right in the property. Hence, a release can never be for the entire property but would always be for a portion thereof. To illustrate, A and B are equal co-owners in a in a flat. A relinquishes his share to B. This can be achieved by a release deed. If in this case, A charges any consideration from B then it could also be termed as a conveyance while if it is without consideration that it can also be termed as a gift.

A release of a share in an immovable property in excess of Rs. 100 requires that the instrument is registered.

Practical experience shows that sometimes a release deed is executed (and accepted by the Registrar) even in cases where the transferee has no interest in the property. In such cases, a gift deed or a conveyance is a better alternative. However, in law, a release deed can transfer title to one who before the transfer had no interest in the property – Kuppuswamy Chettiar vs. A.S. P. A. Arumugam Chettiar 1967 AIR 1395 (SC), although in such cases, the duty would be as on a conveyance or a gift deed.

Stamp Duty
Since Gifts/Release Deeds of immovable property require registration, they would also require to be duly stamped.

The Maharashtra Stamp Act, 1958, applicable in the State of Maharashtra defines an “instrument of gift” to include, in a case where the gift is not in writing, any instrument recording whether by way of declaration or otherwise the making or acceptance of such oral gift. The gift could be of movable or immovable property. The term gift has not been defined and hence, one has to refer to the definition given u/s. 122 of the Transfer of Property Act”.

An instrument of gift not being a Settlement or a Will or a transfer attracts duty under Artice 34 of Schedule-I. A gift deed attracts duty at the same rate as applicable to a Conveyance (under Article 25) on the market value of the property which is the subject matter of the gift. Thus, in case of immovable property, the rates vary depending upon the type of immovable property, (i.e., whether it is a land, building, a flat in co-operative society), and the location (relevant in case of land and building). The maximum rate for immovable property is 5% of the Reckoner Value. Further, any gift of property to a family member (i.e., a spouse, sibling, lineal ascendant/descendant ) of the donor, shall attract duty @ 2% or as specified above, whichever is less.

On the other hand, under the Maharashtra Stamp Act, a release deed attracts duty on an Instrument of Release whereby a person renounces a claim upon other person or property as follows: If the release is of an ancestral property in favour of certain specified relatives ~Rs. 200

Every other Case ~ Same duty as on a conveyance as on the market value of the share, interest or part renounced.

The Bombay High Court, in the case of Asha Krishnalal Bajaj, 2001(2) Bom CR (PB) 629 held that a Release Deed is not a conveyance and only attracts stamp duty as on a release deed. In the case of Shailesh Harilal Poonatar, 2004 (4) All MR 479, the Bombay High Court held that a release deed without consideration under which one co-owner released his share in favour of another in respect of a property received under a will, was not a conveyance. Accordingly, it was liable to be stamped not as a conveyance but as a release deed.

To plug this loophole, in 2005, the duty in the State of Maharashtra was increased on such instruments to Rs. 5 for every Rs. 500 of market value of the property. The 2006 Amendment Act has once again made an amendment in Maharashtra to provide that if the release is in respect of ancestral property and is executed by or in favour of the renouncer’s spouse, siblings, parents, children, grandchildren of predeceased son, or the legal heirs of these relatives, then the stamp duty would only be Rs. 200. In case of any other Release Deed, the duty is equal to a conveyance. Thus, for immovable properties, it would be @ 5% on the market value of the property. What is an ancestral property becomes an important issue.

The   Punjab   &   haryana   high   Court   in   the   case   of Harendar Singh vs. State, (2008) 3 PLR 183 (P&H) has held that property received by a mother from her sons is not ancestral in nature. in another decision of the Punjab and haryana high Court, it has been held that property inherited by a hindu male from his father, grandfather or great grandfather is ancestral for him–Hardial Singh vs. Nahar Singh AIR 2010 (NOC) 1087 (P&H).

In Laxmikant vs. Collector and Assistant Superintendent of Stamps, Ahmedabad AIR (1976) Guj 158, it was held that a release postulates that the claim is renounced in favour of a person, who has got some right in the property. Release also connotes that the person releasing his right does not retain any ownership right over it. Where the property was thrown in the common hotch-pot with the result that while before the said property was thrown, the person throwing the property was the sole owner, after it is so thrown, he remains a joint owner. Therefore, retention of joint ownership, and the fact that the other members of the family had, previous to the throwing of the property in the joint stock of the family, no right in the property, conclusively showed that the transaction did not amount to a release.

Stamp Duty as on a Gift or a release – which to pay?
Having looked at the provisions pertaining to gift deed and release deed, the essential question is which to consider for paying stamp duty? if the property may be called “an- cestral” and is in favour of defined relatives, the obvious answer is release deed since in that case, the duty is only Rs. 200! The definition of conveyance under the Maharashtra Stamp act states that any instrument whereby a co-owner transfers his interest to another co-owner would be a conveyance. hence, in such cases the instrument would not be a release deed but would be a conveyance. however, if no consideration is charged then it would not be a conveyance and the moot point would be should it be considered as a gift? if one sees the wordings used in the Stamp Act, it defines a release deed only as one “where a person renounces a claim upon another or against any specified property”. Would instruments which are in the nature of a gift deed or a conveyance deed also fall under this definition of a release deed is the question? The cur- rent practice suggests that the answer is “yes”.

In Chief Controlling Revenue Authority vs. Rustom Nussewanji Patel, AIR 1968 Mad. 159 (FB), the Court observed that in order to determine whether a document is a release deed or conveyance, the nomenclature or the language used is not decisive. What is decisive is the actual character of the transaction and the precise nature of the rights created by means of the instrument. In rustoms case, the essential ingredients of release were present, there was already a legal right in the property vested in the releasee and the release operated to enlarge that right into an absolute title for the entire property, insofor as the parties were concerned.

A recent decision of the delhi high Court in the case of Srichand Badlani vs. Govt. of NCT of Delhi, AIR 2014 539 (Del), the contention is that in order to qualify as a relinquishment deed, the document must purport to relinquish share of the relinquishor in favour of all the other co-owners of the property and, if the relinquishment is   in favour of only one of the two co-owners, it has to be treated as a Gift deed, the property having been inherited from a common ancestor. It further held that one of the co-owners can relinquish his share in a co-owned property in favour of one or more of the co-owners. The document executed by him in this regard would continue to be a relinquishment deed irrespective of whether the relinquishment is in favour of one or all the remaining co- owners of the property. there is no basis in law for the proposition that if the relinquishment deed is executed in favour of one of the co-owners, it would be treated as a Gift deed. the law of stamp duty treats relinquishment deed and Gift deed as separate documents, chargeable with different stamp duties. it is not necessary that in order  to  qualify  as  a  relinquishment  deed  the  document must purport to relinquish the share of the relinquisher in favour of all the remaining co- owners of the property. Even if the relinquishment is in favour of one of the co- owners it would qualify as a relinquishment deed. more- over, it is immaterial as to what the relationship between the co- owners of the property. So long as relinquishment is in favour of one of the co-owners, the relationship between the relinquisher and the relinquishee is wholly immaterial and of no consequence at all. The law permits one of the co-owners even if they are not related to each other to relinquish his share in favour of other co-owner.

In Manjulaben Amrutlal vs. CCRA, 1994 GLR 1779 (FB) two sons executed a release in favour of their par- ents for their joint family property. it was held that it was difficult to hold that the parents of the applicants did not have any right, title and interest or share in the property for which deed was executed. The document clearly recit- ed that it was no claim release deed. it also recited in the deed that house was purchased by the mother as their guardian. executants and parents were residing jointly and that they were maintained by their parents. It is also stated that by the said deed whatever right and share they had in the house was released in favour of their mother and father. hence, by the impugned deed the executants had renounced their claim against the house which was purchased by their mother in their names. the property was originally purchased in the name of minors. It was treated by the parents at the most as joint hindu family property, as stated by them. Once it was a joint hindu family property, all the members of the h.u.f. would have share in the said property. In the deed itself it was mentioned that the executants (sons) were maintained by the parents. There was no reason to hold that the property was not belonging to the h.u.f. of executants and their parents. Once it is held that the property belonged to an HUF , then there was no difficulty in holding that the deed executed by the applicants was a release deed and not a gift deed.

Taxation
Section 56(2)(vii) of the income-tax act taxes certain gifts received by an individual or an huf from unrelated sources. hence, such gifts are taxed as income from other Sources in the hands of the donee. A receipt under a release deed without consideration would also be cov- ered by the same provision. thus,  whether under a gift or a release deed, specified receipts without consideration would be taxable u/s. 56(2)(vii).

An acquisition for consideration of a share in a house property from one co-owner by another co-owner under a release deed tantamounts to a purchase for the purposes of exemption u/s. 54 of the income-tax act. This was the view of the Supreme Court in the case of CIT vs. TN Aravinda Reddy, 120 ITR 46 (SC). It held that a release was a transfer of the releasor’s share for a consideration to the releasee who purchased the share of the releaser and was thus, entitled to relief u/s. 54.

Conclusion
The structuring of an instrument is an important element. Drafting should pay heed to the Law and Language both. While a document drafted in a particular manner and form may yield the desired results it may not always have the desired consequences!

Stamp valuation – Market value – Property purchased in Company Court auction – Sale deed executed in their favour by official liquidator – Registration authorities cannot question the sale deed on ground of undervaluation. Stamp Act, 1899, section 47-A.

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The Inspector General of Registration, Chennai and Ors vs. K.P. Kadar Hussain. AIR 2014 Madras 230.

The Respondents purchased the property in an auction, which was held by this Court, after paper publication on 08-03-2012. The said sale was confirmed by this Court and the Court directed the Official Liquidator to execute a sale deed in favour of the Respondents after receiving entire sale consideration.

The Respondents contended that it was not open to the appellants to take a stand that since the guideline value of the properties were increased only in the month of April 2012 and therefore, the Respondents are liable to pay the amount on that basis.

The Respondents vehemently submitted that the law is a well settled in regard to the purchase of property in a Court Auction and the authorities cannot refer the document demanding higher stamp duty unless a fraudulent attempt on the part of parties to document to evade payment of stamp duty is manifest.

When the Respondents had purchased the properties in question by way of sale deeds executed by the official liquidator for the sale value mentioned in the sale deeds, the said value cannot be questioned by appellants at a later point of time merely on the premise that the sale value mentioned in the sale deeds purchased by the respondents cannot be termed as `market value’.

The court observed that section 47A has no application whatsoever, in sofar as the respondents, purchasers of properties in company court auction because of the prime reason that there is no room for entertaining any doubt that there was any under valuation in regard to the sale deeds executed by the official liquidator.

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Right to fly National Flag – Fundamental Right of Citizen – Mandamus would not lie against authority to act in contravention of provisions of statute: Constitution of India.

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H. R. Vishwanath vs. Registrar General, High Court of Karnataka and Ors. AIR 2014 Karnataka 163

The writ petition was filed asking for a mandamus against the Registrar General, High Court of Karnataka, not to allow Sri Ravivarma Kumar, Advocate General, High Court of Karnataka, 2nd respondent herein, to hoist the Indian National Flag at the Office of Advocate General, High Court of Karnataka i.e., parallel to the Advocates’ Association, Bangalore and to ensure enough solidarity, unity and integrity of the Advocates’ Association and for a mandamus to the 2nd respondent, to participate in the Flag hoisting ceremony of the Advocates’ Association, on the eve of Independence Day.

According to the petitioner, respondent violated the established norm of celebration of Independency Day and Republic Day, by the Advocates’ Association. He submitted that a parallel function was being organised by the 2nd respondent, since, a Circular has been issued to all the Law Officers of the Government, to participate in the function, wherein, he would hoist the National Flag. Petitioner submitted that the 2nd respondent by hoisting the National Flag, by organising a separate function, rather than participating in the Flag hoisting ceremony of the Advocates’ Association, has destroyed the unity and integrity of the Association.

The question that arose for consideration is, whether a mandamus can lie against the 1st respondent, not to allow the hoisting of Indian National Flag.

The Court held that the Right to fly the National Flag freely with respect and dignity is a fundamental right of a citizen within the meaning of Article 19(1)(a) of the Constitution of India, subject to reasonable restrictions under clause (2) of Article 19 of the Constitution of India.

The Court observed that order that a writ of mandamus may be issued, there must be a legal right with the party asking for the writ to compel the performance of some statutory duty cast upon the authorities.

Thus, it is clear, that for issue of a writ of mandamus, there must be a legal right with the petitioner, to compel the performance of statutory duty cast upon the 1st respondent. The petitioner was not able to show that there was any statute or rule having the force of law which cast a duty on respondent No.1, not to allow respondent No. 2, hoist the National Flag near the Office of the Advocate General and to ensure his participation in the Flag hoisting ceremony organised by the 3rd respondent, as the President of the Advocates’ Association.

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Precedent – Binding nature of order of Tribunal – Strictures against Commissioner (Appeals): Section 35G of Central Excise Act 1944.

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CCE, Chennai – IV vs. Fenner India Ltd. 2014 (307) ELT 516 (Mad.)

The facts were that the first respondent/assessee is engaged in the manufacturing of Oil Seals. On account of fire accident on 05-05-2006 in the ‘post cutting area’ of the factory, the work in progress stocks were burnt and rendered unfit for usage, which was informed to the department in writing on the same day. It was further stated that the assessee had availed Cenvat credit on the raw materials, which were to be used for production of Oil Seals. A show cause notice dated 28-12-2006 was issued calling upon the assessee to explain as to why the Cenvat credit availed on raw materials, which were destroyed in fire should not be reversed. The assessee by referring to Rule 2(k)(i) of the Central Excise Rules, 2002 submitted its reply. The Assessee relied on the Tribunal decision in the case of Commissioner of Central Excise, Chennai III vs. Indchem Electronics reported 2003 (151) ELT 393 (Trib. Chennai). The Original Authority, rejected the assessee’s plea and directed the assessee to reverse the Cenvat credit availed.

The assessee preferred appeal before the Commissioner of Central Excise (Appeals). The First Appellate Authority held that the assessee is liable to reverse the credit on inputs contained in the work-in-progress, which were destroyed in fire, by placing reliance on the decision of the Tribunal, in the case of M/s. Tambraparani Coatings vs. Commissioner of Central Excise, Pondicherry: 2006 (193) E.L.T. 80 (Tri.-Chen.)]. As regards the order of the Tribunal in the case of Indchem Electronics, the First Appellate Authority held that the Special Leave Petition filed by the Department as against the said order was dismissed by a non-speaking order and therefore that would not be binding. On the above ground, the appeal came to be rejected.

Aggrieved by the said order, the assessee preferred a further appeal to the CESTAT . The Tribunal after considering the case of the assessee and taking note of the facts held that there is no dispute with regard to the destruction of the goods, when manufacturing work is in progress, and therefore the assessee need not reverse the Cenvat credit availed. The Tribunal by placing reliance on the decision of Indchem Electronics (cited supra) allowed the assessee’s appeal.

On appeal, the Court held that stand taken by the Commissioner (Appeals) is wholly unsustainable and quite contrary to the settled legal position. It is to be noted that the Hon’ble Supreme Court, while dismissing the assessee appeal has assigned reasons. The Hon’ble Supreme Court observed that the Appellate Tribunal in its impugned order had held that Modvat/Cenvat credit cannot be denied on inputs destroyed in the fire accident when the fact that the inputs were actually issued and thereafter destroyed in fire accident, which fact is not disputed by the Department. Therefore, it cannot be stated that it is a non-speaking order. In any event the Commissioner orders are subject to scrutiny by the Tribunal and he is bound by the order passed by the Tribunal and it is wholly untenable on the part of the Commissioner to contend that the decision of the Tribunal would not bind the Commissioner. Therefore, the finding of the Commissioner to that extent is absolutely perverse.

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Gift – Muslim Law – Immovable property – Conditions curtailing its use or disposal are to be treated as void. Transfer of property Act section 123

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V. Seeramachandra Avadhani (D) by L.Rs vs. Shaik Abdul Rahim and Anr. AIR 2014 SC 3464

Sheikh Hussein was married to Banu Bibi. During the subsistence of his matrimonial ties, Sheikh Hussein executed a gift deed on 26-04-1952, whereby a “tiled house” with open space was gifted in favour of his wife Banu Bibi. Banu Bibi enjoyed the immovable property gifted to her, during the lifetime of her husband Sheikh Hussein. Sheikh Hussein died in 1966. Even after the demise of Sheikh Hussein, Banu Bibi continued to exclusively enjoy the said immovable property. On 02- 05-197802- 05-1978, Banu Bibi sold the gifted immovable property, to V. Sreeramachandra Avadhani. The vendee V. Sreeramachandra Avadhani is the Appellant before the Court (through his legal representatives).

Banu Bibi died on 17-02-1989. On her demise, the Respondents before this Court-Shaik Abdul Rahim and Shaik Abdul Gaffoor issued a legal notice to the vendee. Through the legal notice, they staked a claim on the abovementioned gifted immovable property. In the notice, the Respondents asserted, firstly, that Banu Bibi had only a life interest in the gifted immovable property; and secondly, the Respondents being the legal representatives of Sheikh Hussein (who had gifted the immovable property to Banu Bibi) came to be vested with the right and title over the gifted immovable property, after the demise of Banu Bibi.

In the suit, the Respondents sought a declaration of title, over the “tiled house” with open space, gifted by Sheikh Hussein to his wife Banu Bibi.

The Court observed that the parameters for gifts (under Mohammedan Law) are clear and well defined. Gifts pertaining to the corpus of the property are absolute. Where a gift of corpus seeks to impose a limit, in point of time (as a life interest), the condition is void. Likewise, all other conditions, in a gift of the corpus are impermissible. In other words, the gift of the corpus has to be unconditional. Conditions are however permissible, if the gift is merely of a usufruct. Therefore, the gift of a usufruct can validly impose a limit, in point of time (as an interest, restricted to the life of the donee).

Having concluded that the donor Sheikh Hussein through the gift deed dated 26-04-1952, had transferred the corpus of the immovable property to his wife Banu Bibi, it is natural to conclude that the gift deed executed in favour of Banu Bibi, was valid.

The conditions depicted in the gift deed, that the donee would not have any right to gift or sell the gifted property, or that the donee would be precluded from alienating the gifted immovable property during her life time, are void.

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Family – Definition – Is exhaustive and not illustrative : Stamp Act 1899 Sch. I, Art. 58(a) Explanation

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T. Muthu Balu vs. The Inspector General of Registration Chennai & Anr. AIR 2014 Madras 240

The
petitioner executed a Settlement Deed, in respect of certain items of
properties mentioned in the schedule to a document, in favour of his
great-grand daughter S. Sugirtha, dated 11-11-2011, the same was on the
file of the Sub-Registrar, Madurai, the 2nd respondent herein. The
petitioner claimed exemption from payment of normal Stamp Duty stating
that the settlement is between persons coming under the term “Family”
mentioned in Article 58(a) of Schedule-I to the Indian Stamp Act, 1899.
However, the 2nd respondent did not release the document and insisted on
payment of normal stamp duty on the ground that the registration fee in
the instant case would not be covered under Article 58(a), in view of
Explanation to Article 58(a) of Schedule-I of the Indian Stamp Act.

The
Hon’ble Court observed that the word “family” as defined in the
Explanation to Article 58(a) of Schedule I, appended to the Stamp Act,
would mean only such of those persons mentioned in the Explanation. The
definition to the word “family” is exhaustive and not illustrative and
it is applicable only to such of those persons indicated therein and it
will not extend to other persons who do not form part of the definition
“family”. The interpretation of the word “means” in the Explanation will
be specific to the members of the family mentioned therein.

The
definition cannot give an extended or expanded meaning to the word
“grand child” to include “great grand child” also. It is for the state
government to include great grandchild and other remote lineal
descendants, as members of the family, it they chose to, for the purpose
of extending the benefit of the concessional stamp duty applicable to
settlement within the members of the family.

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SEBI ORDERS ON TAX LAUN DERING – More orders and updates

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Background

In an article in this column earlier published in the February 2015 issue of this Journal, recent orders of SEBI debarring hundreds of persons from dealing in securities were discussed. It was alleged in these orders that trades were carried out for the purposes of making illegitimate long term capital gains (LTCG) using the stock market which would be exempt from tax. In other words, the allegation was that massive tax evasion has been carried out by indulging in price manipulation and related activities.

Soon thereafter, there have been two more Orders of SEBI (Mishka Finance, dated 17th April 2015 and Pine Animation, dated 8th May 2015) of similar nature. The earlier article referred to orders of SEBI in the case of First Financial Services Limited (“First Financial”), Radford Global Limited (both orders dated 19th December 2014) and Moryo Industries Limited (dated 4th December 2014).

The amounts continue to be large with alleged tax evasion as LTCG as high as Rs. 87 crore in case of a single individual. The price increase reflected in such profits is nearly 8300% over a period of less than two years.

There are related developments too, which will also be discussed. Apparently, on the basis of guidance by SEBI, the Bombay Stock Exchange suspended 22 companies from trading ostensibly on the ground that these companies too had certain similar suspicious features. One of the companies, however, appealed to the Securities Appellate Tribunal which reversed the SEBI’s order. It appears that now the matter is before the Supreme Court. Some parties raised a grievance that only because the second holder in their demat account was debarred, their demat account has also been frozen.

In light of these and a few other factors, an update is in order.

Review of the Orders
A quick review of what the earlier and latest orders involved is given hereafter, though for a detailed discussion the preceding article of February 2015 can be referred to. SEBI made observations as follows that were common in most companies. SEBI found that there were certain companies that had very low activities and revenues/ profits/losses. They made preferential allotment of shares that was many times its existing paid up capital to a large number of persons. The allotment price was not, according to SEBI, justified by the fundamental of such companies. There were off market transfer of existing shares held by the Promoters. The shares were subdivided and/ or bonus shares issued. The share capital thus underwent a massive expansion in terms of total paid up capital and number of shares.

Following this, the share price was allegedly increased by manipulation by entities related/connected to the Promoters. In a short period of time, the price increased many times. In case of Mishka, the increase in price was more than 60 times the cost of the shares/preferential issue price. In case of Pine, such increase was 85 times.

The persons who acquired shares off market and those who were allotted shares by way of preferential allotment sold the shares at such high price. The shares were allegedly purchased by persons connected with the Promoters. Thus, SEBI alleged that the shares went back to the same group from whom shares were acquired. Since there was a gap of more than one year between the date of purchase and sale (also because of lock in period in case of preferential allotment of shares), the gains were long term capital gains and thus exempt from tax. SEBI alleged that this whole exercise was undertaken to generate such bogus LTCG using the stock market.

SEBI referred the matter, inter alia, to income-tax authorities. It also debarred the Company, its Promoters, the persons who had acquired the shares and the persons who gave the exit route to such persons, from accessing the capital markets and also dealing in the stock markets. The demat accounts of such persons were also frozen.

22 companies have already been identified by the BSE and their trading suspended though in one case, SAT has reversed the order of suspension. However, the matter appears to be in appeal before the Supreme Court now.

Debarring other companies? – directions of BSE and decision of SAT

The issue already involves hundreds of persons facing such a bar and hundreds of crores of allegedly bogus LTCG. From press reports, the total amount of such allegedly bogus LTCG may be Rs. 20,000 crore taking into account further companies being investigated. Thus, it is likely that more such orders involving other companies may be released soon.

The Bombay Stock Exchange (BSE) suspended trading of twenty-two other companies with effect from 7th January 2015 by a notice dated 1st January 2015. One of the companies, viz., 52 Weeks Entertainment Ltd. (formerly known as Shantanu Sheorey Aquakult Ltd.), appealed to SAT against this suspension. It is interesting to study this decision though it relates to the facts of one of the twentytwo companies.

The original notice of BSE did not give any reason for the suspension, nor had it given any opportunity to the companies to be heard. SAT directed BSE to give hearing and record decision, which BSE did on 12th January 2015. The SAT Order contains certain details relating to this company which are given below and then proceeds to set aside the Order of BSE, alongwith certain directions.

The company was suspended from 2001 to 2012 on account of non-payment of listing fees, NSDL charges, etc. The company decided to revive its operations in 2012. The company made three preferential allotment of shares in 2013/2014 after taking due approval from BSE as required by law. The aggregate preferential allotment was of 3,07,55,000 shares, and it appears that this took the share capital from 41,25,000 to 3,48,80,000 shares (i.e., by about 8.50 times). The public holding post the preferential issue was about 91%.

The suspension was made, BSE stated, on account of directions given by SEBI in its meeting with stock exchanges. SEBI gave certain parameters to identify companies for this purpose. These were (a) non-existence of the company at the address mentioned (b) making of preferential allotment with or without stock split and following end of lock in period, rise in volumes in trading and exit of the preferential allottees (c) company having weak financials which did not warrant the rise in price. The company disputed the order giving several reasons. It stated that the company did exist at the address given. It pointed out the existence of a representative there who had offered the BSE representative who had visited there to talk to the concerned person on phone.

The company had many upcoming operations/projects. Though some of the preferential allottees were also such allottees in case of Radford/Moryo orders, this cannot be a ground for suspension of trading. After hearing representatives of SEBI and BSE, SAT , vide its order dated 13th March 2015, set aside the order (the two members gave their reasons separately, and in following paragraphs, reasons given by Presiding Officer, Justice J. P. Devadhar are given).
It was noted that in other cases, SEBI had found market manipulation, etc. and passed formal orders while it had passed no such orders in the present case. it also noted that even the existence of the three parameters specified by SEBI were not established. BSE suspended trading “… even though there is not an iota of evidence to show that the appellant-company or its promoters/ directors have directly or indirectly indulged in market manipulation.” (per justice devadhar). SAT also noted that the price had risen from Rs. 2.67 to Rs. 149 but still, assuming there was market manipulation, no action was taken against the manipulators but trading in the company suspended instead. Justice devadhar observed that “…it is not open to SEBI to direct the Stock exchanges to suspend the trading in the securities of the companies if they satisfy certain parameters fixed by SEBI which have no bearing whatsoever with the alleged market manipulation.”

Justice  devadhar  further  stated  that,  “..the  fact  that some of those preferential shareholders have allegedly indulged in market manipulation cannot be a ground to consider that all preferential shareholders are market manipulators.”

The SEBI order was set aside. However, directions were also given that the Promoters of the company shall not buy/sell/deal in the securities of the company till 30th june 2015. further, SEBI/BSE could suspend the trading in the securities of the company and restrain the promoters/directors/preferential allottees if prima facie evidence of manipulation by them is found.

It appears that an appeal has been filed against the order of  SAT before  the  Supreme  Court  for  this  matter  of  52 Weeks entertainment Limited.

Debarment of Joint Account Holders
There  was  another  interesting  decision  of  SEBI.  It  appears that SEBI has frozen the accounts of certain persons named in its orders. However, in some cases, those accounts where such persons were second holders were also frozen. the result of this was that even though the first holder may not be a person who has been debarred, simply having a debarred person as a second holder resulted in such account getting frozen. this happened in the case of ms. Sachi agrawal and Ms. Sneha Agrawal. Their parents were debarred from dealing in securities in the matter of moryo industries Limited. However, though each of them had a separate demat account, such account was also frozen because their mother, Ms. Neeli Agrawal, who was second holder, had been debarred by an order. They prayed to SEBI claiming that the securities in such account belonged to them exclusively. They also provided several documents including certificates of Chartered accountant in support of their contention. However, SEBI was not satisfied. It held that in view of section 2(1)(a) of the Depositories Act, joint holders were joint beneficial owners. Taking a view that “…it is likely that the aforesaid beneficiary demat accounts would be used by Ms. Neeli agarwal for sale or purchase of securities thereby defeating the purpose of the interim order and ongoing investigation”, it refused to unfreeze the account.

Conclusion
The facts in such cases are clearly prima facie of serious concern. however, it is also seen that orders have been passed by SeBi till now against 5 companies, their Promoters and hundreds of shareholders. They have been debarred indefinitely from accessing the capital markets and dealing in securities. The orders are ad-interim and eXparte. It appears, from the statements of  SEBI itself, that it could be a long period before which the final orders would be passed. Trading in 22 other companies has been suspended by BSE, of which in one matter, SAT has reversed the matter and now the matter is before the Supreme Court. It also is seen that SEBI has  not yet given opportunity to most of the persons involved to present their case. In some cases, prima facie, it is submitted that orders are arbitrary and may cause injustice to people who are not involved in the alleged manipulation, etc. also, a common order has been passed against all persons even though the orders themselves describe substantially different alleged roles played by different groups.

Interesting question arises: Can SEBI question the eventual motive of a person trading on stock exchange? Can SEBI, purely on suspicion that the transaction is with an intent to avoid/evade tax, of financing, etc., take action against such persons? Parties may have many reasons for dealing through the stock exchange, not all of which would involve violations of Securities Laws. it appears from past decisions that what was relevant was whether price manipulation was involved.

The next few months, and eventually perhaps at least a couple of years will be interesting to watch. Apart from SEBI passing orders in case of several other companies, it is also likely that there will be appeals to SAT and Supreme Court. There will also be objections raised by parties before SEBI itself who will be obliged to confirm or modify the directions in individual cases. More importantly, these cases may also help clarify the role of SEBI in matters where there may be avoidance or violation of other laws such as income-tax.

It will also be interesting to watch how the income-tax department, with whom the information about such transactions has been shared by SeBi, deals with such transactions. More particularly, whether it disallows outright the claims of the parties to exemption leaving them exposed to interest, penalties and even prosecution. Some cases relate to AY 2013-14/2014-15, the returns for which have already been filed while other cases related to AY 2015- 16 for which there is time to file returns.

From the legal and other perspectives, the coming years will result in interesting developments which will be worth closely watching.

Part A Article of CIC

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Following is the article written by Shri Shailesh Gandhi – Former Central Information Commissioner, similar to what appeared in Times of India on 19.05.2015.

The RTI Act Present Status
The RTI Act has caught the imagination of people and the way it has spread is being appreciated and admired around the world. A great change has come in India in the last decade in the power equation between the sovereign citizens of the country and those in power. This change is just beginning and if we can sustain and strengthen it, our defective elective democracy could metamorphose into a truly participatory democracy within the next one or two decades. We have just begun this journey towards a meaningful Swaraj. I believe media-visual, print and social, and RTI have all been a fortunate heady mix. They have the potential of actualizing the promise of democracy. However there are also signs of regressive forces which could stymie these promises.

I am going to refer to the two biggest dangers to RTI :

1. Most established Institutions are unhappy with RTI . When the power equation changes between those with power and the ordinary citizen, resistance is to be expected.

Everyone in power generally feels transparency is good for others, whereas they should be left to work effectively. It is implied that transparency is a hindrance to good governance. We have travelled some distance away from the statement made by a seven judge bench by Supreme Court of India in S. P. Gupta vs. President of India & Ors. (AIR 1982 SC 149). “There can be little doubt that exposure to public gaze and scrutiny is one of the surest means of achieving a clean and healthy administration. It has been truly said that an open government is clean government and a powerful safeguard against political and administrative aberration and inefficiency”.

The former Prime Minister, harried by the uncovering of various scams by RTI , said at the Central Information Commission’s convention in October 2012: “There are concerns about frivolous and vexatious use of the Act in demanding information the disclosure of which cannot possibly serve any public purpose.” The present Prime Minister has taken a pre-emptive action by not appointing a Chief Information Commissioner at all to render it dysfunctional. The bureaucracy is also hardening its stand and in most cases has realised that the Commissioners are not really committed to transparency. This coupled with the long wait at the Commissions and the stinginess of the Commissions in imposing penalties is slowly making it difficult to get sensitive information which could aid citizens to expose structural shortcomings or corruption. A former Chief Justice of India said in April 2012, “The RTI Act is a good law but there has to be a limit to it.” I am amazed at the suggestion that there should be a limit to RTI . The limit has been laid down in the law by Parliament in terms of exemptions. Any interpretation beyond what is written in the law will be a violation of Citizen’s fundamental right to information.

2. A greater danger comes from the selection of Information Commissioners as a part of political patronage. Most have no predilection for transparency or work. Their orders are often biased against transparency and in many places a huge backlog is being built up as a consequence of their inability to cope. Consequently a law which seeks to ensure giving information to citizens in 30 days on pain of penalty gets stuck for over a year at the Commissions. Most of these Commissioners do not work to deliver results in a time bound manner and lose all moral authority to penalise PIOs who do not work in a time bound manner. Commissioners are slowly working less and less. In the Central Information Commission six Commissioners had disposed 22351 cases in 2011, whereas in 2014 seven Commissioners disposed only 16006 cases! Whereas civil society and media are rightly critical of the government for not appointing the balance four Commissioners, at the current rate of disposal eleven Commissioners will not dispose over 25000 cases a year. In 2014 CIC received 31000 cases and presently has a pendency of over 38000 cases. It is evident that at this languorous pace of working RTI will slowly become like the Consumer Act, mainly in existence for the Commissioners. Citizens must wake out of their slumber and focus on getting commissioners who will dispose over 6000 cases each year and give clear signals that they will not tolerate tardiness from Public Information Officers or Commissioners.

Eternal Vigilance is the price for democracy. We have a very useful tool to make our democracy meaningful and effective. It will work and grow if we struggle to ensure its health. We need to put pressure on various institutions so that they restrain from constricting our right, ensure a transparent process of selection for Commissioners and adequate disposal of cases at the Commissions. If we are lazy this right will also putrefy.

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IS IT FAIR TO CHARGE LATE FEES U/S. 234 E FOR DELAY IN FILING RETURN FOR TDS U/S. 194 IA?

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Introduction
Readers are aware that the Finance Act, 2012 introduced section 234E in the Income-tax Act, 1961 with effect from 01/07/2012. It requires payment of a late fee of Rs. 200/- per day for delay in submission of TDS returns. This is in addition to the interest payable on belated payment of TDS. Although, the late fee is restricted to the amount of TDS, it is very unfair. In fact, it has become a nightmare to small tax-deductors. The Hon’ble Bombay High court has upheld its constitutional validity of the provision in the case of Mr. Rashmikant Kundalia and another vs. Union of India and others (Writ Petition No.771 of 2014)

Unfairness
Section 194 IA was inserted by the Finance Act, 2013 w.e.f. 01/06/2013. It requires any person, being a transferee, responsible for paying to a resident transferor any sum by way of consideration exceeding Rs.50 lakh to deduct 1% as income tax thereon.

For any other type of TDS viz. u/s. 192, 194C, 194J etc. (collectively referred as other TDS) one need to have TAN but for the purpose of TDS u/s. 194IA, it is to be paid on PAN of deductor.

In case of other TDS, payment of TDS is to be made on or beforethe 7th of next month and TDS returns are to be filed at least 15 days after the end of the quarter. Therefore, there is a breathing time between payment of tax and filing of TDS return.

However, in case of 194IA, there is no separate return as such. The return is embedded in the challan itself. And there lies the problem.

As all are aware, the late fee u/s. 234 E has created havoc across the board. The Hon’ble Bombay High Court has upheld the constitutional validity of the section. Many deductors were not aware of this draconian fee applicable to TDS u/s. 194 IA.

In case of the other TDS, if the payment is delayed by, say a month, but before the due date of filing return, he will be liable to pay only the interest but not the late fee once the TDS return is filed in time.

However, if there is a delay in payment of TDS u/s. 194 IA, one has to pay interest as well as late fee u/s. 234E. Thus, the levy of late fees become automatic and results in double jeopardy.

It may be noted that instances for average individual paying for an immovable property maybe once or twice in his lifetime. The provision of TDS u/s. 194 IA is applicable to every transaction exceeding Rs. 50 lakh irrespective of the fact whether deductor is educated or uneducated, salaried or pensioner, housewife or senior citizen. It is improper to expect everyone to be well aware of the stringent provisions and deadlines just because the consideration exceeds Rs. 50 lakh.

Rather, it is pertinent to note that individuals and HUFs whose turnover of previous year has not exceeded the limit prescribed u/s. 44AB are exempt from the TDS provisions u/s. 194C, 194 J, 194 I, etc. There is no sound logic in thrusting such onerous burden u/s. 194IA on a layperson.

Suggestion
Ideally, section 234E itself deserves to be omitted from the Act. There was already a penalty of Rs. 100/- per day in terms of section 272A which in itself is on higher side. In any case, late fee should not be levied on individuals and HUFs in respect of delay in complying with section 194IA.

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Stamp Act – Change is the Only Constant!

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Introduction
Heraclitus, a Greek Philosopher stated that “Change is the Only Constant in Life”. Lawmakers in India also follow this maxim, especially when it comes to Fiscal Statutes. The Stamp Act is no exception. Every year, the Maharashtra Stamp Act, 1958 (“the Act”) is tweaked throwing up a mixed bag of changes – some good, some bad and some ugly! The Maharashtra Stamp (Amendment) Act, 2015 has made some substantial changes to the Maharashtra Stamp Act, 1958. Let us consider the impact of these changes on the way instruments are executed in the State of Maharashtra.

Multiple Documents for a Lease
Where multiple documents are executed for a lease transaction, the Act now provides that only the principal document would be exigible with the duty as on a lease. All other instruments would be chargeable with a duty of only Rs. 100. This would avoid double taxation. Earlier this facility was only available for four transactions ~ sale, mortgage, development agreement and settlement.

Ensuring Stamp Duty Payment
Certain State Government Departments, Institutions of Local Self-Government, Semi-Government Organisations, Banks, Non-Banking Institutions, etc., which have been notified by the State Government shall ensure that proper stamp duty is paid on certain unregistered documents which would also be notified. This is to ensure better compliance with the Stamp Act in respect of unregistered documents which may escape payment of stamp duty. The Notification would be eagerly awaited. This would also place an additional burden upon banks / NBFCs. One wonders whether they are capable of determining whether or not an instrument is adequately stamped? Can one expect an officer of a bank or an NBFC to exercise a quasi-judicial function?

Penalty Doubled
Under the Act, if any instrument is inadequately /not stamped, then it shall be inadmissible in evidence for any purpose, e.g., in a Civil Court. Such instruments are admissible in evidence on payment of the requisite amount of duty and a penalty @ 2% per month on the deficient amount of duty calculated from the date of execution. Earlier, the maximum penalty could not exceed twice the amount of duty involved. The maximum penalty now cannot exceed four times the amount of shortfall in duty involved. That is a 200% increase in the ceiling limit – an amazing strike rate even by Twenty20 standards! One would have to be extremely careful and exercise caution while executing instruments so that there is no hefty penalty later on.

Claim for Refund Extended
A claim for refund of stamp duty on an instrument which has not been executed due to refusal of any party to the instrument must be filed within 6 months from the date of the instrument. However, a concession has now been provided in case of a registered agreement to sell an immovable property which has been cancelled by a registered cancellation deed before taking possession of the property. In respect of such an agreement to sell, the application for refund of stamp duty can be now made within 6 months from the date of registration of the cancellation deed.

Amendments in Schedule – I to the Act
Schedule-I to the Act provides for various Articles which lay down the stamp duty applicable on different instruments. Section 3 provides that an instrument shall be stamped as per the rates / amount specified in Schedule-I. Hence, it becomes very essential to ascertain the rate specified in Schedule-I. The 2015 Amendment Act has made several changes to this Schedule-I, let us analyse some key changes:




Conclusion
In recent times, the Stamp Law has become very important and dynamic. Businesses and advisors would be well advised to pay heed to this Act and keep pace with the changes or else they could face unpleasant consequences.

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Notary – Recognition of notarial acts – Document executed and authenticated before Notary Public of Singapore – Document cannot be judicially recognised: Evidence Act section 85, Notaries Act, section 14.

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In the Matter of Rei Agro Ltd. & Ors. AIR 2015 Calcutta 54 (HC)

In a winding up petition, the counsel representing the petitioners produced a document which purported to be a Power of attorney issued by UBS AG dated 5th November, 2014, signed by two persons, namely, Celine Teo and Pram Kurniawan, described as Executive Directors. The Power of attorney had been notarised by one Yang Yung Chong, whose seal indicated that he/she was a notary public of Singapore.

A question, therefore, arose as to whether the Court can recognise a notarial act which took place before a notary public at Singapore.

The Court observed that the answer to this question was clearly provided u/s. 14 of the Notaries Act, 1952. So far as section 85 of the Indian Evidence Act was concerned, it provided that the Court shall presume that every document purporting to be a Power of attorney, and to have been executed before, and authenticated by a Notary Public, or any Court, Judge, Magistrate, Indian Consul or Vice- Consul, or representative of the Central Government, was so executed and authenticated. However, it must be held that to the extent it dwells upon presumption as to Powers of attorney, executed and authenticated by a Notary Public, the provision of section 85 of the Indian Evidence Act, 1872, cannot be read in isolation to the specific provision as contained u/s. 14 of the Notaries Act, 1952, insofar as notarial acts done by foreign notaries are concerned. For an Indian Court to recognise a notarial act done by a notary public at Singapore, it is imperative for the Central Government to issue a notification u/s. 14 of the Notaries Act, 1952, declaring that the notarial acts lawfully done by notaries in Singapore shall be recognised within India for all purposes, or as the case may be, for such limited purposes as may be specified in the notification. In other words, unilateral recognition by an Indian Court of a notarial act done by a foreign notary is impermissible in the absence of reciprocity of recognition as contemplated u/s. 14 of the Notaries Act, 1952. The reason is, if it is otherwise, the sanctity of the sovereign power being exercised by an Indian Court will be compromised.

Since there is clearly no such notification of the Central Government in the Official Gazette granting recognition to the notarial acts done by the notary public of Singapore, the Court held that it is unable to take any judicial recognition of the document which has been handed over before the Court by the counsel appearing on behalf of the petitioners.

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Hindu Law – Joint family property – Wife is entitled to share in property alongwith her husband – Wife cannot demand for partition, unlike daughter

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Thabagouda Satteppa Umarani vs. Satteppa AIR 2015 (NOC) 435 (Kar)(HC)

The Petitioner contended that as per the position of law the mother cannot demand a partition but, in the suit filed for partition among the co-parceners, she is entitled to a share, independent of her husband.

The court observed that the wife may be a member of a joint Hindu Family, but by virtue of being a member in the joint Hindu Family, she cannot get any share, right, title or interest in the joint Hindu Family property which that family owns. A wife cannot demand for partition, unlike a daughter. She would get a share only if partition is demanded by her husband or sons and the property is actually partitioned. The claim by a wife during lifetime of the husband in the share and interest which he has as a co-parcener in his Hindu Undivided Family is wholly premature and completely misconceived. This position of law is that though the wife is entitled to interest i.e. share, it is to be along with her husband. Any such decision being taken by the Courts, earmarking separate share for herself and one share in that of her husband’s cannot in any way be recognised.

To clarify this position, here it is to be noted that coparcener refers to a male issue i.e. may be a father or a son. The wives of co-owners do not get any interest by virtue of their marriage. It is only a Hindu widow who gets the interest of her husband in the co-parcenary or in the joint family property upon the death of her husband. That interest enables her to claim maintenance and residence. Only a widow can demand partition of the interest which her deceased husband would have been entitled to. Consequently, a wife has no share, right, title or interest in the Hindu Undivided Family in which her husband is a co-parcener with his brothers, father or sons and after the amendment of section 6 of the Hindu Succession Act, 2005, with his sisters and daughters also. The wife,may be a member of a joint Hindu Family, but by virtue of being a member in the joint Hindu Family, she cannot get any share, right, title or interest in the joint Hindu Family property which that family owns. A wife cannot demand for partition unlike a daughter. She would get a share only if partition is demanded by her husband or sons and the property is actually partitioned. The claim by a wife during lifetime of the husband in the share and interest which he has as a co-parcener in his Hindu Undivided Family is wholly premature and completely misconceived.

This position clarifies that though the wife is entitled to interest i.e., share, it is to be along with her husband.

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Black holes in the economy: Noida engineer’s case shows why India must get to the roots of black money generation

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India is one of the world’s largest generators of black money, and this is aided and supported by a weak institutional mechanism and incentives framework, which actually encourages it. The generation of black money in India is both a planned by-design activity and an unplanned ‘we-are-like-this-only’ socio cultural aspect of how we conduct our day-to-day lives, especially in everyday transactions.

Given complex social and economic dimensions to black money, it is not susceptible to easy solutions. Which parts of the Indian ecosystem are conducive for the generation of black money and what immediate steps can the government take to curb it?

First, almost every public works department of most governments in India manufactures illegal money – while awarding contracts for roads, buildings’ construction and other such projects.

This is because the system is very forgiving till ‘quid pro quo’ can be proved as per Sections 8, 9 and 10 of Prevention of Corruption Act 1988. Unless the bribe is taken in full view of a camera where voice samples and video images can be independently authenticated as being genuine and not doctored, it is almost impossible to prove this, thereby encouraging mass retail corruption in government.

India’s forensic abilities are limited and extraordinary investigative abilities are needed to link the money trail to questionable transactions (and not noting in files) and further link them to ‘quid pro quo’ as defined under the Act where it involves public servants.

Second, almost every Indian businessman’s favourite national pastime is over-invoicing and under-invoicing. Most Indian buyers and sellers try to reduce or hide their profits to pay less taxes than due (under-invoicing), or else they over-invoice imports.

Third, India’s real estate sector is the ‘mecca’ of black money generation and habitation. It is estimated that of India’s $2 trillion economy about 10-15% comprises real estate transactions of which about 40% is estimated to be in cash transactions!

It is impossible for an average Indian to sell property while accepting money purely by cheque, even if they are willing to sell their assets at a discount. This generates large sums of black money, which the promised real estate regulator is required urgently to curb.

In addition to addressing the above issues, what else can the government do to curb black money? The usual response of many governments is to announce a ‘one time’ amnesty scheme. These are short-term responses, for no one believes that anything is ‘one time’ in India. Further, while it may generate revenue for the government, it militates against the honest taxpayer.

Opaque instruments such as P-notes, introduced for and by vested interests with deep roots in subverting the system, should be forced to disclose the names of those whose wealth they contain. Likewise shell accounts or donations to trusts, anything that encourages ‘round tripping’ must be investigated.

An amendment to the existing Prevention of Money Laundering Act, to have every Indian citizen disclose all bank accounts and immoveable assets in India and abroad, would be a first step to build an inventory which can provide baseline data upon which changes can be tracked using an electronic tracking system.

Lastly, a request for disclosing names of purported offenders to the public is expected to be placed before Supreme Court by the SIT today. This great clamour and pressure to make all the names public is unwarranted because it will be in clear violation of the confidentiality norm in various bilateral investment and tax treaties, which can lead to a huge reputational risk for India, globally, if that happens.

Clear thinking suggests that one should make a distinction between crime proceeds and black money. The two are fundamentally different and here one is referring to the latter, not the former. Black money is money on which there is legitimate tax due in India but remaining unpaid. Instead of embarrassing a handful, the focus should be on getting to the roots of black money generation and preventing or reducing that significantly.

India should emerge as a torchbearer on the global stage through its concrete actions at home and abroad to curb black money, which will make it a global role model to emulate and not a pariah to shun.

(Source: Extracts from an article in Times of India, dated 03-12-2014)

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A. P. (DIR Series) Circular No. 51 dated 17th December, 2014

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Foreign Exchange Management (Deposit) Regulations, 2000 – Exemption thereof
This circular provides that all multilateral organisations of which India is a member nation, and their subsidiary/ affiliate bodies in India, and their officials in India are entitled to the exemption in terms of Regulation 4(5) of the Foreign Exchange Management (Deposit) Regulations, 2000, notified vide Notification No. FEMA 5/2000-RB dated 3rd May, 2000.

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A. P. (DIR Series) Circular No. 50 dated 16 December, 2014

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Rupee Drawing Arrangement – Delegation of work to Regional Offices – Submission of Statements/Returns

This circular reminds banks to make all their correspondence with RBI including submission of prescribed statements to the Regional Office of the Foreign Exchange Department of the Reserve Bank, under whose jurisdiction their registered offices function.

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A. P. (DIR Series) Circular No. 49 dated 16th December, 2014

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Money Transfer Service Scheme – Delegation of work to Regional Offices – Submission of Statements/Returns

This circular reminds Indian Agents under MTSS to make all their correspondence with RBI including submission of prescribed statements to the Regional Office of the Foreign Exchange Department of the Reserve Bank, under whose jurisdiction their registered offices function.

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A. P. (DIR Series) Circular No. 48 dated December 09, 2014

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Notification No. FEMA.320/2014-RB dated 5th September, 2014 Overseas Investments by Alternative Investment Funds (AIF )

This circular now permits an Indian Alternative Investment Fund (AIF) as defined under the SEBI (Alternative Investment Funds) Regulations, 2012 to invest in foreign securities subject to guidelines issued by RBI & SEBI.

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A. P. (DIR Series) Circular No. 47 dated 8th December, 2014

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Notification No. FEMA.320/2014-RB dated 5th September, 2014 Foreign Direct Investment (FDI) in India – Review of FDI policy – Sector Specific Conditions – Railway Infrastructure

This Notification & circular have made the following two changes in to Notification No. FEMA. 20/2000-RB dated 3rd May 2000 pertaining to FDI in Railway Infrastructure so as to bring it line with the Press Note issued by DIPP.

The amendments are as under: –
1. T he existing Annexure A has been substituted as under: –

“Annexure A”
Sectors Prohibited for FDI
FDI is prohibited in:
(a) Lottery Business including Government/ private lottery,
online lotteries, etc.
(b) Gambling and Betting including casinos etc.
(c) Chit funds
(d) Nidhi company
(e) Trading in Transferable Development Rights (TDRs)
(f) Real Estate Business or Construction of Farm Houses
(g) Manufacturing of Cigars, cheroots, cigarillos and cigarettes,
of tobacco or of tobacco substitutes
(h) Activities/sectors not open to private sector investment
e.g.
(I) Atomic energy and
(II) Railway operations (other than permitted activities
mentioned in entry 18 of Annex B).

Note: Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities.”

2. Annexure B has been amended as under: –
a. I n the existing entry 12.1, for the clauses (ii) and (iii), the following shall be substituted, namely:
“(ii) Infrastructure” refers to facilities required for functioning of units located in the Industrial Park and includes roads (including approach roads), railway line/sidings including electrified railway lines and connectivities to the main railway line, water supply and sewerage, common effluent treatment facility, telecom network, generation and distribution of power, air conditioning.

(iii) “Common Facilities” refer to the facilities available for all the units located in the industrial park, and include facilities of power, roads (including approach roads), railway line/sidings including electrified railway lines and connectivities to the main railway line, water supply and sewerage, common effluent treatment, common testing, telecom services, air conditioning, common facility buildings, industrial canteens, convention/ conference halls, parking, travel desks, security service, first aid center, ambulance and other safety services, training facilities and such other facilities meant for common use of the units located in the Industrial Park.”

b. T he following new Clause 18 has been added and certain other clauses have been re-numbered: –

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A. P. (DIR Series) Circular No. 46 dated 8th December, 2014

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Notification No. FEMA. 312/2014-RB dated 2nd July, 2014 Foreign Direct Investment (FDI) in India – Review of FDI policy – Sector Specific conditions – Defence

This Notification & circular have made the following two changes in to Notification No. FEMA. 20/2000-RB dated 3rd May 2000 pertaining to FDI in Defence Sector so as to bring it line with the Press Notes issued by DIPP.

The amendments are as under: –
1. I n Regulation 14(3)(iv)(D) the words “Defence Sector” have been deleted.
2. Paragraph 6 of Annexure B pertaining to “Defence Sector” has been substituted as under: –



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A. P. (DIR Series) Circular No. 45 dated 8th December, 2014

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Notification No. FEMA. 312/2014-RB dated 2nd July, 2014 Foreign Direct Investment (FDI) in India – Review of FDI policy – Sector Specific conditions

This circular has amended Annexure B of Schedule 1 to Notification No. FEMA. 20/2000-RB dated 3rd May 2000 with regard to sectoral classification/conditionalities for FDI/Foreign Investment so as to align it with the Circular on Consolidated FDI Policy issued by the DIPP on 17th April, 2014. The amended clauses are annexed to this Circular.

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Press Note No. 10 (2014 Series) dated December 03, 2014

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Review of Foreign Direct Investment (FDI) policy on the Construction Development Sector – amendment to ‘Consolidated FDI Policy Circular 2014’ 

This Press Note has with immediate effect revised paragraph 6.2.11 of ‘Consolidated FDI Policy Circular 2014’ as under: –

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