Laws And Business Archives

Redeemable Preference Shares – Debt or Equity?

In EPC Constructions vs. Matix Fertilizers, the Supreme Court ruled that redeemable preference shares (RPS) constitute equity, not “debt”. Consequently, RPS holders cannot initiate insolvency as financial creditors under the IBC. The Court emphasized that non-redemption is not a legal default, since the Companies Act strictly restricts redemption to distributable profits or fresh share issues. Although Ind AS 32 classifies mandatory RPS as financial liabilities, the Court held that this accounting treatment cannot override statutory legal character,. Ultimately, RPS classification depends on the specific statute: while Income Tax and Stamp Duty treat RPS as equity, FEMA regulations explicitly classify them as debt.

INTRODUCTION

In EPC Constructions India Ltd. vs. Matix Fertilizers and Chemicals Ltd. [2025] 260 Comp Case 766 (SC), the Supreme Court has delivered a significant judgment clarifying the legal character of cumulative redeemable preference shares and their treatment under the Insolvency and Bankruptcy Code, 2016 (IBC). The Court unequivocally held that preference shares, being part of a company’s share capital, do not constitute “debt” and that a preference shareholder cannot assume the status of a financial creditor for the purposes of initiating a Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC.

The ruling settles an important and frequently litigated question at the intersection of company law, Ind AS and the IBC — whether equity instruments structured with redemption features and fixed returns can be recharacterised as financial debt on the basis of their “commercial effect of borrowing”.

FACTS

The dispute arose from an engineering, procurement and construction (EPC) relationship between EPC Constructions India Limited and Matix Fertilizers and Chemicals Limited. EPC Constructions had undertaken substantial construction work for Matix’s fertilizer complex. Over time, significant sums became payable to EPC Constructions. Faced with a liquidity crunch, Matix converted a portion of EPC Constructions’ outstanding receivables into redeemable preference share capital. The terms provided for redemption at par after three years, subject to statutory conditions, and for cumulative dividends at a fixed rate of 8%. Subsequently, EPC Constructions issued a demand notice to Matix, asserting that non-redemption of CRPS constituted a default in payment of a financial debt and, hence, invoked the corporate insolvency of Matix under s.7 of the IBC.

The NCLT dismissed the Section 7 application, holding that:

preference shares were a part of share capital and not debt;
redemption of preference shares was statutorily restricted under Section 55 of the Companies Act, 2013;
non-redemption did not result in the preference shareholder becoming a creditor; and
in the absence of profits or proceeds from a fresh issue of shares, no redemption obligation could legally arise. Hence, it was not possible for a default in redemption to become a debt.

The NCLAT affirmed these findings, observing that the original contractual receivables stood extinguished upon conversion into preference share capital and that the appellant’s rights thereafter were confined to those of a shareholder.

ISSUE BEFORE THE SUPREME COURT

The issue before the Court was whether a holder of cumulative redeemable preference shares could be regarded as a financial creditor, and whether non-redemption of such shares could constitute a default under Sections 3(12) and 7 of the IBC.

PREFERENCE SHARES ARE SHARE CAPITAL, NOT DEBT

The Supreme Court held that it was a settled principle of company law that preference shares formed a part of a company’s share capital, and amounts paid on such shares were not loans. Dividends on preference shares were payable only out of distributable profits, and redemption is similarly constrained. The Court noted that the appellant had consciously agreed to convert its receivables into preference shares and had approved the transaction as an “investment”. Once such conversion took place, the original debt stood extinguished.

Relying on precedents, the Court held that a preference shareholder “does not and cannot become a creditor merely because redemption has not taken place”. It relied on the decision of the AP High Court in Lalchand Surana vs. Hyderabad Vanaspathy Ltd [1990] 68 COMP CASE 415 (Andhra Pradesh) which had held as follows:

“…………whether, in case of failure of the company to repay the amount due thereunder, such shareholders become “creditors”. ……….no such shares shall be redeemed except out of the profits of the company, which would otherwise be available for dividend, or out of the proceeds of a fresh issue of shares made for the purposes of the redemption. This aspect, in my opinion, shows that where redeemable preference shares are issued but not honoured when they are ripe for redemption, the holder of those shares does not automatically assume the character of a “creditor”. The reason is that his shares can be redeemed only out of the profits of the company which would otherwise be available for dividend, or by a fresh issue of shares. This is a limitation which is not applicable to the case of an ordinary creditor. In the face of this position in law, and in the absence of any authority on the subject, I hold that the holders of redeemable preference shares do not and cannot become creditors of the company in case their shares are not redeemed by the company at the appropriate time. They continue to be shareholders, no doubt subject to certain preferential rights mentioned in section 85. If they do not become the creditors of the company, they cannot apply for winding up of the company under section 433(e).”

The Court also referred to an English Commentary, “Principles of Modern Company Law” (Tenth Edition) by Gower, page 1071 which had stated:

The line between the holder of a debt instrument and a share is particularly narrow if the contrast is made with a preference shareholder, who is a member of the company, but a member whose share rights may limit the shareholder’s dividend to a fixed percentage of the nominal value of the share and give that shareholder no right to participate in surplus assets in a winding-up, and perhaps only limited voting rights. The main difference between the two in such a case may then be that the dividend on a preference share is not payable unless profits are available for distribution, whereas the debt holder’s interest entitlement is not subject to this.

The Court highlighted that redemption of preference shares under s.55 of the Companies Act, 2013 could occur only:

a) out of profits available for distribution as dividends; or
b) out of the proceeds of a fresh issue of shares made for the purpose of redemption.

The Court observed that in the present case, it was undisputed that Matix had incurred losses and had not made any fresh equity issue for redemption. Consequently, the CRPS had not become legally due and payable.

The Court rejected the argument that mere expiry of the contractual redemption period could override statutory restrictions, holding that redemption contrary to Section 55 would amount to an impermissible return of capital.

No “Debt” and No “Default” under the IBC

Turning to the IBC, the Court examined the definitions of “debt”, “financial debt” and “default”. It emphasised that a default could occur only when a debt has become due and payable in law and remains unpaid.

The Court held that since preference shares do not constitute debt, and since no redemption obligation had arisen in law, there could be no default under Section 3(12) of the IBC. Consequently, the threshold requirement for admission of a Section 7 application was not met.

The Court reiterated that the IBC is not a recovery statute and that its triggering mechanism is strictly circumscribed by statutory prerequisites.

COMMERCIAL EFFECT OF BORROWING

The Court drew an important distinction. It observed that while the phrase “commercial effect of borrowing” allows courts to look beyond form in appropriate cases, it cannot be used to recharacterise equity as debt where the legal nature of the instrument is clear and statutorily defined.

The Court noted that Section 5(8) expressly refers to instruments such as bonds, debentures and notes, but makes no reference to preference shares. The omission, the Court held, was significant.

The Court placed reliance on Radha Exports (India) Pvt. Ltd. vs. K.P. Jayaram, (2020) 10 SCC 538 which had held that the payment received for shares, duly issued to a third party at the request of the payee as evident from official records, cannot be a debt, not to speak of financial debt.

ACCOUNTING ENTRIES NOT CONCLUSIVE

Reliance was sought to be placed on the fact that the issuer company had shown the preference shares as a financial liability in its books of accounts under Ind AS. However, the Court negated this ground and held that the treatment in the accounts, due to the prescription of accounting standards, would not be determinative of the nature of the relationship between the parties as reflected in the documents executed by them.

Further it held that the IBC has its own prerequisites which a party needs to fulfil, and unless those parameters are met, an application under Section 7 will not pass the initial threshold. Hence, by resorting to the treatment in the accounts, this case could not be decided. It relied upon an earlier decision in Sutlej Cotton Mills Ltd. vs. CIT, (1979) 116 ITR 1 (SC) which had held that it was well settled that the way in which entries are made by an entity in its books of account is not determinative of the question whether it has earned any profit or suffered any loss.

It also relied upon another decision in Union of India vs. Association of Unified Telecom Service Providers of India and Others, (2020) 3 SCC 525, which dealt with the definition of gross revenue as appearing in AS-9, which was contrary to the definition as understood under earlier decisions. The Court held that the accounting standard is not comprehensive and does not supersede the practice of accounting. It only lays down a system in which accounts have to be maintained. Accounting standards make it clear that these do not provide for a straitjacket formula for accounting but merely provide for guidelines to maintain the account books in a systematic manner. The AS-9 definition could not supersede the generally accepted definition.

FINAL RULING OF THE COURT

The Supreme Court dismissed the appeal, holding that:

a) preference shares were equity, not debt;

b) a preference shareholder was not a financial creditor under the IBC;

c) non-redemption of preference shares did not constitute default;

d) accounting treatment could not override statutory and contractual character; and

e) the s.7 application was rightly rejected by the NCLT and NCLAT.

TREATMENT OF PREFERENCE SHARES UNDER OTHER LAWS

While the Supreme Court has given a good exposition of the treatment of preference shares under the IBC, it would be worthwhile to examine their classification under other laws also.

COMPANIES ACT

Under the Companies Act, 2013, redeemable preference shares are expressly classified as share capital and not as debt instruments. Section 43 recognises preference share capital as a distinct category of share capital, conferring preferential rights with respect to dividends and repayment of capital in winding up.

In this respect, an old decision of the Madras High Court in the case of Kothari Textiles Ltd. vs. Commissioner of Wealth-tax [1963] 48 ITR 816 (Madras) is quite relevant:

“We are unable to find any authority in support of this proposition. The real position seems to be to the contrary. In Palmer’s Company Law, it is stated at page 295 :

“Preference shares carry invariably a preferential right as to dividend which is expressed in a percentage of the nominal amount of the share, e.g., ‘6 per cent, preference shares’.

This does not mean that the preference shareholder is invariably entitled to six per cent, per annum. Unlike the debenture-holder, the preference shareholder who, after all, is a shareholder, is only entitled to income from his investment if a distributable profit within the meaning of the law is available. His right is not to dividend but to preferential treatment if and when dividend is distributed.

Moreover, this right will, in the normal cases, not automatically become effective when distributable profit is available; normally, according to the terms defining the rights of the preference shares, the preference shareholders are only entitled to claim preferential treatment when a dividend is declared. …………. The result accordingly is that the contention that the proposed dividends are classifiable as debts as on the valuation dates though there had been no declaration of the dividend by the general body fails. “

FEMA (NON-DEBT INSTRUMENTS) RULES, 2019

The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (FEMA NDI Rules) classify fully and mandatorily convertible preference shares as equity instruments, while optionally convertible or non-convertible preference shares are treated as debt instruments for FEMA purposes. Redeemable preference shares, which do not convert into equity but are repayable at par or otherwise, therefore fall outside the definition of “equity instruments” under Rule 2(k) of the NDI Rules. Thus, the FEMA approach is contrary to the one expressed by the Supreme Court in the context of IBC and Companies Act.

FEMA OVERSEAS INVESTMENT RULES, 2022

Under the FEMA Overseas Investment Rules and Regulations, 2022, redeemable preference shares issued by foreign entities are generally classified as debt instruments for outbound investment purposes, unless they are fully and compulsorily convertible into equity within a specified timeframe. Redeemable preference shares typically fall under the debt category, attracting restrictions on maturity, return, and leverage, and are subject to the overall financial commitment limits prescribed for overseas investments.

ACCOUNTING CLASSIFICATION UNDER IND AS 32

Ind AS 32 adopts a substance-over-form approach in distinguishing between financial liabilities and equity instruments. Under this standard, a preference share that contains a contractual obligation to deliver cash or another financial asset, such as mandatory redemption at a fixed or determinable date, is classified as a financial liability, notwithstanding its legal form as share capital. Consequently, mandatorily redeemable preference shares are typically presented as borrowings or other financial liabilities in the issuer’s balance sheet, with dividends treated as finance costs rather than distributions. Compulsorily convertible preference shares would continue to be shown as equity capital.

However, as the Supreme Court emphasised, this accounting classification is not determinative of legal rights and remedies under the Insolvency and Bankruptcy Code or the Companies Act. Ind AS 32 serves financial reporting objectives and cannot alter the statutory character of an instrument or elevate a shareholder to the status of a creditor for insolvency purposes.

INCOME TAX

Preference Shares are treated as capital under the Income Tax Act and dividend paid on them is treated as dividend both in the hands of the payer company and the investor. Thus, preference dividend is not allowed as a deduction for the payer company even if the shares are classified as debt under Ind AS.

STAMP DUTY

An issue of preference shares attracts duty as on an issue of capital. RPS are treated as securities under the Securities Contract (Regulation) Act, 1957 and hence, would be treated as capital for the purposes of levy of stamp duty. The Indian Stamp Act, 1899 levies duty at 0.005% on the value of the shares.

CONCLUSION

The Supreme Court’s decision in EPC Constructions vs. Matix Fertilizers marks a critical clarification in insolvency law. By holding that preference shares do not constitute debt and that preference shareholders cannot invoke the IBC as financial creditors, the Court has drawn a clear and principled boundary around the insolvency regime.

The ruling promotes certainty, preserves the integrity of corporate capital structures, and prevents misuse of the insolvency process. For practitioners, investors and corporate advisors, the judgment serves as a reminder that commercial substance cannot override statutory form where the law draws an explicit line — and that equity, however structured, remains equity unless Parliament decides otherwise.

However, when the statutes expressly provide otherwise, such as in the case of FEMA and Ind AS, the preference shares would be classified as debt. Hence, one needs to first determine the statute being dealt with and then adopt a “horses for courses approach”. Clearly, a “one-size-fits-all attitude” would not work in this case!!

BCAJ Admin

Probate – No Longer Required, Or Is It?

A probate is a court-certified copy of a Will that establishes its authenticity and validates the executor’s authority. Historically, the Indian Succession Act mandated probate for specific communities (e.g., Hindus, Parsis) residing in or holding assets in Mumbai, Chennai, or Kolkata. Significantly, the Repealing and Amending Act 2025 removes this mandatory requirement effective January 1, 2026, aiming to unify legal provisions across communities. While this amendment is prospective and does not affect pending proceedings, practical challenges likely persist. Institutions like housing societies may still insist on probate or indemnity bonds to avoid liability in family disputes. Furthermore, while the right to apply for probate is viewed as “continuous” courts generally apply a three-year limitation period from when the right accrues. Consequently, Living Trusts are recommended as a safer alternative to unprobated Wills.

INTRODUCTION

“Where there is a Will, there is a Relative,

Where there is a Relative, there is a Dispute,

And where there is a Dispute, there is a Probate.”

The above quote is the reality of several succession/inheritance cases. A probate is a copy of the Will certified by the seal of a Court. The probate of a Will establishes the authenticity and finality of a Will and validates all the acts of the executors. It conclusively proves the validity of the Will, and after a probate has been granted, no claim can be raised about the genuineness of the Will. A probate is different from a succession certificate. A succession certificate is issued by a Court when a person dies intestate, i.e., without making a valid Will. Thus, a probate is granted by a Court only when a valid Will is in place, while a succession certificate is granted only if a Will has not been made.

PROBATE WAS MANDATORILY REQUIRED

According to the Indian Succession Act, 1925 (‘the Act”), no right as an executor or a legatee can be established in any Court unless a Court has granted a probate of the Will under which the right is claimed. This provision applied only to certain communities:

(a) To those Hindus, Sikhs, Jains and Buddhists who were residing within the territory which on September 1870, was subject to the Lieutenant Governor of Bengal (Kolkata) or within the local limits of the ordinary original civil jurisdiction of the High Courts of Madras and Bombay.

(b) To those Hindus, Sikhs, Jains and Buddhists who were residing elsewhere, but who had immovable properties situated within the above territories. Thus, for Hindus, Sikhs, Jains and Buddhists who were residing or whose immovable properties were situated outside the territories of West Bengal or the Presidency Towns of Madras and Bombay, a probate was not mandatorily required. The requirement of probate also applied to Parsis who were residing or whose immovable properties were situated within the limits of the High Courts of Calcutta, Madras and Bombay.

Thus, the Act had a unique situation where a combination of certain communities and locations mandatorily required probate.

PROCEDURE

To obtain a probate, an application needs to be made to the relevant court along with the Will. The executor has to disclose the names and addresses of the heirs of the deceased. Once the Court receives the application for a probate, it invites objections, if any, from the relatives of the deceased.

The Court also places public notice for public comments. The petitioner must satisfy the Court about the proof of death of the testator and the proof of the Will. Proof of death could be in the form of a death certificate. However, in the case of a person who is missing or has disappeared, it may become difficult to prove the death. Under Section 108 of the Indian Evidence Act, 1872, any person who is unheard of or missing for a period of seven years by those who would have naturally heard of him if he had been alive, is presumed to be dead unless otherwise proved to be alive.

On being satisfied that the Will is indeed genuine, the Court grants a probate (a specimen of the probate is given in the Act) under its seal. The probate is granted in favour of the Executor/s named under the Will. The Supreme Court has held in the cases of Lalitaben Jayantilal Popat vs. Pragnaben J Kataria (2008) 15 SCC 365 and Syed Askari Hadi Ali vs. State (2009) 5 SCC 528, that while granting a probate, the Court must not only consider the genuineness of the Will but also the explanation given by the parties to all suspicious circumstances surrounding thereto along with proof in support of the same. The onus of proving the Will is on the propounder. The propounder has to prove the legality of the execution and genuineness of the Will by proving the absence of suspicious circumstances and surrounding the said Will and also by proving the testamentary capacity and the signature of the testator. When there are suspicious circumstances, the onus is also on the propounder to explain them to the court’s satisfaction and only when such onus is discharged would the court accept the Will – K. Laxmanan vs. T. Padmini (2009) 1 SCC 354.

It may be noted that the mere fact that a nomination has been made would have no impact on the Probate since the nominee is only a stop-gap arrangement till the actual legal heir is given the estate of the deceased.

The Evolutiom of Probate understanding the 2025 legal shift

OPPOSITION

If any relative, heir of the deceased, or other person feels aggrieved by the grant of a probate, then he must file a caveat before the Court opposing the granting of the probate for the Will. Once a caveat has been filed, the Court hears the aggrieved party. The aggrieved party has to prove that he would have a share in the estate of the testator if he (testator) had died intestate, i.e., without leaving a Will.

WHY DOES ONE NEED A PROBATE?

One of the questions that almost always arises in the case of a Will, is “why is the probate required?” A probate is a certificate from the High Court certifying the genuineness and finality of the Will.

Some of the reasons why a probate is obtained (even in cases/cities where not mandatorily required) are as follows:

(a) It is necessary to prove the legal right of a legatee under a Will in a court.

(b) Some listed / limited companies insist on a probate for the transmission of shares.

(d) The Registrar of Sub-Assurances usually insists on a probate for the registration of immovable properties/lands.

However, it would not be correct to say that no transfer can take place without a probate. There are several companies, societies, etc., which do transfer shares, flats, etc., even in the absence of a probate. They may, as a precaution, insist upon a release deed from the other heirs in favour of the legatee who is the transferee. Sometimes, the company/ society also asks for an indemnity from the legatee in its favour against any possible claims/lawsuits from the other heirs of the deceased.

SPECIAL FACTORS

Some of the rules in respect of obtaining a probate are as follows:

a) For obtaining a probate, the applicable court fee stamp is payable as per the rates prescribed in different States. For instance, to obtain a probate in the city of Mumbai, the application has to be made to the Bombay High Court and the court fee rates prescribed under the Bombay Court-Fees Act, 1959 would apply which are as follows:

Situation Court fees

(a) If the Property value 2% of the property value

exceeds ₹1,000 but is

lower than ₹50,000

(b) If the Property value 4% of the property value

exceeds ₹50,000 but is

lower than ₹2,00,000

exceeds ₹200,000 but

is lower than ₹300,000

(d) If the Property value 7.5% of the property

exceeds ₹300,000 value, subject to a maximum of ₹75,000

(b) A probate cannot be granted to a minor or a person of an unsound mind.

(c) If there is more than one executor, then the probate can be granted to all of them simultaneously or at different times.

(d) If a Will is lost since the testator’s death or it has been destroyed by accident and not due to any act of the testator and a copy of the Will has been preserved, then a probate may be granted on the basis of such a copy until the original or an authenticated copy has been produced. If a copy of the Will has not been made or a draft has not been preserved, then a probate can be granted of its contents or of its substance, if the same can be proved by evidence.

(e) A probate petition requires the following contents:

(i) A copy of the Will or the contents of the Will in case the Will has been lost, mislaid, destroyed, etc.

(ii) The time of the testator’s death – a proof of death would be helpful.

(iii) A statement that the Will is the last Will and testament of the deceased and that it was duly executed.

(iv) The details of assets which may come to the petitioner and the value for the purposes of computing the Court Fees.

(v) A statement that the petitioner is the executor of the Will.

(vi) That the deceased had a fixed place of residence or some immovable property within the jurisdiction of the Judge where the application is made.

(vii) It must be verified by at least one of the witnesses to the Will in the manner prescribed. It must be signed and verified by the petitioner and his lawyer.

2025 AMENDMENT

In light of the above position, the Repealing and Amending Act 2025 has removed the mandatory requirement of obtaining a probate in case of certain communities. As of 1st January 2026, a probate would not be mandatory even for Hindus and Parsis residing in Mumbai, Chennai, or Kolkata, or for those having immovable properties in these locations. The amendment aims to bring about uniformity in the provisions of the Act for all communities. However, this amendment does not alter the position in respect of a Will for which a probate petition is pending before any Court. The repeal will not affect existing rights, acts, obligations, liabilities, or proceedings. Thus, the amendment is not retrospective but is prospective from 1st January 2026. The amendment does not invalidate existing probates or automatically terminate pending existing probate proceedings. In the author’s view, even if a person resident in Mumbai, Chennai or Kolkata has died before 1st January 2026, but his Will is executed after this date, then a Probate would not be required.

IS NO PROBATE PRACTICALLY POSSIBLE?

While the Amending Act 2025 removes the mandatory requirement of a probate, in practice it may still be required. Without a probate the executor would immediately divide the estate among the beneficiaries under the Will. What happens in case of a subsequent challenge to the Will? What if the Will is challenged after many years? In case of disputes among family members, a probate may yet be insisted upon by the sub-registrar / company. As explained above, even today in places where a probate is not mandatory under the Act, many agencies insist upon the same. A similar scenario is likely to unfold even in Mumbai, Chennai and Kolkata. Some co-operative housing societies have taken a stand that even after the above Repealing Act, they would insist on a probate since the Managing Committee does not want to be caught up in the cross -fire of an unprobated Will.

WHEN CAN AN UNPROBATED WILL BE CHALLENGED?

One of the important questions which often arises in relation to a probate is, until when can the probate petition be lodged? Thus, is there a maximum time limit after the death of the testator within which the executors must lodge the petition before the Courts? In Vasudev Daulatram Sadarangani vs. Sajni Prem Lalwani, AIR 1983 Bom 268, the Court dealt with the issue of whether Article 137 was applicable to applications for probate, letters of administration or succession certificate? The Court held that there was no warrant for the assumption that this right to apply accrued on the date of death of the deceased. It held that the right to apply may therefore accrue not necessarily within 3 years from the date of the deceased’s death but when it becomes necessary to apply, which may be any time after the death of the deceased, be it after several years. However, reasons for delay must be satisfactorily explained to the Court. Further, such an application was for the Court’s permission to perform a legal duty created by a Will or for recognition as a testamentary trustee and was a continuous right which could be exercised any time after the death of the deceased, as long as the right to do so survived. This view of the High Court was approved by the Supreme Court in Kunvarjeet Singh Khandpur vs. Kirandeep Kaur &Ors(2008) 8 SCC 463. However, the Supreme Court also held that the application for the grant of a probate or letters of Administration was covered by Article 137 of the Limitation Act.

In Krishna Kumar Sharma vs. Rajesh Kumar Sharma (2009) 11 SCC 537 the Supreme Court once again reiterated this view and also held that the right to apply for a probate was a continuous right.

The Bombay High Court had an occasion to consider this question in the case of Suresh Manilal Mehta vs. Varsha Bhadresh Joshi, 2017 (1) AIR Bom R 487. The Court held that the only consistent view was that the right to apply for a probate was a continuing right and the application must be made within three years of the time when the right to apply accrued. An executor named in the Will could apply for probate at any time so long as the right to do so survived.

The next issue that arises is whether there is a time limit within which the unprobated Will can now be challenged? The Law of Limitation provides for a three years for filing a suit. However, it is important to note that the three-year period would commence from the time of the petitioner coming to know of the Will and not from the date of the death of the testator.

EPILOGUE

Removing the mandatory filter of a probate for certain communities and cities is a good move. However, one needs to tread with a great deal of care and caution in case of an unprobated Will. The risk of passing off a fraudulent /forged Will without the scrutiny of a Court will now be higher and could lead to higher hazards for families. A living Trust could be a better solution in such cases since it constitutes a transfer inter vivos rather than one that takes place on death.

BCAJ Admin

Transmission Of Securities

Transmission of securities occurs by operation of law upon a shareholder’s death, distinct from voluntary inter vivos transfers,. While nominees provide immediate administrative continuity, they act only as trustees; beneficial ownership remains governed by succession laws or Wills,. For transmission, companies require death certificates and legal evidence like probates or succession certificates, especially during disputes,. SEBI’s new “TLH” code (effective 2026) streamlines tax reporting for transfers from nominees to heirs,. To bypass complex probate processes, many individuals utilize private family trusts, removing assets from their personal estate during their lifetime.

INTRODUCTION

Securities have become the most valuable asset for many individuals. This is all the more true for promoters of listed companies. In such a scenario, when a shareholder dies, the transmission of the securities held by him in an effective and efficient manner becomes very vital. While the law in this respect is a mix of Legislation and Decisions, the practical aspects have issues at times. Let us examine the position with respect to the transmission of securities when a shareholder dies.

TESTATE OR INTESTATE SUCCESSION?

Depending upon whether the individual shareholder who dies left behind a valid Will, or not, the transmission would be testamentary (under a Will) or intestate (under the relevant succession law). In case of intestate succession, the law applicable would be the Hindu Succession Act, 1956 or the Indian Succession Act, 1925 of Portuguese Civil Code or the Uniform Civil Code (only where applicable) or the Shariah Law, depending upon the faith professed by the deceased.

LAW ON TRANSMISSION OF SHARES

A decision of the Gauhati High Court in Hemendra Prasad Barooah vs. Bahadur Tea Co. (P.) Ltd. [1991] 70 Comp Case 792 (Gauhati) has explained the meaning of transmission of shares. The word ‘transfer’ was an act of the parties or of the law, by which title to property was conveyed from one person to another. Inter vivos transfer was a transfer from one living person to another. It was a transfer of property during the lifetime of the owner and it was to be distinguished from succession where the property passed on death. Under section 211 of the Indian Succession Act, 1925, the executor of a deceased person was the legal representative for all purposes, and all the property of the deceased person vested in him as such. The word ‘transmission’ had been used in the Companies Act in contradistinction to the word ‘transfer’. ‘Transmission’ was referable to devolution of title by operation of law. It may be by succession or by testamentary transfer. As regards ‘transfer’, it had been used to mean inter vivos transfer. The executor of a deceased person was his legal representative for all purposes, and all the property of the deceased vested in him as such. Therefore, the right to the shares or other interest of the deceased member in the company devolved on the executor of the deceased by operation of law as distinguished from inter vivos transfer. But the executors did not become members of the company unless their names were registered. In such a situation, on death, the right of deceased to the shares or other interest as a member in the company devolved on executors as they are the legal representatives of the deceased. The right to the shares or other interest in the company, of the deceased member, passed or transmitted to the executors.

S.44 of the Companies Act, 2013 states that the shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the Articles of the company. The NCLAT Chennai Bench has explained the procedure for transmission of shares in its decision in the case of Emaar Hills Township Pvt. Ltd. vs. Telangana State Industrial Infrastructure Corporation, (2022) ibclaw.in 992 NCLAT.

In respect of `Transfer of Securities’, there are two parties to the `Contract’, i.e., Transferor and Transferee. Such a transfer is like any other `commercial transaction’. However, in the case of `Transmission of Shares’, there is no `Transferor’ or `Transferee’, as `Shares’ vests in favour of a `Person’, by an `Operation of Law’, like that of an `inheritance’ of `property’. Where `Transmission of Shares’ takes place, by an `operation of law’, there is no further requirement, to be carried out, like executing an `instrument of Transfer’ and `Company Law Register’; the `Securities’ on receipt of intimation of `Transmission’, in favour of a `Person’, to whom the `Shares’ are `transmitted’. Moreover, when `Title’ to the `Shares’, came to `Vest’ in another `Person’, by an `Operation of Law’, it was not essential to submit a Transfer Form.

A decision of the NCLAT, Chennai Bench in Avanti Metals Pvt. Ltd. vs. Alkesh Gupta, [2024] 158 taxmann.com 650 (NCLAT – Chennai) has succinctly summarised the law with respect to transmission of securities. The NLCAT analysed s.44 of the Companies Act and held that when s.44 of the Act provided that shares of any member in a Company were required to be transferred in the mode and manner provided for under the Articles of Association of the Company, the prescribed requirements were bound to be followed. In this case, the Articles required the production of a valid succession certificate. The NCLAT held that production of a succession certificate was a necessary requirement for transmission and since there was a dispute as to heirship of the deceased shareholder, the Company was within its right to refuse transfer of shares, until such succession dispute was resolved by a Competent Court of Law. It held that a Company cannot refuse `Transmission of Shares’, once the `legal heirs’ proved his/her entitlement to them, through a `Probate’, a `Succession Certificate’. It was pointed out that `transfer’ was an act of parties or law by which the title to the party was conveyed from one person to another. This would lapse by `Operation of Law’ or `Succession’. `Transmission of Shares’ on the basis of `Will’ could raise complicated issues which required an `evidence’, to be read by the parties and need to be determined by a Court of Law. It further held that a Will probated by a `Competent Court’ was binding on the parties, unless it is set aside by a `Competent Forum’. If the `Probate Proceedings’ were pending in a `Civil Court’, then the `Petition’ under the `Companies Act’ for `rectification of register’ would not be maintainable. Where there was a dispute as to the heirship of a `deceased shareholder’, the Company could refuse `transfer of shares’, until such dispute was resolved by a `Competent Court of Law’.

It relied upon the decision in the case of Thenappa Chettiar vs. Indian Overseas Bank Ltd. [1943] 13 Comp Case 202 (Madras) which held that a succession certificate can be granted, not merely in respect of a debt but also in respect of a security, which was defined in the Indian Succession Act to include a share in a company. The application for a certificate had to set out the right which the petitioner claimed and also the debts and securities in respect of which it was applied for. The grant of the certificate, specifying the debts and the securities, empowered the person to whom it was granted, not merely to receive the interest or the dividends on the securities, but also to negotiate or transfer them. The grant of a certificate gives to the grantee a good title to recover the debt or the security and affords full indemnity to all persons dealing with him. The High Court also held that transfer and transmission were quite distinct from each other. The former was based upon an act of parties; the latter was the result of the operation of law. In the case of a transmission of shares, they continued to be subject to the original liabilities, and if there was any lien on the shares for any sums due, the lien would subsist, notwithstanding the devolution of the shares.

The Supreme Court in Aruna Oswal vs. Pankaj Oswal [2020] 221 Comp Case 374 (SC) has held that a dispute as to inheritance of shares was eminently a civil dispute which could not be decided in proceedings of oppression and mismanagement.

ARTICLES OF ASSOCIATION

The Articles of Association of a Company generally provides for the procedure that a company will adopt in respect of an application made for transmission of shares. The Companies Act, 2013 Table F provides for the model form of the Articles. Regulation 23 states that on the death of a member, the survivor or survivors where the member was a joint holder, and his nominee or nominees or legal representatives where he was a sole holder, shall be the only persons recognised by the company as having any title to his interest in the shares.

It further states that any person becoming entitled to shares in consequence of the death of a member may, upon such evidence being produced as may from time to time properly be required by the Board of Directors and subject as hereinafter provided, elect, either
(a) to be registered himself as holder of the share; or
(b) to make such transfer of the share as the deceased member could have made

Moreover, the Board of Directors shall have the same right to decline or suspend registration as it would have had, if the deceased member had transferred the share before his death.

JOINT OR SINGLE HOLDING?

Since most shares and securities are held in a dematerialised form, the transmission needs to be seen with the Demat Account. The hierarchy in a demat account is that on demise of a joint holder the 2nd holder would become the account holder and on the demise of both the holders, the nominee, if any, would become the account holder.

In case of a single holder in a demat account, the nominee, if any, would become the account holder.

However, it should be remembered that the joint holder and the nominee would only be the legal owner and not the beneficial owner of the account. In this respect the decision of the Supreme Court in Shakti Yezdani vs. Jayanand Jayant Salgaonkar, 2024 (4) SCC 642 has settled the issue once and for all. The issue of whether a nomination overrides a Will in respect of securities and demat accounts had been a contentious issue for long. The Supreme Court analysed various Supreme Court decisions in case of bank accounts, insurance policies, PPF, etc., which had held that a Will overrides a nomination. It then analysed the provisions of the Companies Act and the Depositories Act, 1996 and held that the same legal principle even applies in the case of securities and a demat account. The vesting of the shares/securities in the nominee under the Companies Act, 1956 and the Depositories Act, 1996 was only for a limited purpose, i.e., to enable the Company to deal with the securities thereof, in the immediate aftermath of the shareholder’s death and to avoid uncertainty as to the holder of the securities, which could hamper the smooth functioning of the affairs of the company. The Court rejected the argument that the intention of the shareholder was to bequeath the shares/securities absolutely to the nominee, to the exclusion of any other persons (including legal representatives) and hence, constituted a ‘statutory testament. The Court held that this was because the Companies Act did not deal with succession, nor did it override the laws of succession. It was beyond the scope of the company’s affairs to facilitate the succession planning of the shareholder. In case of a Will, it was upon the administrator or executor under the Indian Succession Act, 1925, or in case of intestate succession, the laws of succession to determine the line of succession. Ultimately, it concluded that the nomination process did not override the succession laws. Simply said, there was no third mode of succession that the scheme of the Companies Act, 1956 (pari materia provisions in Companies Act, 2013) and the Depositories Act, 1996 aimed or intended to provide!

SEBI LODR PROVISIONS

The SEBI (LODR) Regulations, 2015 also provide for the procedure of transmission of shares in the case of a listed company. R.40 provides that the listed entity shall comply with all procedural requirements as specified in Schedule VII to the Regulations with respect to transmission of securities. Further, transmission of securities held in physical or dematerialised form shall be effected only in dematerialised form. The key requirements specified in the Regulations are as follows:

(1) In case of transmission of securities, where the securities are held in single name with nomination, the following documents shall be submitted:

(a) duly signed transmission request form by the nominee;
(b) death certificate;
(c) PAN of the nominee

(2) In case of transmission of securities, where the securities are held in single name without nomination, the following documents shall be submitted:

(a) a notarized affidavit from all legal heir(s) to the effect of identification and claim of legal ownership to the securities. In case the legal heir(s) are named in a Succession Certificate or Probate of Will or Will or Letter of Administration an affidavit from these legal heir(s)/claimant(s) alone shall be sufficient;

(b) duly signed transmission request form by the legal heir(s)/claimant(s);

(d) PAN of the legal heir(s)/claimant(s)
(e) a copy of Succession Certificate or Probate of Will or Will or Letter of Administration or Court Decree; Where a copy of Legal Heirship Certificate is submitted, a No Objection Certificate from all non-claimants must also be given

(f) for cases where the value of securities is up to ₹5 lakhs per listed entity in case of securities held in physical mode, and up to ₹15 lakhs per beneficial owner in case of securities held in dematerialized mode, as on date of application, and where the documents mentioned in para (e) are not available, the legal heir(s) /claimant(s) may submit the following documents:

(i) no objection certificate from all legal heir(s) stating that they do not object to such transmission or copy of family settlement deed executed by all the legal heirs; and

(ii) a notarized indemnity bond indemnifying the Share Transfer Agent/ listed entity,

The listed entity may, at its discretion, enhance the value of securities from the threshold limit of ₹5 lakhs, in case of securities held in physical mode.

SEBI’S NEW TLH CODE

In September 2025, SEBI introduced a new reporting code ‘TLH’ to simplify transmission of securities from nominees to legal heirs. It recognises that the nominee acts as a Trustee of the securities of the original security holder and transfers the securities to the legal heir as per succession plan.

As per earlier procedure for effecting such transfers, the nominee, while transferring the securities to legal heir had to effectuate an off-market transfer. This unfortunately in some cases led to the nominee being assessed for capital gains tax as on a transfer. SEBI recognised that while clause (iii) of Section 47 of the Income-tax Act, 1961, exempted such transmission from being considered as a “transfer”, this process caused inconvenience to the nominee.

In order to alleviate this inconvenience, a Working Group (“WG”) was formed. The WG, based on engagement with the CBDT, recommended that to address the issue, reporting entities should use the reason code “TLH” (i.e. Transmission to Legal Heirs), while reporting such transactions to the CBDT.

Accordingly, as a part of ease of doing investment and in order to streamline the process of transmission of securities from nominee to legal heir and resolve the above-mentioned issues related to taxation, SEBI has now specified that a standard reason code viz. “TLH” shall be used by the reporting entities while reporting the transmission of securities from nominee to legal heir, to the CBDT so as to enable proper application of the provisions of the Income Tax Act, 1961. This should be used in Demat Slips executed by the nominee who is transferring shares to the legal heir. SEBI has directed RTAs, Listed Issuers, Depositories and Depository Participants to make necessary system changes and implement this proposal with effect from 1st January 2026.

TRUSTS AS AN ALTERNATIVE SOLUTION

The entire judicial debate explained above over nominee vs beneficial owner, transmission, succession certificates/probates is relevant only in the case of securities held by the deceased in his individual name. Thus, these issues come to the fore when the shares where held by an individual and he/she passes away. However, in case the same are settled on a private family trust then all these problems cease to exist. A transfer to a trust is made during one’s lifetime and the shares then cease to be a part of the settlor’s estate. Accordingly, transmission and succession to these shares is not relevant even after the settlor passes away since they would constitute assets of the trust and not of the estate. In countries levying Estate Duty/Inheritance Tax, gifting assets to a trust could sometimes also help reduce this tax incidence. However, the trusts need to be structured properly after paying due heed to income tax/gift tax and other relevant issues. This has led to promoters of several listed companies parking their promoter holdings in private irrevocable trusts. Some press reports indicate that nearly one-third of all companies listed on the NSE have promoter holding parked in trusts and this number is rapidly increasing.

CONCLUSION

Promoter shares and for that matter shares, in general, form a large component of the estate of many families. If due care and caution is not paid to their succession/inheritance, then these could get locked up in legal tangles and controversies.

BCAJ Admin

Can You Be A Coparcener In Your Maternal Grandfather’s HUF?

INTRODUCTION

The Indian HUF is like the mythical ‘10-headed hydra’, cut off one head of controversy and two new controversies will spring up in its place! The storm over daughters being coparceners in their father’s HUF raged on for a very long time and finally, a three-judge decision of the Supreme Court in Vineeta Sharma’s case settled the issue. Just when one thought that this matter had been resolved, a new, related issue has cropped up – can one be a coparcener in his/her maternal grandfather’s HUF?

To discuss and deliberate on this issue, one would first need to understand the checkered background in relation to this aspect and then move on to the problem at hand.

HINDU SUCCESSION ACT – 2005 AMENDMENT

The Hindu Succession (Amendment) Act, 2005, amended the Hindu Succession Act, 1956 with effect from 9th September 2005. The Hindu Succession Act, 1956, is one of the few codified statutes under the Hindu Law. It applies to all cases of intestate succession by Hindus. The Act applies to Hindus, Jains, Sikhs, Buddhists and to any person who is not a Muslim, Christian, Parsi or a Jew. Any person who becomes a Hindu by conversion is also covered by the Act. The Act overrides all Hindu customs, traditions and usages and specifies the heirs entitled to property in case of intestate succession and the order or preference among them. The Act also deals with some important aspects pertaining to HUFs.

The 2005 Amendment provides that a daughter of a coparcener shall become, by birth, a coparcener in her own right in the same manner as the son, and further, she shall have the same rights in the co¬parcenary property as she would have had if she had been a son. It also provides that she shall be subject to the same liabilities in respect of the coparcenary property as a son. Accordingly, the amendment equated all daughters with sons, and they would now become a coparcener in their father’s HUF by virtue of being born in that family. She has all the rights and obligations in respect of the coparcenary property, including testamentary disposition. Not only would she become a coparcener in her father’s HUF but she could also make a will for er share in the same.

S.1(2) of the Hindu Succession (Amendment) Act, 2005, stated that it came into force from the date it was notified by the Government in the Gazette, i.e., 9th September 2005. Thus, the amended s.6 was operative from this date. However, did this mean that the amended section applied to:

(a) daughters born after this date;

(b) daughters married after this date; or

There was no clarity under the Act on this point.

JUDICIAL MATRIX

Various Supreme Court decisions dealt with these issues. Prominent amongst them were G. Sekar vs. Geetha (2009) 6 SCC 99; Sheela Devi vs. Lal Chand, (2007) 1 MLJ 797 (SC); Prakash vs. Phulavati, (2016) 2 SCC 36; Danamma @ Suman Surpur & Anr. vs. Amar & Ors., (2018) 3 SCC 343, etc. Some of the principles emanating from these decisions were as follows:

(a) The 2005 amendment is not retrospective and its application is prospective;

(b) If the HUF’s partition has taken place before 9th September 2005, then the amendment has no impact;

(c) The rights under the Hindu Succession Act Amendment applied to living daughters of living coparceners (fathers) as on 9th September, 2005, irrespective of when such daughters were born;

(d) The amendment applied to living daughters of living coparceners as of 9th September 2005. It did not matter whether the daughters were married or unmarried. It did not matter when the daughters were born.

VINEETA SHARMA’S DECISION

A three Judge Bench of the Supreme Court in the case of Vineeta Sharma vs. Rakesh Sharma, 2020 (9) SCC 1, considered a bunch of SLPs before it on the issue of the Amendment Act, 2005. The Court, by a very detailed verdict, considered the entire genesis of HUF Law. It held that in the Mitakshara School of Hindu law (applicable in most parts of India), in a coparcenary, there is unobstructed heritage, i.e., right is created by birth. When right is created by birth is called unobstructed heritage. At the same time, the birthright is acquired in the property of the father, grandfather, or great-grandfather. In case a coparcener dies without leaving a son, the right is acquired not by birth, but by virtue of there being no male issue is called obstructed heritage. It is called obstructed because the accrual of the right to it is obstructed by the owner’s existence. It is only on his death that the obstructed heritage takes place. It held that property inherited by a Hindu from his father, father’s father, or father’s grandfather (but not from his maternal grandfather) is unobstructed heritage as regards his own male issues, i.e., his son, grandson, and great-grandson. His male issues acquire an interest in it from the moment of their birth. Their right to it arises from the mere fact of their birth in the family, and they become coparceners with their paternal ancestor in such property immediately on their birth, and in such cases, ancestral property unobstructed heritage. Further, any property, the right to which accrues not by birth but on the death of the last owner without leaving a male issue, is called obstructed heritage. It is called obstructed, because the accrual right to it is obstructed by the existence of the owner. Consequently, property which devolves on parents, brothers, nephews, uncles, etc., upon the death of the last owner, is obstructed heritage. These relations do not take a vested interest in the property by birth. Their right to it arises for the first time on the death of the owner. Until then, they have a mere spes successionis, or a bare chance of succession to the property, contingent upon their surviving the owner. Accordingly, the Apex Court held that unobstructed heritage took place by birth, and the obstructed heritage took place after the death of the owner.

The Apex Court laid down a very vital principle that the coparcenary right, under s.6 (including after Amendment), is given by birth, which is called unobstructed heritage. It is not a case of obstructed heritage depending upon the owner’s death. Thus, the Supreme Court concluded that a coparcener’s father need not be alive on 9th September 2005, i.e., the date of the Amendment.

It held that though the rights could be claimed, w.e.f. 9th September 2005, the provisions were of a retroactive application, i.e., they conferred benefits based on the antecedent event, and the Mitakshara coparcenary law should be deemed to include a reference to a daughter as a coparcener. Under the amended section 6, since the right was given by birth, i.e., an antecedent event, the provisions concerning claiming rights operated on and from the date of the Amendment Act. Thus, it is not at all necessary that the father of the daughter should be living as on the date of the Amendment, as she has not been conferred the rights of a coparcener by the obstructed heritage. The effect of the amendment is that a daughter is made a coparcener, with effect from the date of the amendment, and she can also claim partition, which is a necessary concomitant of the coparcenary. Section 6(1) recognises a joint Hindu family governed by Mitakshara Law. The coparcenary must exist on 9th September 2005 to enable the daughter of a coparcener to enjoy the rights conferred on her. As the right is by birth and not by dint of inheritance, it is irrelevant that a coparcener whose daughter is conferred with the rights is alive or not. Conferral is not based on the death of a father or other coparcener.

The Court also held that the daughter should be living on 9th September 2005. It held that the expression ‘daughter of a living coparcener’ has not been used by Parliament. One corollary to this explanation would mean that if the daughter had died before this date, then her children cannot become coparceners in their maternal grandfather’s HUF. However, if she dies on or after this date, then her children can become coparceners in their maternal grandfather’s HUF.

POSITION OF DAUGHTER’S CHILDREN?

A son’s children automatically become coparceners in their paternal grandfather’s HUF. This is a right that is enjoyed by them by virtue of being born in that family. However, what would be the position of a daughter’s children? Could they also automatically now claim to be coparceners in their maternal grandfather’s HUF? Their mother is a coparcener at par with her brother, their mother can now be the karta of her father’s HUF (see Sujata Sharma vs. Manu Gupta, 2016 (222) DLT 647), then should they not necessarily become coparceners in such an HUF?

A Single Judge of the Aurangabad Bench of the Bombay High Court had an occasion to consider this issue in the case of Vishambhar s/o Namdev Nikam vs. Sunanda w/o Maheshankar Suryawanshi, Civil Revision Application No. 119/2025, Order dated 3rd September 2025.

In this case, a person (Namdev) had 4 daughters and 4 sons. His HUF owned land. One of his daughter’s daughters, Sunanda, filed a suit claiming to be recognised as a coparcener in her maternal grandfather’s HUF. Sunanda claimed that since her mother had a 1/8th share in the HUF of her father, Namdev (by virtue of the 2005 Amendment), she (Sunanda) in turn, had a ½ share (since her mother had 2 children) in this 1/8th share of her mother. She filed this claim when her mother was alive.

The Single Judge negated the claim of the granddaughter. The Court relied heavily on Vineeta Sharma’s decision (supra) to explain the concept of unobstructed and obstructed heritage. It held that the plaintiff has not acquired any right by birth. Thus, there she did not have any unobstructed heritage. She was not the lineal descendant of a paternal ancestor. She had a right of obstructed heritage in her maternal grandfather’s HUF. The Court also relied upon a decision of the Privy Council in the case of Muhammad Husain Khan vs. Kishva Nandan Sahai, AIR 1937 PC 233. In that case, the Privy Council held that an estate inherited by a person from his maternal grandfather cannot be held to be ancestral property. Only property which a man inherits from any of his 3 paternal ancestors, namely, his father, his grandfather and his great-grandfather would be called ancestral property.

Following this decision of the Privy Council, the High Court held that the mother of the plaintiff did not inherit an ancestral property. Further, as long as her mother was alive, she could not claim any interest in her grandfather’s HUF. The Court held that the plaintiff had no locus standi/cause of action till her mother was alive.

By virtue of the Hindu Succession Act, 1956, the plaintiff’s mother would become the absolute owner of the joint property when she is allotted a share in it. After that, she would be at liberty to dispose of this share. In the event that she died without making a valid Will, then the plaintiff could say that she had a ½ share in her estate.

IMPLICATIONS OF THIS JUDGEMENT

This judgment has far-reaching consequences till such time as it is reversed by a Higher Court.

(a) While a daughter and son are at par in their father’s HUF, their children are not.

(b) The son’s children will become coparceners in their paternal grandfather’s HUF, the daughter’s children will not become coparceners in their maternal grandfather’s HUF.

(d) Such grandchildren could become entitled to their mother’s share only after her demise, either by her Will or by virtue of intestate succession.

(e) Property inherited from one’s paternal grandfather is ancestral but not if it is inherited from the maternal grandfather.

One other (though not so held) implication, could be that the son-in-law would not become a member in his father-in-law’s HUF. A daughter-in-law on the other hand, would become a member in her father-in-law’s HUF!

EPILOGUE

The Supreme Court in Vineeta Sharma held that “The goal of gender justice as constitutionally envisaged is achieved though belatedly, and the discrimination made is taken care of by substituting the provisions of section 6 by Amendment Act, 2005”. So much for gender parity!!

BCAJ Admin

Fast Tracking Mergers

INTRODUCTION

Mergers are governed by the provisions of the Companies Act, 2013 (“the Act”). A traditional merger of two or more companies involves obtaining permission from the National Company Law Tribunal (“the NCLT”). However, the Companies Act also contains a provision for fast-track mergers that shortens the approval process for mergers. This Article examines these provisions and the recent developments that have taken place in this respect.

PROVISION FOR MERGERS

Sections 230 to 232 of the Act deal with compromises, arrangements and amalgamations between a company and its members/creditors. These constitute the provisions governing traditional mergers and require the companies to obtain permission of the NCLT for the merger. The Companies (Compromises, Arrangements and Amalgamations) Rules 2016 (“the Rules”) have prescribed the procedure under the Act. The Finance Minister in her Budget Speech for 2025–2026 stated that “Requirements and procedures for speedy approval of company mergers will be rationalised. The scope for fast-track mergers will also be widened and the process made simpler”.

However, consider a case where a Hindu male/female dies intestate and leaves behind no heirs at all to succeed to his property. In such a case, s.29 of this Act provides that such property shall devolve upon the Government and the Government would take such property subject to all obligations and liabilities to which an heir would have been subject.

FAST-TRACK MERGERS

Section 233 of the Act prescribes an alternative route to the traditional merger for certain eligible companies. Instead of obtaining permission of the NCLT, this class of eligible companies can opt for a fast-track merger. Such a merger shall comply with the following conditions:

(a) A notice of the proposed scheme inviting objections or suggestions, if any, from the RoC and Official Liquidators or persons affected by the scheme within 30 days is issued by the transferor and transferee company.

(b) The objections and suggestions received are considered by the companies in their respective general meetings and the scheme is approved by at least 90% of their respective members.

(d) The scheme is approved by majority representing 90% in value of the creditors or class of creditors of respective companies indicated in a meeting convened by the company by giving a notice of 21 days along with the scheme to its creditors.

(e) The Transferee shall file a copy of the scheme so approved with the Regional Director (RD), the RoC and the Official Liquidator.

(f) If the RoC or the Official Liquidator has no objections, the RD shall register the same. The RoC or the Official Liquidator may communicate the objections within 30 days to the RD.

(g) If the RD after receiving the objections or suggestions or for any reason is of the opinion that such a scheme is not in public interest or not in the interest of the creditors, he may file an application before the NCLT within a period of 60 days of the receipt of the scheme stating his objections and requesting that the Tribunal may consider the scheme under section 232. The section also provides that if the RD does not have any objection to the scheme or he does not file any application under this section before the Tribunal, it shall be deemed that he has no objection to the scheme, and the scheme will be considered as approved.

(h) On receipt of an application from the RD, if the NCLT is of the opinion that the scheme should be considered as per the merger procedure laid down in section 232, the NCLT may direct accordingly or it may confirm the scheme by passing such order as it deems fit.

(i) A copy of the order confirming the scheme shall be communicated to the RoC and the RoC shall register the scheme.

Once the scheme is registered, it would mean that the Transferor Company has been wound-up without liquidation and all its assets and liabilities have become those of the Transferee Company. Thus, this route prescribes a highway to mergers compared to the traditional route that requires a substantial amount of time for approval of merger by the NCLT.

Another significant difference between a regular NCLT process and the fast-track route is that the former requires approval of 75% of shareholders and value of creditors whereas the fast-track merger route requires approval of 90% of the total shareholders and value of creditors. Thus, a significantly higher approval threshold has been prescribed under the fast-track route.

ELIGIBLE COMPANIES

Rule 25 of the Rules prescribes a list of companies that are eligible for the fast-track merger route. Vide Notification NO. G.S.R. 603(E) [F. NO. 2/31/CAA/2013-CL.V PART] dated 04-09-2025, the Government has widened the class of companies eligible for fast-track mergers under section 233. The revised list of eligible companies prescribed under Rule 25 reads as follows:

(i) Two or more start-up companies – a “start-up company” means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognised as such in accordance with notification number G.S.R. 127 (E), dated the 19th February, 2019 issued by the Department for Promotion of Industry and Internal Trade.

(ii) One or more start-up company with one or more small company.

(iii) One or more unlisted company, (not being a section 8 Company) with one or more unlisted company, (not being a section 8 company), where every company involved in the merger, –

(a) has, in aggregate, outstanding loans, debentures or deposits not exceeding ` 200 crores, and

(b) has no default in repayment of loans, debentures or deposits referred to above.

These conditions must be satisfied within 30 days prior to the date of inviting objections from regulatory authorities as well as on the date of filing the scheme. Further, a certificate from the auditor of the company that the company meets the conditions referred to in this clause must also be filed in Form No. CAA-10A along with a copy of the approved scheme.

(iv) A holding company (whether listed or unlisted) and a subsidiary company (whether listed or unlisted). However, the transferor cannot be a listed company. Thus, a listed holding or subsidiary can be a transferee company. A major amendment is that earlier only merger with or into a wholly-owned subsidiary was permissible. Now, any subsidiary is permissible. Here it should be noted that even if a listed transferee company is involved, the voting threshold required is 90% of its members. This could become a difficult requirement for a listed company.

(v) Merger of fellow subsidiary companies of the same holding company, provided the transferor company is not listed. Thus, again the transferee can be listed.

(vi) Merger of a foreign holding company into a transferee Indian company which is its wholly owned subsidiary company incorporated in India. While cross-border mergers were always permissible under Rule 25A of the Rules and also permissible under FEMA vide the Foreign Exchange Management (Cross Border Merger) Regulations, 2018, this is the first time that such a merger has been made possible under the fast-track route.

(vii) The amendment also now specifies that the above provisions will also apply to a demerger of an undertaking. Thus, fast-track demergers are now expressly permissible.

TAX NEUTRALITY

S.2(1B) of the Income-tax Act, 1961 defines an amalgamation. This definition does not prescribe that the amalgamation must be one under sections 230-232 of the Act. Hence, even fast-track mergers would be treated as an amalgamation under the Act. S.47 prescribes additional conditions for an amalgamation when a transfer of capital asset, issue of shares would not be treated as a taxable transfer for computing capital gains. Even these do not prescribe that the merger must be one approved by the NCLT. S.2(6) of the Income tax Act, 2025 is also on similar lines as the aforesaid s.2(1B).

However, in the case of a demerger, s.2(19AA) of the 1961 Act states that it must be a demerger pursuant to a scheme of arrangement under ss.391-394 of the Companies Act, 1956 (now ss. 230-232 of the Companies Act 2013). Hence, the 1961 Act specifically requires that the demerger must be NCLT approved. Similarly, s.2(35) of the Income tax Act 2025 also specifically refers to a demerger under ss.2302-232 of the Companies Act 2013. Hence, both the Acts require that a demerger must be a traditional NCLT approved one. With the recent amendment to the Rules expressly permitting a fast-track demerger, it would be desirable that this restriction in the Income tax Act is removed. However, the Ministry of Finance Response to the Select Committee stated that fast-track mergers are non-court monitored and therefore the valuations thereof can result in tax implications or avoidance. Hence, tax neutrality was never provided to such demergers both under the 1961 Act as well as under the 2025 Act.

STAMP DUTY

The Maharashtra Stamp Act, 1958 levies duty on an instrument executed in the State of Maharashtra. Article 25(da) of Schedule I to this Act prescribes the stamp duty in case of an order of the NCLT in respect of a merger or demerger. However, this Article specifically refers to Sections 230 to 234 of the Companies Act, 2013. Hence, the concessional duty allowed for NCLT approved mergers/demergers would be applicable even to fast-track mergers and demergers.

SEBI TAKEOVER CODE EXEMPTION

The SEBI (Substantial Acquisition of Shares & Takeover Regulations) 2011 provides a general exemption from making an open offer for any acquisition of shares/voting rights pursuant to a Scheme of amalgamation /merger /demerger pursuant to an order of a Tribunal under any law. Even in case of a fast-track scheme, the ultimate order is passed by the NCLT. Thus, it is possible to contend that the exemption is wide enough to cover fast-track schemes also.

SEBI LODR REGULATIONS

Regulation 37 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 prescribes that every listed company that is undergoing a scheme of arrangement must file its scheme with BSE/NSE for their approval once it is approved by the shareholders and before submitting the same to the NCLT. Thus, if the transferee company is a listed company and is a party to the fast-track merger/demerger, then it must comply with these provisions once the scheme is approved by its shareholders.

FEMA REGULATIONS

The Foreign Exchange Management (Cross Border Merger) Regulations, 2018 deal with both inbound and outbound cross border mergers. These Regulations are wide enough to cover the fast-track merger of a foreign holding company into a transferee Indian company which is its wholly owned subsidiary company incorporated in India.

ACCOUNTING

Ind AS 103 lays down the accounting treatment for Business Combinations. The phrase business combinations has been defined to mean a transaction or other event in which an acquirer obtains control of one or more businesses. Thus, it is wide enough to cover accounting for fast-track schemes.

AS 14 on Accounting for Amalgamations is also wide enough to cover such schemes. It defines an Amalgamation to mean an amalgamation pursuant to the provisions of the Companies Act, 2013 or any other statute which may be applicable to companies and includes ‘merger’. Thus, fast-track mergers would be covered under AS 14.

GST IMPLICATIONS

Section 87 of the Central GST Act, 2017 deals with the GST applicability on supplies between the Appointed Date and the Date of the Order of the NCLT. Section 22 deals with the requirement of GST registration of the transferee. Section 18(4) deals with transfer of unutilised input tax credit of the transferor involved in a scheme of merger/demerger. All these provisions are wide enough to apply even to a fast-track merger / demerger.

TO SUM UP

Expanding the scope of fast-track mergers is a step in the right direction. NCLTs across are burdened with insolvency cases under the IBC 2016. This has led to limited time being available for schemes of mergers. Fast-tracking this to RDs might be a good move. However, one needs to consider whether the RDs would have the bandwidth to adjudicate such schemes. Nevertheless, this is a good move to unclog the judicial system!

BCAJ Admin

Law Of Escheat

INTRODUCTION

How many of us have heard the term “Escheat”? While at first blush it sounds like it is a new form of cheating, the reality is far from this. Escheat is a legal phrase of French origin which means that the property of a deceased, to which there are no legal claimants, falls to the State, i.e., reverts to the Government. This law is useful in cases of intestate succession since the Laws of India provide that in cases where there is no legal heir of the deceased, the State becomes the entity entitled to succeed to his estate. The Supreme Court in Bombay Dyeing & Manufacturing Co., Ltd vs. the State of Bombay, 1958 AIR 328 has held that the expression “abandoned property” or to use the more familiar term “bona vacantia ” comprises properties of two different kinds, those which come in by escheat and those over which no one has a claim. In Halsbury’s Laws of England, Third Edition, Vol. 7, page 536, para. 1152, it is stated that ” the term bona vacantia is applied to things in which no one can claim a property and includes the residuary estate of persons dying intestate “.

The earliest exposition on this issue was by the Privy Council in the case of Collector of Masulipatnam v. Cavaly Vencata Narainapah (1859-1961) 8 M.I.A. 529. The Court held that the estate of a Hindu Brahmin, dying without heirs, escheats to the Crown, as the Sovereign power in British India. An estate taken by escheat is subject to the trusts and charges, if any, previously affecting the estate.

Article 296 of the Constitution of India is the constitutional provision enabling vesting of the property with the State Government if a person dies intestate and without any heir qualified to succeed to his or her property. It provides that any property in the territory of India which, if this Constitution had not come into operation, would have accrued to His Majesty or, as the case may be, to the Ruler of an Indian State by escheat or lapse, or as bona vacantia for want of a rightful owner, shall, if it is property situate in a State, vest in such State, and shall, in any other case, vest in the Union.

HINDU SUCCESSION ACT, 1956

This Act applies in case of a Hindu, Jain, Sikh or Buddhist dying intestate, i.e., without a valid Will. In such an event, in case of a Hindu male dying intestate, his estate devolves on his Class I legal heirs; else, his Class II heirs; else his agnates and if none, then his cognates. Similarly, in the case of a Hindu female dying intestate, her estate first devolves on her husband and children; if none, then on the heirs of her husband; if none, then on her parents; if none, then on the heirs of her father and lastly on the heirs of her mother.

Based on this enabling law, certain States have enacted specific Escheat Legislation. For instance, the Rajasthan Escheats Act, 1956 regulates the procedure for initiation of proceedings and making of enquiries in the matter of lawaris properties vesting in the State of Rajasthan under Article 296 of the Constitution of India. Maharashtra does not have such a specific Law.

The Supreme Court in State of Punjab v Balwant Singh, (1992) Suppl (3) SCC 108, has held that this section shall not operate in favour of the State if there is any other heir of the intestate. The section itself indicated that there must be failure of heirs. Failure of heirs meant the total absence of heirs to the intestate. It was important to remember that female Hindu being the full owner of the property became a fresh stock of descent. The phrase fresh stock of descent refers to an heir’s ability to inherit property, and pass it on to their own direct heirs, thereby creating a new line of succession separate from the original owner’s lineage. This would thus create a new line of succession. If she left behind any heir , her property could not be escheated. It is only in the event of the deceased leaving behind no heir to succeed, that the State steps in to take the property. The Court held that the State did not take the property as a rival or preferential heir of the deceased but as the Lord paramount of the whole soil of the country. It cited Halsburys’ Laws of England, 4th ed. Vol. 17 para 1439 wherein it was stated as follows:

“To whom land escheated – Escheat in the case of death intestate before 1926 was to the mesne lord is he could be found but, as since 1290 sub-infeudation has been forbidden, in the great majority of cases there was no record of the mesne tenure, and the escheat was to the Crown as the Lord paramount of the whole soil of the country.”

Again, in Kutchi Lal Rameshwar Ashram Trust Evam Anna Kshetra Trust through Velji Devshi Patel vs. Collector, Haridwar, 2017 (16) SCC 418, the Court explained the doctrine of escheat. It held that the postulated that where an individual died intestate and did not leave behind an heir who is qualified to succeed to the property, the property devolved on the government. Though the property devolved on the government in such an eventuality, yet the government took it subject to all its obligations and liabilities. Failure meant a total absence of any heir to the person dying intestate. When a question of escheat arose, the onus rested heavily on the person who asserted the absence of an heir qualified to succeed to the estate of the individual who had died intestate to establish the case. The law did not readily accept such a consequence. Where the Crown or Government claimed by escheat, the onus lay on it to show that the owner of the estate died without heirs. An estate taken by escheat was subject to the trusts, charges and legal obligations (if any) previously affecting the estate, e.g., mortgages and other encumbrances. It concluded that Escheat was a doctrine which recognised the state as a paramount sovereign in whom property would vest only upon a clear and established case of a failure of heirs. This principle was based on the norm that in a society governed by the rule of law, the court will not presume that private titles were overridden in favour of the state, in the absence of a clear case being made out on the basis of a governing statutory provision.

In State of Bihar vs. Radha Krishna Singh, (1983) 3 SCC 118, a Bench of three Judges of the Supreme Court formulated the principle that it was well settled that when a claim of escheat was put forward by the Government the onus lay heavily on the appellant (that is the Government) to prove the absence of any heir anywhere in the world. Normally, the court frowned on the estate being taken by escheat unless the essential conditions for escheat were fully and completely satisfied. Further, before the plea of escheat could be entertained, there must be a public notice given by the Government so that if there is any claimant anywhere in the country or for that matter in the world, he may come forward to contest the claim of the State.

The Calcutta High Court in Debabrata Mondal vs. State of West Bengal, 2008 AIR Cal 13, was faced with an interesting case. A lady died, leaving behind her step-sons from her husband’s previous marriage. The State of West Bengal invoked the law of escheat on grounds that the stepchildren were not entitled to her property for inheritance. The High Court negated the attachment by the State and held that the Hindu Succession Act was very clear that the property of a female Hindu dying intestate shall devolve upon the heirs of her husband, i.e., upon her husband’s children. Hence, there could not be any doubt that they were entitled to claim that the property left by the deceased and the same would devolve on them. Since they succeeded to their step-mother’s property, the Law of Escheat would fail.

INDIAN SUCCESSION ACT, 1925

This Act deals with intestate succession in case of persons other than that of a Hindu, Jain, Sikh, Buddhist or a Muslim. Thus, it would cover cases of Indian Christians, Parsis, etc. This Act provides that where the intestate dies without a widow and without leaving people who are kindred (i.e., persons descended from the same stock or common ancestor as his) to him, then his property shall go to the Government.

In his Commentary on “The Indian Succession Act”, 11th edition, 2015, LexisNexis, P. L. Paruck states that the reason of this law seems to be that the state as the protector of every citizen during his life is entitled to take his property as a reward for its services where there are no heirs to the deceased. In such cases, the Collector has powers to issue notices to the claimants of the property – Indian Timber and Plywood Corp Ltd, v Collector of Kozlikode, 1996 KLJ 564.

Thus, both the Hindu Succession Act and the Indian Succession Act have codified the Law of Escheat!

State of Rajasthan v. Ajit Singh & Others, SLP (C) NO(S).14721-14723/2024, Order dated 1st September 2025

This decision of the Apex Court dealt with an interesting issue of what happens when a Will of a Hindu deceased is held to be invalid? Can the law of escheat automatically apply in such a case? The Court analysed the provisions of the Hindu Succession Act and that of the Indian Succession Act inasmuch as it pertained to a Will. It laid down the following waterfall mechanism:

(a) If a Hindu male had prepared a valid Will for his property then the Will would override the provisions of the Hindu Succession Act;

(b) If the Will is probated or proved before a competent court of law, then the legatees under the Will would succeed to the demised testator’s properties.

(c) If the Will was held to be invalid by a Court, then firstly as per the Hindu Succession Act, his estate would devolve upon his Class I heirs;

(d) If there is no heir of class I, then upon the Class II heirs;

(e) If there was no Class II heir, then upon his agnate (one person is said to be an “agnate” of another if the two are related by blood or adoption wholly through males);

(f) If there was no agnate then upon his cognate (one person is said to be a “cognate” of another if the two are related by blood or adoption but not wholly through males);

(g) It was only when the Will was declared invalid and also when all of the above legal heirs failed, that the principle of escheat would come into play.

(h) In other words, if a Will of a Hindu has been declared to be invalid and probate is not granted, then the provisions of the Hindu Succession Act would automatically apply as the deceased would have died intestate. It has to be then ascertained as to whether there are any Class I or Class II heirs, agnates or cognates. Only on the failure of any qualified heir being present to succeed to the properties, under the aforesaid Act.

(i) It is only when there is failure of heirs that the estate of an intestate Hindu would devolve on the Government under the Act. This means that till that stage arrives, the Government is a stranger to the probate proceedings as well as any proceeding regarding succession under the personal law.

(j) Merely because the State has invoked the escheat provisions, would not give locus standi to assail the grant of probate of the Will of the testator.

(k) Even in the event the probate has been granted illegally to the legatees of a Will inasmuch as the Will itself is not a valid Will, then under section 263 of the Indian Succession Act, only the persons who could have succeeded, by the Will could have filed an application for revocation of the grant of probate and none else.

Ultimately, the Court concluded that it was only in the event of intestate succession, that section 29 of the Act would apply and there would be a devolution of the estate of a deceased Hindu on the Government and not otherwise.

Strangers cannot be parties to intestate succession

One important fundamental difference between an intestate succession and a succession by a Will is that in the case of an intestate succession only heirs of the deceased can succeed to his property. These could be closer heirs or distant heirs. However, strangers cannot be a party to his estate. In the case of a valid Will, a testator is free to leave everything to strangers. India does not have forced heirship rules and hence, an Indian has full freedom to prepare his Will as per his wishes and bequeath to whomsoever he wishes. This issue has been elaborated eloquently by the Supreme Court in its decision in Krishna Kumar Birla vs. RS Lodha, (2008) 4 SCC 300 where it has held:

“Why an owner of the property executes a Will in favour of another is a matter of his/her choice. One may by a Will deprive his close family members including his sons and daughters. She had a right to do so. The court is concerned with the genuineness of the Will. If it is found to be valid, no further question as to why did she do so would be completely out of its domain. A Will may be executed even for the benefit of others including animals.”

CONCLUSION

The Law of Escheat is one more reason why it makes sense for every adult to make a valid Will. This would give one the discretion to decide who gets his estate after his lifetime. Otherwise, rest assured that the Government would always be there for those who have no one!

BCAJ Admin

Wills – Recent Judicial Developments

INTRODUCTION

This feature has over the last 23 years covered the subject of Wills and its myriad issues many times. However, this is a topic which is always subject to interesting developments and many controversies and hence, we keep revisiting it time and again. Recently, the Supreme Court has had occasions to examine important facets pertaining to a Will. Let us examine these vital decisions and the propositions laid down by them.

EXCLUDING NEAR AND DEAR RELATIVES

Quite often we hear that a person has excluded his nearest relatives from his Will in favour of a stranger. This is absolutely possible in India and the answer to this lies in the legal system followed by India. There are two basic legal systems in International Law ~ Civil Law and Common Law. Certain Civil Law jurisdiction countries, such as, France, Italy, Germany, Switzerland, Spain, Japan, etc., have forced heirship rules. Forced Heirship means that a person does not have full freedom in selecting his beneficiaries under his Will. Certain close relatives must get a fixed share. Sharia Law is also an example of forced heirship rules. This is a feature which is not found in Common Law countries, such as, the UK and India. Thus, an Indian has full freedom to prepare his Will as per his wishes and bequeath to whomsoever he wishes. This issue has been elaborated eloquently by the Supreme Court in its decision in Krishna Kumar Birla vs. RS Lodha, (2008) 4 SCC 300 where it has held:

“Why an owner of the property executes a Will in favour of another is a matter of his/her choice. One may by a Will deprive his close family members including his sons and daughters. She had a right to do so. The court is concerned with the genuineness of the Will. If it is found to be valid, no further question as to why did she do so would be completely out of its domain. A Will may be executed even for the benefit of others including animals.”

Inspite of the above clear position, the question that often arises is whether any specific wordings are needed by a testator (i.e., the person who prepares the Will) to exclude his near and dear relationships and bequeath his estate to a stranger? On a lighter vein, once excluded the near would not remain so dear.

The Supreme Court considered this issue in the case of Gurdial Singh (Dead) vs. Jagir Kaur (Dead), CA (Nos.) 3509-3510/2010, Order dated 17^th July 2025. A person while executing a Will did not make any bequest to his wife and instead preferred his nephew. The question before the Apex Court was faced with the question of whether, in the facts and circumstances of the case, the non-mention of the status wife of the testator in the Will was valid? Further, was the failure to give reasons for her disinheritance in the Will a suspicious circumstance which exposed a lack of a free disposing mind of the testator, thereby rendering the Will invalid? This question arose inspite of the Will being a registered one.

The Court laid down the basic legal framework in this aspect. A Will has to be proved like any other document subject to the requirements of Section 63 of the Indian Succession Act, 1925 and Section 68 of the Indian Evidence Act, 1872, that is examination of at least of one of the attesting witnesses. However, unlike other documents, when a Will is propounded, its maker is no longer in the land of living. This casts a solemn duty on the Court to ascertain whether the Will propounded had been duly proved. The onus was on the propounder (i.e., the person claiming that the Will was genuine) not only to prove due execution but dispel from the mind of the court, all suspicious circumstances which cast doubt on the free disposing mind of the testator. Only when the propounder dispelled the suspicious circumstances and satisfied the conscience of the court that the testator had duly executed the Will out of his free volition, without coercion or undue influence, would the Will be accepted as genuine. It relied on an earlier decision in Rani Purnima Devi vs. Kumar Khagendra Narayan Dev, AIR 1962 SC 567, which held that merely because the Will was registered and signatures were proved, the Will would not be treated as genuine if suspicious circumstances existed.

This led to the next relevant question as to what circumstances could be considered suspicious? In Indu Bala Bose vs. Manindra Chandra Bose, (1982) 1 SCC 20, the Court held that a circumstance would be “suspicious” when it is not normal , or it is not normally expected in a normal situation, or is not expected of a normal person. However, as held in PPK Gopalan Nambier vs. PPK Balakrishnan Nambiar, 1995 Supp (2) SCC 664, the suspicions must be real, germane and valid suspicious features and not a fantasy of the doubting mind.

The Apex Court then held that mere deprivation of a natural heir, by itself, may not amount to a suspicious circumstance because the whole idea behind the execution of the Will is to interfere with the normal line of succession. However, in Ram Piari vs. Bhagwant, (1993) 3 SCC 364, the Court held prudence requires reason for denying the benefit of inheritance to natural heirs and an absence of it, though not invalidating the Will in all cases, shrouds the disposition with suspicion as it does not give inkling to the mind of the testator to enable the court to judge that the disposition was a voluntary act.

Again, in Leela Rajagopal vs. Kamala Menon Cocharan, (2014) 15 SCC 570 the Court held that a Will may have certain features and may have been executed in certain circumstances which may appear to be somewhat unnatural. Such unusual features appearing in a Will or the unnatural circumstances surrounding its execution will definitely justify a close scrutiny before the same can be accepted. It is the overall assessment of the court on the basis of such scrutiny; the cumulative effect of the unusual features and circumstances which would weigh with the court in the determination required to be made by it. The judicial verdict, in the last resort, will be on the basis of a consideration of all the unusual features and suspicious circumstances put together and not on the impact of any single feature that may be found in a Will or a singular circumstance that may appear from the process leading to its execution or registration.

Thus, it held that a suspicious circumstance, i.e. non-mention of the status of wife or the reason for her disinheritance in the Will ought not to be examined in insolation but in the light of all attending circumstances of the case. The Court examined crucial facts and held that when one read the contents of the Will, the nephew’s stand was stark and palpable in its tenor and purport. The Will was a cryptic one where the testator bequeathed his properties to his nephew as the latter was taking care of him. However, the Will was completely silent with regard to the existence of his own wife and natural heir or the reason for her disinheritance. Evidence on record showed that she was residing with the testator till the latter’s death. Nothing had come on record to show the relation between the couple was bitter. As per the widow, she was the nominee entitled to receive his pension. This showed his conduct in accepting her to be his lawfully wedded wife. The Lower Courts had erroneously held that she did not perform the last rites of her husband and hence, their relationship had soured. The Supreme Court held that normally in case of Hindus/Sikhs, male relations perform the last rites and thus, this observation of the Lower Courts was wrong.

In this backdrop, it could not be said that the testator had during his lifetime, denied his marriage with his wife or admitted that their relation was strained, so as to prompt him to erase her very existence in the Will. Such erasure of marital status was the tell-tale insignia of the propounder and not the testator himself. A cumulative assessment of the attending circumstances including this unusual omission to mention the very existence of his wife in the Will, gave rise to serious doubt that the Will was executed as per the dictates of the nephew and was not the free will of the testator. Accordingly, the Court held that the Will was not duly proved.

This judgment once again lays down a very vital principle, i.e., in cases where close relatives are excluded from the Will, the testator must give reasons for the same. Giving a background of the soured relationship or fact of having helped the relative earlier could be some explanations. Ultimately, the Will speaks from the grave of the testator when he is not alive so it should be self-explanatory and leave no doubts!

REGISTERED WILLS

The controversy over whether registered Wills are superior to unregistered ones continues. In Metpalli Lasum Bai vs. Metapalli Muthaih(D) by Lrs., CA(Nos.)5291,52922 of 2015, Order dated 21st July 2025, the testator executed a registered Will in favour of a relative of his based on which the beneficiary became entitled to a land parcel. The issue before the Court was whether this Will was valid. The Court held that the Will, was a registered document and thus there was a presumption regarding genuineness thereof. A trial Court accepted the execution of the Will based on the evidence led before it. As the Will was a registered document, the burden would lie on the party who disputed its existence thereof, who in this case would be defendant, to establish that it was not executed in the manner as alleged or that there were suspicious circumstances which made the same doubtful. However, the defendant himself in his evidence, admitted the signatures as appearing on the registered Will to be those of the testator. Accordingly, the Supreme Court upheld the genuineness of the Will.

However, it should be noted that a registered Will does not automatically become a valid Will. In case suspicious circumstances exist then even a registered Will can be disregarded. Another recent decision of the Supreme Court in the case of Leela and Ors vs. Muruganantham & Ors., 2025 AIR SC 230, has held that the legal position is well settled that mere registration of a Will would not attach to it a stamp of validity and it must still be proved in terms of the legal mandates under the provisions of Section 63 of the Indian Succession Act and Section 68 of the Evidence Act. It relied on an earlier decision in the case of Moturu Nalini Kanth vs. Gainedi Kaliprasad (Dead), through Lrs., 2023 SCC OnLine SC 1488, which held:

“Trite to state, mere registration of a Will does not attach to it a stamp of validity and it must still be proved in terms of the above legal mandate.”

A very old 3-Judge Supreme Court decision in the case of H. Venkatachala Iyengar vs. B. N. Thimmajamma & Others, 1959 AIR SC 443, has summed up the requirements of the validity of a Will very succinctly. It held that there was an important feature which distinguished Wills from other documents as, unlike other documents, a Will spoke from the grave of the testator and, therefore, when it was propounded or produced before a Court, the testator who had already departed from the world could not say whether it was his Will or not. It held that the onus on the propounder to prove the Will could be taken to be discharged on proof of the essential facts, such as, that the Will was signed by the testator; that the testator at the relevant time was in a sound and disposing state of mind; that he understood the nature and effect of the dispositions; and that he put his signature to the document of his own free will. It was, however, noted by the Bench that there might be cases in which the execution of the Will was surrounded by suspicious circumstances and the same would naturally tend to make the initial onus very heavy and unless it was satisfactorily discharged, Courts would be reluctant to treat the document as the last Will of the testator.

VALIDLY EXECUTED WILL NOT SAME AS GENUINE WILL

The Supreme Court in Lilian Coelho & Ors. vs. Myra Philomena Coalho, 2025 (2) SCC 633 laid down a very crucial principle, that a ‘Will is validly executed’ and a ‘Will is genuine’ cannot be said to be the same. If a Will was found not validly executed, in other words invalid owing to the failure to follow the prescribed procedures, then there would be no need to look into the question whether it is shrouded with suspicious circumstances. Therefore, it can be said that even after the propounder was able to establish that the Will was executed in accordance with the law, that will only lead to the presumption that it was validly executed but that by itself was no reason to canvass the position that it would amount to a finding with respect to the genuineness of the same. In other words, even after holding that a Will was genuine, it was within the jurisdiction of the Court to hold that it was not worthy to act upon as being shrouded with suspicious circumstances when the propounder failed to remove such suspicious circumstances to the satisfaction of the Court.

CAN’T APPROBATE AND REPROBATE

An interesting decision was rendered in the case of Bhagwat Sharan (Dead Thr.LRs) vs. Purushottam and Ors, 2020(6) SCC 387. In this case, a person who was a beneficiary under a Will accepted the bequest but contested that the description of the properties as given by the testator was incorrect. The Court held that it was trite law that a party cannot be permitted to approbate and reprobate at the same time. This principle was based on the principle of doctrine of election. In respect of Wills, this doctrine was held to mean that a person who took benefit of a portion of the Will could not challenge the remaining portion of the Will. The doctrine of election was a facet of law of estoppel. A party could not blow hot and blow cold at the same time. Any party which took advantage of any instrument must accept all that was mentioned in the said document.

EPILOGUE

The above decisions demonstrate that when it comes to Wills, there is no one-size-fits-all approach! Each decision is based on the way the Will is drafted, the peculiar facts and circumstances surrounding the testator and his estate, and an examination of evidence in relation to the Will. However, one common thread emanating from these and various other judgments is that when it comes to matters of drafting of Wills or for that matter any succession planning, due care and caution is the norm. It is always safer to err on the safer side since the person making the Will would not be around to explain his side of the story!

BCAJ Admin

Conditional Gifts v/s Senior Citizens Act – Beneficial Legislation Rules

INTRODUCTION

A gift is a transfer of property, movable or immovable, made voluntarily and without consideration from a donor to a donee. This Feature in the past has examined whether a gift to children can be taken back by parents if relationships sour between the parents and the child. It has also examined certain provisions of the Maintenance and Welfare of Parents and Senior Citizens Act, 2007 (“Senior Citizens Act”). In other words, can a gift be revoked? The Supreme Court in Urmila Dixit vs. Sunil Sharan Dixit, 2025 SCC OnLine SC 2 has given an interesting judgment by invoking the concept of beneficial legislation in the case of a gift made by a senior citizen, being revoked by having resort to the Senior Citizens Act.

LAW ON GIFTS

The Transfer of Property Act, 1882 deals with gifts of property, both immovable and movable. S.122 of the Act defines a gift as the transfer of certain existing moveable or immoveable property made voluntarily and without consideration, by a donor, to a donee. The gift must be accepted by or on behalf of the donee during the lifetime of the donor and while he is still capable of giving. If the donee dies before acceptance, then the gift is void. In Asokan vs. Lakshmikutty, CA 5942/2007 (SC), the Supreme Court held that in order to constitute a valid gift, acceptance thereof, is essential. The Act does not prescribe any particular mode of acceptance. It is the circumstances of the transaction which would be relevant for determining the question. There may be various means to prove acceptance of a gift. The gift deed may be handed over to a donee, which in a given situation, may also amount to a valid acceptance. The fact that possession had been given to the donee also raises a presumption of acceptance.

CONDITIONAL GIFTS

The Larger Bench of the Supreme Court in its decision in the case of Renikuntla Rajamma vs. K. Sarwanamma, (2014) 9 SCC 445 dealt with the issue of conditional gifts. In this case, the donor made a gift of an immovable property by way of a registered gift deed which was duly attested. However, the donor retained the possession of the gifted property for enjoyment during her life time and she also retained the right to receive the rents of the property. The question before the Court was that since the donor had retained to herself the right to use the property and to receive rents during her life time, whether such a reservation or retention or absence of possession rendered the gift invalid?

REVOCATION OF GIFTS

S.126 of the Transfer of Property Act provides that a gift may be revoked in certain circumstances. The donor and the donee may agree that on the happening of certain specified event that does not depend on the will of the donor, the gift shall be revoked. Further, it is necessary that the condition should be express and also specified at the time of making the gift. A condition cannot be imposed subsequent to giving the gift. In Asokan vs. Lakshmikutty, 2007 (13) SCC 210, the Supreme Court has held that once a gift is complete, the same cannot be rescinded. For any reason whatsoever, the subsequent conduct of a donee cannot be a ground for rescission of a valid gift.

CANCELLATION VS. SENIOR CITIZENS ACT

The Maintenance and Welfare of the Parents and Senior Citizens Act 2007 is an Act enacted for the welfare and protection of the elderly. S.23 of this Act introduces an interesting provision. If any senior citizen who, after the commencement of this Act, has transferred by way of gift or otherwise, his property, on the condition that the transferee shall provide the basic amenities and basic physical needs to the transferor and such transferee refuses or fails to provide such amenities and physical needs, then the transfer of property shall be deemed to have been made by fraud or coercion or under undue influence and shall at the option of the transferor be declared void by the Tribunal.

The Supreme Court in the case of Sudesh Chhikara vs. Ramti Devi, 2022 SCCOnline SC 1684 was faced with a very interesting issue as to whether a senior citizen can cancel a gift of lands made to her children on grounds that their relationship was strained. Accordingly, she filed a petition under s.23 of the Senior Citizens Act for cancellation of the gift. The Maintenance Tribunal constituted under the Act (which adjudicates all matters for maintenance, including provision for food, clothing, residence and medical attendance and treatment) upheld the cancellation on the grounds that her children were not taking care of her.

S.23 of this Act contains an interesting provision. If any senior citizen has transferred by way of gift or otherwise, his property, on the condition that the transferee shall provide the basic amenities and basic physical needs to the transferor and such transferee refuses or fails to provide such amenities and physical needs, then the transfer of property shall be deemed to have been made by fraud or coercion or under undue influence and shall at the option of the transferor be declared void by the Tribunal. This negates every conditional transfer if the conditions subsequent are not fulfilled by the transferee. Property has been defined under the Act to include any right or interest in any property, whether movable/immovable, ancestral/self-acquired, tangible/intangible.

The Supreme Court in Sudesh Chhikara (supra) held that the Senior Citizens Act was enacted for the purposes of making effective provisions for the maintenance and welfare of parents and senior citizens guaranteed and recognized under the Constitution of India. The Maintenance Tribunal had been established to exercise various powers under the Act. It provided that the Maintenance Tribunal, had to adopt such summary procedure while holding inquiry, as it deemed fit. The Court held that the Tribunal exercised important jurisdiction under s.23 of the Senior Citizens Act and for attracting s.23, the following two conditions must be fulfilled:

a) The transfer must have been made subject to the condition that the donee / transferee shall provide the basic amenities and basic physical needs to the senior citizen transferor; and

b) the transferee refuses or fails to provide such amenities and physical needs to the transferor.

The Apex Court concluded that if both the aforesaid conditions are satisfied, the transfer shall be deemed to have been made by fraud or coercion or undue influence. Such a transfer then became voidable at the instance of the transferor and the Maintenance Tribunal has the jurisdiction to declare the transfer as void.

The Court held that when a senior citizen parted with his property by executing a gift deed / release deed in favour of his relatives, the senior citizen does not make it conditional to taking care of him. On the contrary, very often, such transfers were made out of natural love and affection without any expectations in return. Therefore, the Court laid down an important proposition that when it was alleged that the conditions mentioned in s.23 were attached to a transfer, existence of a conditional gift deed must be clearly brought out before the Maintenance Tribunal. If a gift was to be set aside under s.23, it was essential that a conditional gift deed / release deed was executed, and in the absence of any such conditions, s.23 could not be attracted. A transfer subject to a condition of providing the basic amenities and basic physical needs of the senior citizen transferor was a sine qua non (essential condition) for applicability of s.23. Since in this case, there was no such conditional deed, the Apex Court did not set aside the release deed executed by the senior citizen.

SC INVOKES BENEFICIAL LEGISLATION

In the case of Urmila Dixit (Supra), a mother had executed a gift deed in favour of her son wherein it was stated that he was maintaining her. A separate Promissory Note was executed by the son on the same date wherein it was stated that he will take care of his mother till the end of her life and if he does not do so, she would be at liberty to take back the gift. Things soured between the two and the mother wanted to cancel the gift by invoking s.23 of the Senior Citizens Act. The Division Bench of the Madhya Pradesh High Court did not allow the cancellation on the grounds that no condition for maintenance of the mother was expressly stated in the gift deed. If that was the intent then a clause to that effect was necessary in the deed itself. The Senior Citizens Act does not empower the Tribunal to order repossession of the property of the Senior. It can only examine whether the condition in the gift deed or otherwise contains a clause providing for basic amenities and whether the transferee has refused or failed to provide them.

The Supreme Court set aside the Order of the High Court’s Division Bench and allowed the cancellation. It proceeded with the rules of interpretation to be applied when interpreting a beneficial legislation akin to the Senior Citizens Act. It held that a beneficial legislation must receive a liberal construction in consonance with the objectives that the concerned Act seeks to serve. Also, interpretation of the provisions of a beneficial legislation must be in line with a purposive construction, keeping in mind the legislative purpose and beneficial legislation must be interpreted in favour of the beneficiaries when it is possible to take two views.

It was in this background that the Apex Court proceeded to analyse the Statement of Object and Reasons of the Senior Citizens Act as decoded by an earlier decision of S. Vanitha vs. Deputy Commissioner, Bengaluru Urban District and Ors., (2021) 15 SCC 730 – the Act is intended towards more effective provisions for maintenance and welfare of parents and senior citizens, guaranteed and recognised under the Constitution. Therefore, the Court held that it was apparent, that the Act was a beneficial piece of legislation, aimed at securing the rights of senior citizens, in view of the challenges faced by them. It was in this backdrop that the Act must be interpreted and a construction that advanced the remedies of the Act must be adopted. It relied upon an earlier decision in the case of Vijaya Manohar Arbat vs. Kashirao Rajaram Sawai, (1987) 2 SCC 278 which had highlighted that it was a social obligation for both sons and daughters to maintain their parents when they were unable to do so. In Badshah vs. Urmila Badshah Godse, (2014) 1 SCC 188 the Court had observed that when a case pertaining to maintenance of parents or wife was being considered, the Court was bound to advance the cause of social justice of such marginalised groups. Again in Ashwani Kumar vs. UOI, (2019) 2 SCC 636, the Court had reiterated the rights of elderly persons that were also recognised by Article 21 of the Constitution as understood and interpreted by the Supreme Court in a series of decisions over a period of several decades, and rights that have gained recognition over the years due to emerging situations.

SUDESH’S DECISION APPLIED

The Apex Court in Urmila Dixit’s case, then discussed the ratio of Sudesh’s case (supra). It observed that there were two documents in the case on hand – a Gift Deed and a Promissory Note. Both documents were signed simultaneously by the donor. It held that the mother has alleged a break-down in relationships. In such a situation, the Supreme Court held that the two conditions mentioned in Sudesh (supra) must be appropriately interpreted to further the beneficial nature of the legislation and not strictly which would render otiose the intent of the legislature. Accordingly, the Tribunals below had rightly held the gift deed ought to be cancelled since the conditions for the well-being of the senior citizens were not complied with. It was unable to agree with the view taken by the Division Bench, because it took a strict view of a beneficial legislation.

It also held that the Tribunals under the Act may order eviction if it is necessary and expedient to ensure the protection of the senior citizen. Therefore, Tribunals constituted under the Act, while exercising jurisdiction under s.23, could order possession to be transferred. Failure to so hold would defeat the purpose and object of the Act, which was to provide speedy, simple and inexpensive remedies for the elderly.

It also held that the relief available to senior citizens under s.23 was intrinsically linked with the statement of objects and reasons of the Act, that elderly citizens of India, in some cases, were not being looked after. It was directly in furtherance of the objectives of the Act and empowered senior citizens to secure their rights promptly when they transferred a property subject to the condition of being maintained by the transferee.

Accordingly, it concluded that the gift deed should be quashed and possession of the premises should be restored to the mother by the son.

CONCLUSION

This is an interesting social welfare statute designed to provide speedy redressal to parents and seniors. While there were many judicial debates on whether eviction is possible, this decision has come as a shot-in-the arm for all such cases. However, it should be noted that this decision did have its share of peculiarities in as much as the son had, simultaneously with the gift deed, executed a Note promising to take care of his mother. In the absence of such an express Note whether in the gift deed or otherwise, it may be a challenge for the Courts to cancel the gift deed.

BCAJ Admin

Guardianship of Persons with Intellectual Disabilities

INTRODUCTION

Guardianship of Persons with intellectual disabilities or mentally challenged persons and their estate is a specialised subject. However, while India has multiple legislations dealing with this sensitive issue, it does not have a holistic Law that addresses all concerns. Unlike a person suffering from a physical disability, a person with an intellectual disability cannot easily take care of his own property/estate and hence, it becomes very essential to understand who can be the guardian and what such a guardian can do.

MULTIPLE LEGISLATIONS

In India, this subject is specifically addressed by three main Laws:

(a) The National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999 (“National Trust Act”) – an Act to provide for the constitution of a body at the National level for the Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities and for matters connected therewith or incidental thereto;

(b) The Rights of Persons with Disabilities Act, 2016 (“Disabilities Act”) – an Act to empower persons with disabilities; and

(c) The Mental Healthcare Act, 2017 (“MHCA”) – an Act to provide for mental healthcare and services for persons with mental illness and to protect, promote and fulfil the rights of such persons during the delivery of mental healthcare and services.

In addition, guardianship of minors is generally regulated by the following Acts:

(a) Guardians and Wards Act, 1890

(b) Hindu Minority and Guardianship Act, 1956

Let us examine these different Legislations in more detail.

NATIONAL TRUST ACT

Under this Act, the Central Government has constituted an authority known as the National Trust for the welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities. The National Trust functions through various Local Committees. One of its objectives is to evolve the procedure for the appointment of guardians and trustees for persons with disability requiring such protection.

The phrase “persons with disability” has been defined to mean a person suffering from any of the conditions relating to autism, cerebral palsy, mental retardation or a combination of any two or more of such conditions and includes a person suffering from severe multiple disabilities. The Act also defines these intellectual disabilities as follows:

(a) “Autism” means a condition of uneven skill development primarily affecting the communication and social abilities of a person, marked by repetitive and ritualistic behaviour;

(b) “Cerebral palsy” means a group of non-progressive conditions of a person characterised by abnormal motor control and posture resulting from brain insult or injuries occurring in the pre-natal, perinatal or infant period of development;

(c) “Mental retardation” means a condition of arrested or incomplete development of mind of a person which is specially characterised by sub-normality of intelligence;

(d) “Multiple disabilities” means a combination of two or more disabilities as defined in the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995. This Act has been since repealed by the Disabilities Act.

The Act provides that the parent of a person with disability or his relative may make an application to the local level committee for the appointment of any person of his choice to act as a guardian of the person with disability. The Act gives a very expansive meaning to the term relative as including any person related to the person with disability by blood, marriage or adoption. Thus, all possible types of relatives are included within this phrase. Any registered organisation (i.e., an association of persons with disability or an association of parents of persons with disability or a voluntary organisation) may also make an application in the prescribed form to the local level committee for the appointment of a guardian for a person with disability. The local committee would then consider whether or not such a person should be appointed as a guardian. While taking a decision on the appointment of a guardian, the local level committee shall ensure that the person whose name has been suggested for appointment as guardian is:

(a) a citizen of India – the Delhi High Court in Sunil Podar vs. the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities, 2023/DHC/000987 has upheld the provision requiring only Indian citizens to be appointed as guardians.

(b) is not of unsound mind or is currently undergoing treatment for mental illness;

(d) is not a destitute and dependent on others for his own living; and

(e) has not been declared insolvent or bankrupt.

Every person appointed as a guardian under the Act shall, wherever required, either have the care of such person of disability and his property or be responsible for the maintenance of the person with disability. The guardian shall, within 6 months from the date of his appointment, deliver to the authority which appointed him, an inventory of immovable property belonging to the person with disability and all assets and other movable property received on behalf of the person with disability, together with a statement of all claims due to and all debts and liabilities due by such person with disability.

The Act also provides for the removal of the guardian. If a parent or a relative of a person with disability or a registered organisation finds that the guardian is (a) abusing or neglecting a person with disability; or (b) misappropriating or neglecting the property, it may in accordance with the prescribed procedure apply to the committee for the removal of such guardian. The National Trust Rules, 2000 define what constitutes an act of neglect or abuse on the part of the guardian.

DISABILITIES ACT

This Act seeks to empower persons with disabilities. It deals with all sorts of disabilities and defines a person with disability to mean a person with long term physical, mental, intellectual or sensory impairment which, in interaction with barriers, hinders his full and effective participation in society equally with others. The Act defines certain disabilities as follows:

(a) Intellectual disability is defined as a condition characterised by significant limitation both in intellectual functioning (reasoning, learning, problem solving) and in adaptive behaviour which covers a range of everyday, social and practical skills, including —

(i) “Specific learning disabilities” which means a heterogeneous group of conditions wherein there is a deficit in processing language, spoken or written, that may manifest itself as a difficulty to comprehend, speak, read, write, spell, or to do mathematical calculations and includes such conditions as perceptual disabilities, dyslexia, dysgraphia, dyscalculia, dyspraxia and developmental aphasia;

(ii) “Autism spectrum disorder” means a neuro-developmental condition typically appearing in the first 3 years of life that significantly affects a person’s ability to communicate, understand relationships and relate to others, and is frequently associated with unusual or stereotypical rituals or behaviours.

(b) “Mental Illness” means a substantial disorder of thinking, mood, perception, orientation or memory that grossly impairs judgment, behaviour, capacity to recognise reality or ability to meet the ordinary demands of life, but does not include retardation which is a condition of arrested or incomplete development of mind of a person, specially characterised by subnormality of intelligence.

The Act overrides anything contained in any other law for the time being in force. If a District Court or any Designated State Authority, finds that a person with disability, who had been provided adequate and appropriate support but is unable to take legally binding decisions, then he may be provided further support of a limited guardian to take legally binding decisions on his behalf in consultation with such person.

The Act introduces the concept of limited guardianship. This means a system of joint decision which operates on mutual understanding and trust between the guardian and the person with disability, which shall be limited to a specific period and for specific decision and situation and shall operate in accordance with the will of the person with disability. Every guardian appointed under any provision of any other law for the time being in force, for a person with disability shall be deemed to function as a limited guardian.

MHC ACT

The Mental Healthcare Act is the most recent Law on this subject and repeals the erstwhile Indian Lunacy Act, 1912. The Act provides that Mental illness shall be determined in accordance with such nationally or internationally accepted medical standards (including the latest edition of the International Classification of Disease of the World Health Organisation) as may be notified by the Central Government. It defines “mental illness” to mean a substantial disorder of thinking, mood, perception, orientation or memory that grossly impairs judgment, behaviour, capacity to recognise reality or ability to meet the ordinary demands of life, mental conditions associated with the abuse of alcohol and drugs, but does not include mental retardation which is a condition of arrested or incomplete development of mind of a person, specially characterised by subnormality of intelligence.

Every person, including a person with mental illness shall be deemed to have capacity to make decisions regarding his mental healthcare or treatment if such person has ability to—

(a) understand the information that is relevant to take a decision on the treatment or admission or personal assistance; or

(b) appreciate any reasonably foreseeable consequence of a decision or lack of decision on the treatment or admission or personal assistance; or

The Act also introduces the concept of an advance directive. Every major individual has a right to make an advance directive in writing, specifying (a) the way he wishes to be cared for and treated for a mental illness; (b) the way he wishes not to be cared for and treated for a mental illness; (c) the individuals, he wants to appoint as his nominated representative.

The Act introduces an important concept of a nominated representative. Every major individual has a right to appoint a nominated representative. The person appointed as the nominated representative must be competent to discharge the duties or perform the functions assigned to him under this Act and give his consent in writing to the mental health professional to discharge his duties and perform the functions assigned to him under this Act.

Where a nominated representative is not appointed, the following persons for the purposes of this Act in the order of precedence shall be deemed to be the nominated representative of a person with mental illness, namely:

(a) The individual appointed as the nominated representative in the advance directive; or

(b) a relative (i.e., any person related to the person with mental illness by blood, marriage or adoption), or

(c) a care-giver (i.e., a person who resides with a person with mental illness and is responsible for providing care to that person and includes a relative or any other person who performs this function, either free or with remuneration), or if not available or not willing to be the nominated representative of such person; or

(d) a suitable person appointed as such by the Mental Health Review Board appointed under the Act; or

(e) if no such person is available to be appointed as a nominated representative, the Board shall appoint the Director, Department of Social Welfare, or his designated representative, as the nominated representative of the person with mental illness:

However, in case of minors, the legal guardian shall be their nominated representative.

The nominated representative has various duties, including, providing support to the person with mental illness in making treatment decisions.

The Act also lays down various rights of persons with mental illness, such as right to equality and non-discrimination, right to access mental healthcare, etc.

GUARDIANS AND WARDS ACT, 1890 (“G&W ACT”)

In addition to the above specific legislations, there is the generic Guardians and Wards Act, 1890 that deals with guardians in respect of all minors. This Act applies to all minors. A guardian under this Act means a person having the care of the person of a minor or of his property, or of both and a ward means a minor for whose person or property, or both, there is a guardian.

A Court on being satisfied that it is for the welfare of a minor may make an order — (a) appointing a guardian of his person or property, or both, or (b) declaring a person to be such a guardian.

An application for being appointed as a guardian may be made by (a) the person desirous of being, or claiming to be, the guardian of the minor, or (b) any relative or friend of the minor, or (c) the Collector of the district or other local area within which the minor ordinarily resides or in which he has property, or (d) the Collector having authority with respect to the class to which the minor belongs.

A guardian stands in a fiduciary relation to his ward, and, save as provided by the will or other instrument, if any, by which he was appointed, or by this Act, he must not make any profit out of his office. A guardian of the person of a ward is charged with the custody of the ward and must look to his support, health and education, and such other matters as the law to which the ward as subject requires. A guardian of the property of a ward is bound to deal therewith as carefully as a man of ordinary prudence would deal with it if it were his own, and he may do all acts which are reasonable and proper for the realisation, protection or benefit of the property. However, one of the important restrictions on the power of the guardian is that he shall not, without the previous permission of the Court

(a) mortgage or charge, or transfer by sale, gift, exchange or otherwise, any part of the immovable property of his ward, or

(b) lease any part of that property for a term exceeding 5 years or for any term extending more than one year beyond the date on which the ward will cease to be a minor.

HINDU MINORITY AND GUARDIANSHIP ACT, 1956 (“HMG ACT”)

In addition, the Hindu Minority and Guardianship Act, 1956 applies to Hindu minors. This Act is in addition to, and not, save as expressly provided, in derogation of, the Guardians and Wards Act, 1890. It provides that in case of a Hindu minor, the natural guardians in respect of the minor’s person as well as in respect of the minor’s property are:

(a) in the case of a boy or an unmarried girl—the father, and after him, the mother. However, that the custody of a minor who has not completed the age of 5 years shall ordinarily be with the mother. In Surinder Kaur Sandhu vs. Harbax Singh Sandhu, (1984) 3 SCC 698 the Court held that the Act constitutes father as a natural guardian of a minor son but that provision cannot supersede the paramount consideration as to what is conducive to the welfare of the minor.

(b) in the case of an illegitimate boy or an illegitimate unmarried girl – the mother, and after her, the father;

The natural guardianship of an adopted son who is a minor, passes on adoption, to the adoptive father and after him to the adoptive mother.

A Hindu father who is entitled to act as the natural guardian of his minor legitimate children may, by his Will appoint a guardian for any of them in respect of the minor’s person or in respect of the minor’s property or in respect of both. A Hindu mother entitled to act as the natural guardian of her minor illegitimate children may, by her Will, appoint a guardian for any of them in respect of the minor’s person or in respect of the minor’s property or in respect of both.

The Act also provides that where a minor has an undivided interest in HUF property and the property is under the management of an adult member of the family, no guardian shall be appointed for the minor in respect of such undivided interest. However, the High Court has powers to appoint a guardian even in respect of such undivided interest.

In Gaurav Nagpal vs. Sumedha Nagpal, AIR 2009 SC 557, the Court held that it is not the welfare of the father, nor the welfare of the mother that is the paramount consideration for the Court. It is the welfare of the minor and the minor alone which is the paramount consideration.

GUARDIANSHIP UNDER

DIFFERENT LAWS

While the different laws explained above do not specifically refer to each other and many of them appear contradictory, one may adopt the following approach while making an application for being appointed as a guardian of a person with intellectual disability / who is mentally challenged:

(a) If the person with disabilities is a minor – for Hindus the HMG Act will be the main law while for other communities the G&W Act will be the main law. The National Trust Act also provides for the appointment of a guardian but only for those minors who have specified mental disabilities. The Disabilities Act only permits a limited guardian to be appointed whereas the MHC Act only allows a nominated representative.

(b) If the person with disabilities is a major – The National Trust Act would be the main statute as it provides for appointment of a guardian but only for those minors who have specified mental disabilities. The Disabilities Act only permits a limited guardian to be appointed whereas the MHC Act only allows a nominated representative.

SUCCESSION TO PROPERTY

It may be noted that a person suffering from mental disabilities may not be able to make a Will for his property/estate. This is because one of the main conditions under the Indian Succession Act, 1925 for making a Will is that the testator must be of sound mind. A person who is ordinarily insane may make a Will during the interval in which he is of sound mind. The Indian Contract Act, 1872 defines a person to be of sound mind if at the time of making a contract he is capable of understanding it and of forming a rational judgment as to its effects. The Kerala High Court in Natarajan vs. Sree Narayana Dharma Sanghom Trust, A.S.No.203 of 1988, Order dated 27-10-1995 has held that the question of sound disposing mind is a question of fact and degree of mental capacity in each case. Mental weakness to constitute testamentary incapacity must be qua the Will itself. A testator ought to be capable of making his Will with an understanding of the nature of the document he is purporting to create, a recollection of the property he means to dispose of, of the persons who are the objects of his bounty, and the manner in which it is to be distributed between them. The testator’s age, disease and mental weakness are all important considerations in determining the soundness of the mind of the testator at the time of the execution of the Will.

In case a person with mental disability is not treated as being of sound mind and hence, not capable of making a Will, then such a person would die an intestate and the succession to his property would be as provided under the personal law applicable to him. Thus, in the case of a Hindu/Jain/Buddhist/Sikh intestate, the Hindu Succession Act, 1956 would apply; in the case of a Muslim intestate the Shariyat Law would apply, and in the case of a Parsi/Christian/Jewish intestate, the Indian Succession Act, 1925 would apply.

TAX DEDUCTION

S. 80DD of the Income-tax Act, 1961 allows a deduction of ₹75,000 per year to an Individual / HUF assessee who incurs expenditure on medical treatment / nursing / training / rehabilitation of a dependent who has a specified disability. The deduction is also available for paying any sum to an approved Scheme framed by any insurance company for the maintenance of such a dependent. Dependent in the case of an individual means his spouse, children, parents, siblings and in the case of an HUF means any of its members. The specified disabilities include the intellectual disability mentioned in the Disabilities Act, 2016 as well as autism and cerebral palsy referred to in the National Trust Act.

CONCLUSION

It is quite unfortunate that we have multiple laws dealing with the same subject, but no single unified law that weaves all these diverse provisions together. Guardianship is a very sensitive subject and more so in the case of persons with intellectual disability. It is high time that we deal with this issue in a more comprehensive and holistic manner!

BCAJ Admin

Trust Under A Will

INTRODUCTION

Several readers would be aware of the concept of a Will. It is the last wish / desire of a person and takes effect once the person making the Will dies. Many readers would also be familiar with the concept of a Trust.

A trust is defined under the Indian Trusts Act, 1882 as an obligation annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner. A Trust Deed is the deed executed between the settlor and the trustees which lays down the constitution of the trust. It is the charter of incorporation of the trust which defines the beneficiaries and the settlor. It also lays down the rights and duties of the trustees in relation to the beneficiaries. In Superintendent of Stamps and Chief Controlling Revenue Authority vs. Govind Farmeshwar Nair, AIR 1967 Bom 369, a Full Bench of the Bombay High Court ruled:

“When a man creates a trust and constitutes himself a trustee,

he undoubtedly disposes of his property though he is not transferring it.”

However, what if the Trust is a Trust under a Will? This combines the salient features of both a Will and a Trust. The Trust is created by virtue of a Will and hence, is called a Trust under a Will.

Let us examine the important facets of this document.

KEY CONCEPTS

A Trust has 3 parties – a Settlor, Trustees and one or more Beneficiaries.

(a) Settlor: He is the person who settles the trust or forms the trust by appointing the trustees. His role is only limited to forming the trust. Once the trust deed is executed and the trust is set- up he is no longer associated with the trust in any manner whatsoever. However, if the settlor, under the trust deed, retains any powers to enjoy the property settled in the trust, then it would become a revocable trust. The settlor can be any person, individual, company, etc.

(b) Trustee: Just as Directors are the organs by which a company functions, trustees are the organs by which a trust functions. In fact, the relation between the trustees and the trust is stronger than that between directors and the company. In several instances, the trust entity is not recognised but only the trustees are recognised. The trustees could be individuals or even a company. For instance, in most mutual funds, the trustee is a Trustee Company. In case of a trustee company, the board of directors of the trustee company would administer the trust. The number of trustees could be 1, 2, 3, etc. The initial trustees are appointed in the Deed by the Settlor. A person appointed as a trustee is not bound to accept the trusteeship and he may refuse the obligation. A settlor may also become a trustee. The trustees are subjected to several obligations and duties under the Act and also have several rights and powers. In addition, they also derive their powers under the Deed.

(c) Beneficiaries: The beneficiary is the person for whose benefit the trust was created in the first place. He is the raison-d’etre behind a trust. If it were not for the beneficiaries, there would be no trustees and there would be no trust. The beneficiaries could be individuals, companies, etc. The settlor / trustee can also be a beneficiary. However, certain precautions should be taken depending upon the facts of the case. Any person capable of holding property may be a beneficiary. Even a minor or a lunatic or an insane person may be a beneficiary.

A Trust under a Will also has the same 3 parties but the Settlor in this case is the testator, i.e., the person drafting the Will. Hence, such a Trust is not a transfer inter vivos (transfer between living persons) but it is a testamentary document. A trust created in the lifetime of the settlor is a living trust while a trust under a Will is created only once the settlor dies.

The trust may be created for any lawful purpose. Thus, in case the purpose of the trust is forbidden by law, or it defeats the provisions of the law or it is fraudulent or it involves injury to the person or property of another or it is such that the Court regards as immoral or opposed to public policy, then it would be treated as if it is not for a lawful purpose. In case the purpose is unlawful then the trust is void ab intio. For instance, if a trust under a Will is set up to facilitate illegal gambling business in India, the object of the trust being unlawful, it is void ab initio.

Just like all Wills, this Will too needs to comply with the requirements of being a valid Will. If the Will is held to be invalid or forged or obtained by fraud, then both the Trust and the Will will fail. The Will needs to be dated, attested by two witnesses and the testamentary capacity of the testator must be sound. Elsewhere in this publication, these concepts are examined in greater detail. Those principles would equally apply to such a Will that also creates a Trust.

Thus, this document would be jointly governed by the provisions of the Indian Succession Act, 1925 (in as much as they pertain to Wills) and the Indian Trusts Act, 1882 (in respect of the trust portion).

The Madras High Court in Athmaram Rao vs. Shanthan Phawar, A.S.(MD) No.111 of 2015, Order dated 28.03.2018, has held that a trust is called a Private Trust when it is constituted for the benefit of one or more individuals who are, or within a given time may be, definitely ascertained. Private Trusts are governed by the Indian Trusts Act, 1882. A Private Trust may be created inter vivos or by Will. If a trust is created by Will, it shall be subject to the provisions of Indian Succession Act, 1925.

MODE OF INCORPORATION

The first step towards the formation of such a trust is the execution of a Will by the testator. The draft Trust Deed would be annexed to the Will and would come into effect once the Will is executed. Alternatively, instructions could be given to the Executors for setting up a Trust and laying down key features of the Trust.

The Will would specify the Trustees of this Trust. It is essential that at the time when the Will is executed, the Trustees named under the Will should be capable of and willing to act as Trustees of this Trust.

A Trust under a Will does not need registration with the Sub-registrar of Assurances even if it is in relation to an immovable property. This is because the document creating the Trust is a testamentary instrument.

BENEFITS

There is no income-tax incidence on the testator / his estate in case of a trust created under a Will. India does not levy estate duty / inheritance tax and hence, this too would not be an issue. The Trust created under the Will is akin to a legatee / beneficiary of the Will.

The receipt of any assets by the trust would be under the Will and hence, there would not be any incidence of income-tax under s.56(2)(x) of the Income-tax Act, 1961. It may be noted that this not a transfer by a settlor to a trust but one of a testator to a trust and hence, the condition of all beneficiaries being the relative of the settlor would not be applicable for the trust to claim a tax exemption. This is a big advantage that a trust under a Will enjoys compared to a living trust.

The Income-tax Act, 1961 has beneficial tax provisions for trust created under a Will:

(a) Business income received by a trust is taxable at the maximum marginal rate. However, business income received by a trust, created under the Will of a person that is created exclusively for the benefit of any relative dependent upon the testator for support and maintenance, is taxable on a slab rate basis. The condition is that such a trust must be the only one so created by the testator.

(b) The income of a discretionary trust is generally taxable at the maximum marginal rate. However, the income of a trust under a Will is not taxable at the maximum marginal rate. The condition is that such a trust must be the only one so created by the testator. Here there is no condition that the beneficiary must be a relative dependent upon the testator for support and maintenance. Thus, a trust under a Will created for any beneficiary would enjoy this tax treatment.

The Ahmedabad ITAT in Nathiben Kalidas Patel Family Trust vs. ITO, [2025] 173 taxmann.com 992 (Ahmd. ITAT) has held that a trust created by a Will are not be subjected to be taxed at maximum marginal rate (MMR), but are to be taxed at rates applicable to AOPs and they are not to be taxed at MMR as specified in Section 167B of the Income-tax Act 1961, since the applicability of MMR has been specifically excluded by Section 164(1) First Proviso itself. This specific exclusion would override the general provision of Section 167B of the Act. Again, the Ahmedabad ITAT in the case of ITO vs. Rajnikant Gulabdas Sheth Family Trust [1987] 20 ITD 668 (Ahmd. ITAT) held that a discretionary trust created under a Will was to be taxed at normal rate and not at MMR.

The CBDT also vide its Circular has discussed the question of whether the provisions of section 167B, which generally provide for charging of tax at MMR on the total income of an AOP where the individual shares of members are unknown, would also apply to income under a trust declared by any person by Will where such trust is the only trust declared by him. It has held that there was never an intention to subject the income of such trusts to tax at MMR. Where a specific provision had been made in the law in relation to any matter and where that provision was beneficial to the taxpayer, that matter was to be governed by that special provision and not by any other general provision. Accordingly, tax will be payable in such cases at the rate ordinarily applicable to the total income of an AOP and not at MMR.

STAMP DUTY

The Maharashtra Stamp Act, 1958 does not define an instrument of trust. Art. 61 of Schedule I to the Maharashtra Stamp Act lays down the duty applicable on a Trust Deed executed in the State of Maharashtra. This Act levies duty on a trust that is not created under a Will. Thus, a trust under a Will does not attract any stamp duty. Similarly, Art. 64 of Schedule I to the Indian Stamp Act, 1899, that levies duty on a trust does not apply to a trust created under a Will. Hence, even if immovable property is bequeathed under a Will to a trust or bequeathed to a trust that is created under a Will, there would not be any stamp duty. This is one of the biggest advantages of a trust under a Will.

Similarly, registration is not needed for a trust under a Will that includes immovable property. This is because the Registration Act, 1908 expressly exempts any testamentary instrument.

PRECAUTIONS

While a trust under a Will enjoys marked tax benefits compared to a living trust, it also comes with its shares of concerns.

If the Will is held to be invalid, improperly attested, lacking in testamentary capacity, one obtained by fraud / forgery, etc., then the trust also fails. If the Will requires a probate, then the trust cannot be functional until the Will is probated. Thus, the trust is intricately linked with the Will and failure of the Will leads to a failure of the trust. However, the converse may not always be true. If the trust fails owing to some reasons, the Will need not necessarily fail. In such a case, the bequest to the trust would fail and the assets would then be bequeathed to the alternative beneficiary/universal beneficiary, if any, named under the Will.

CONCLUSION

A trust created by a Will is an interesting document and one that needs to be carefully considered before using. It is very useful when a person wants to place assets in trust for the benefit of his relatives but he does not want to cede control over those assets during his lifetime.

BCAJ Admin

Gift Or Will Or Settlement – What’s The Difference?

INTRODUCTION

Is a Gift Deed the same as an Instrument of Settlement, and are both of them the same as a Will? The answer is a resounding No!! However, what are the metrics used to distinguish one instrument from another? What tests would the Courts apply to decipher this question? The answers to all these questions and many others were given by the Supreme Court in its decision in the case of N. P. Saseendran vs.N. P. Ponnamma, CA No.4312/2025 Order dated 24^th March, 2025. This decision can be considered somewhat a landmark decision since it has laid down various tests and has threadbare analysed 21 other landmark Supreme Court judgements on this point. This Article seeks to analyse the salient points of this judgement.

FACTS OF THE CASE

In Saseendran’s case (Supra), a father executed an instrument of settlement transferring his immovable property in favour of his daughter but at the same time reserving life interest for himself. He reserved the right to income generated from the property and also during his wife’s lifetime. He also had the right to mortgage the property up to a certain amount. Possession was transferred to his daughter. The daughter donee got the registration of the instrument done. After a period of 7 years, the father unilaterally executed a Deed of Cancellation and claimed that this was only a Will and not a Gift / Settlement and hence, he reserved the right to deal with the property as he pleased. Thus, the legal issue before the Supreme Court was whether the document was a gift or a settlement or a Will? The Court proceeded to examine the requirements of each of these documents and then gave its verdict on the nature of the document.

GIFT DEED

The Court examined the requirements of a valid gift under the Transfer of Property Act, 1882.

A valid Gift refers to an instrument by which there is voluntary disposition of one’s existing property (movable or immovable) without consideration to another and the donee should accept the same during the lifetime of the donor, implying imminent vesting of the right upon acceptance. Insofar as an immovable property is concerned, registration is mandatory, whereas, it is not mandatory to register a gift of a movable property, it can be effected by delivery also. Unilateral revocation is not possible. The donor may impose any condition in the deed, which has to be accepted for the gift to take effect.

SETTLEMENT DEED

The Specific Relief Act, 1963, defines the same to be a non-testamentary instrument whereby, there is a disposition or an agreement to dispose of any movable or immovable property to a destination or devolution of successive interest. “Settlement” under the Indian Stamp Act, 1899 refers to a non-testamentary disposition of any movable or immovable property in writing, in consideration of marriage or for the purpose of distributing the property of the settlor among his family or to those to whom he desires to provide or for the purpose of providing for some person dependent on him or for any religious or charitable purpose and includes an agreement in writing to make such a disposition. For immovable properties, the registration of the deed is mandatory. A settlement means a disposition of one’s property to another directly or to vest in any such person after successive devolution of rights on other(s). Further, the circumstances and reasons that led to the execution of such a settlement deed are described as its consideration, which need not necessarily be of any monetary value. More often than not, it consists of love, care, affection, duty, moral obligation, or satisfaction, as such deed are typically executed in favour of a family member. Also, a settlor is entitled to reserve a life interest either upon himself or upon others and impose any condition.

WILL

A will is a testamentary document dealt under the Indian Succession Act, 1925 and is defined as a legal declaration of the intention of the testator to be given effect after his death. Such a declaration is with respect to his property and must be certain. A person may revoke or alter a will at any time while he is competent to dispose of his property by will. The will comes into effect only after the person’s lifetime and he is at full liberty to revoke or alter his earlier will any number of times as long as he is in sound state of mind. Chapter VI of Part VI of this Act deals with construction of wills. The provisions consider the various rules regarding the construction of wills to determine the true intention of the testator and to ensure that the object of such testament is achieved. The rules prescribe the remedy to deal with certain errors and circumstances like misdescription, misnomer and the need for casus omissus – if the law does not provide for a situation, then the caselaw will provide for the same. They also lay down that the meaning is to be discerned from the contents of the entire will and every attempt must be made to give effect to every clause. Later clauses would prevail in case of the two conflicting clauses of gifts in the will, if they are irreconcilable.

INTERPLAY BETWEEN AN INSTRUMENT OF GIFT AND SETTLEMENT

The primary difference between the Gift and the Settlement is the existence of consideration in the settlement. A gift is always without any element of consideration whereas in the case of a settlement, consideration is a must. The Court relied upon its earlier decision in Ramachandra Reddy vs.Ramulu Ammal, 2024 SCC Online SC 3304 and held that consideration need not always be in monetary terms. It can be in other forms also.

The Court observed that there were similarities also between a gift and a settlement. Both could not be unilaterally revoked. Creation of a life interest did not affect the nature of the document. Delivery of possession of immovable property was not mandatory, but registration was. It was sufficient if the donee had accepted the same during the lifetime of the executor. The Court analysed various earlier decisions on this point. In K. Balakrishnan vs. K. Kamalam, (2004) 1 SCC 581, the Court held that there was no prohibition in law that ownership in property cannot gifted without its possession and right of enjoyment. Once a gift has been duly accepted it becomes irrevocable in law. A donor cannot unilaterally cancel a completed gift. In Renikntal Rajamma vs. K. Sarwanamma (2014) 9 SCC 445, it was held that in order to constitute a valid gift, acceptance must be made during the donor’s lifetime and whilst he is still capable of giving. If the donee dies before acceptance, the gift is void. Gift of immovable property must be made by a registered instrument, but delivery of possession is not mandatory. In Daulat Singh vs. State of Rajasthan (2021) 3 SCC 459 / Asokan vs. Lakshmikutty (2007) 12 SCC 210, it was held that acceptance of a gift must be ascertained from the surrounding circumstances in each case. It can be inferred by the implied conduct of the donee. In Satya Pal Anand vs. State of MP, (2016) 10 SCC 767 it was held that even if fraud is pleaded, the Registrar cannot unilaterally cancel a document; that right is only with the jurisdictional Court.

INTERPLAY BETWEEN AN INSTRUMENT OF GIFT AND WILL

Every will has an element of gift since there is a bequest, but the bequest takes effect only once the testator dies. Till he is alive, he can revoke and revise his will an unlimited number of times.

INTERPLAY BETWEEN AN INSTRUMENT OF GIFT, SETTLEMENT AND WILL

The element of voluntary disposition is common to all the three deeds. The element of gift is traceable to both “settlement” and “will”. The nomenclature of an instrument is immaterial, and the nature of the document is to be derived from its contents. Reservation of life interest or any condition in the instrument, even if it postpones the physical delivery of possession to the donee/settlee, cannot be treated as a will, as the property had already been vested with the donee/settlee. The Court referred to Navneet Lal vs. Gokul, (1976) 1 SCC 630 wherein it was held that the Court while interpreting a will is entitled to put itself into the armchair of the testator. The true intention of the testator has to be gathered not by attaching importance to isolated expression but by reading the Will as a whole, with all its provisions and ignoring none of them. When apparently conflicting dispositions can be reconciled by giving full effect to every word used in a document, such a construction should be accepted instead of a construction which would have the effect of cutting down the clear meaning of the words used by the testator. The cardinal principle of construction of wills was that to the extent that it was legally possible effect should be given to every disposition contained in the will. In P.K. Mohan Ram vs. B.N. Ananthachary (2010) 4 SCC 161, the court referred to the broad tests or characteristics as to what constitutes a will and what constitutes a settlement? It held that the consistent view was that while interpreting an instrument to find out whether it was of a testamentary character, which took effect after the lifetime of the executant or was it an instrument creating a vested interest in præsenti in favour of a person, the Court had to very carefully examine the document as a whole, look into the substance thereof, the treatment of the subject by the settlor / executant, the intention appearing both by the expressed language employed in the instrument and by necessary implication. It held that a document which was not a will in form, may yet be a will in substance and effect. The line between a will and a conveyance reserving a life estate was a fine one. The main test to find out whether the document constituted a will, or a gift was to see whether the disposition of the interest in the property was in praesenti in favour of the settlees or whether the disposition was to take effect on the death of the executant.

If the disposition took effect on the death of the executant, it would be a will. But if the executant divested his interest in the property and vested his interest in praesenti in the settlee, the document would be a settlement. The general principle was that the document should be read as a whole, and it was the substance of the document that mattered and not the form or the nomenclature the parties had adopted. The various clauses in the document were only a guide to find out whether there was an immediate divestiture of the interest of the executant or whether the disposition was to take effect on the death of the executant. If the clause relating to the disposition was clear and unambiguous, most of the other clauses were ineffective and explainable and could not change the character of the disposition itself. The Court referred to an old English decision and held that “if I make my testament and last will irrevocable, yet I may revoke it, for my act or my words cannot alter the judgement of the law to make that irrevocable which is of its own nature revocable.” Thus, if an instrument is on the face of it a will, the mere fact that the testator called it irrevocable did not alter its quality. The principal test to be applied was, whether the disposition made took effect during the lifetime of the executant of the deed or whether it took effect after his death. If disposition was of the latter nature, then it was ambulatory and revocable during his life.

In Mathai Samuel vs. Eapen Eapen, (2012) 13 SCC 80, while examining a composite document, the Apex Court outlined the requirements for both a will and a gift. A will is, revocable because no interest is intended to pass during the lifetime of the owner of the property. In the case of gift, it comes into operation immediately. The nomenclature given by the parties to the transaction in question, is not decisive. The mere registration of “will” will not render the document a settlement. In other words, the real and the only reliable test for the purpose of finding out whether the document constitutes a will, or a gift is to find out as to what exactly is the disposition which the document has made. A composite document is severable and in part clearly testamentary, such part may take effect as a will and other part if it has the characteristics of a settlement, and that part takes effect in that way. A document which operates to dispose of property in praesenti in respect of few items of the properties is a settlement and in future in respect of few other items after the deaths of the executants, it is a will. In a composite document, which has the characteristics of a will as well as a gift, it may be necessary to have that document registered otherwise that part of the document which has the effect of a gift cannot be given effect to. Therefore, it is not unusual to register a composite document which has the characteristics of a gift as well as a will. Consequently, the mere registration of document cannot have any determining effect in arriving at a conclusion that it is not a will. A will need not necessarily be registered. But the fact of registration of a will would not render the document a settlement.

The Court held that the act and effect of registration depend upon the nature of the document, which was to be ascertained from a wholesome reading of the recitals. The nomenclature given to the document was irrelevant. In case of a gift, it is a gratuitous grant by the owner to another person; in case of a settlement, the consideration is the mutual love, care, affection and satisfaction. The document must be harmoniously read to not only understand the true intent and purport, but also to give effect to each and every word and direction.

INCONSISTENCIES IN DOCUMENTS

The Court laid down various principles to deal with inconsistencies in the same document. In Mauleshwar Mani vs. Jagdish Prasad (2002) 2 SCC 468, it was held that if there is a clear conflict between what is said in one part of the document and in another where in an earlier part of the document some property is given absolutely to one person but later on, other directions are given which are in conflict with and take away from the absolute title given in the earlier portion, then the earlier disposition of absolute title should prevail and the later directions of disposition should be disregarded. When it is not possible to give effect to all of them, then the rule of construction is well established that it is the earlier clause that must override the later clauses and not vice versa. Where under a will, a testator has bequeathed his absolute interest in the property in favour of his wife, any subsequent bequest which is repugnant to the first bequeath would be invalid. The object behind this principle is that once an absolute right is vested in the first beneficiary, the testator cannot change this line of succession. Where a testator confers an absolute right on anyone, the subsequent bequest for the same property in favour of other persons would be repugnant to the first bequest in the will and has to be held invalid.

In Sadaram Suryanarayana vs. Kalla Surya Kantham (2010) 12 SCC 147, it was held that if a clause was susceptible of two meanings, according to one of which it had some effect and according to the other it had none, the former was to be preferred. While interpreting a will, the courts would, as far as possible, place an interpretation that would avoid any part of a testament becoming redundant. Courts will interpret a will to give effect to the intention of the testator as far as the same is possible. The meaning of any clause in a will must be collected from the entire instrument and all parts shall be construed with reference to each other.

In Madhuri Ghosh vs. Debobroto Dutta (2016) 10 SCC 805 it was held that if a will contains one portion which is illegal and another which is legal, and the illegal portion can be severed, then the entire will need not be rejected, and the legal portion can be enforced. The golden rule of construction, it has been said, is to ascertain the intention of the parties to the instrument after considering all the words, in their ordinary, natural sense. The status and the training of the parties using the words have to be taken into consideration. It is well settled that in case of such a conflict the earlier disposition of absolute title should prevail and the later directions of disposition should be disregarded as unsuccessful attempts to restrict the title already given. An attempt should always be made to read the two parts of the document harmoniously, if possible. It is only when this is not possible e.g. where an absolute title is given is in clear and unambiguous terms and the later provisions trench on the same, that the later provisions have to be held to be void.

In Bharat Sher Singh Kalsia vs. State of Bihar (2024) 4 SCC 318, the Court observed that three Clauses of a will – 3, 11 and 15 were in apparent conflict. It perceived a conflict between Clauses 3 and 11, on the one hand, and Clause 15 on the other, and concluded that Clauses 3 and 11 would prevail over Clause 15 as when the same could not be reconciled, the earlier clause(s) would prevail over the latter clause(s), when construing a deed or a contract. It followed the settled principle:

“The principle of law to be applied may be stated in few words. If in a deed an earlier clause is followed by a later clause which destroys altogether the obligation created by the earlier clause, the later clause is to be rejected as repugnant and the earlier clause prevails. In this case the two clauses cannot be reconciled and the earlier provision in the deed prevails over the later……….But if the later clause does not destroy but only qualifies the earlier, then the two are to be read together and effect is to be given to the intention of the parties as disclosed by the deed as a whole”

VERDICT IN SASEENDRAN’S CASE (SUPRA)

In light of the above legal principles, the Court examined the instrument executed by the father in favour of his daughter. The opening phrase stated that the instrument was executed “In consideration of my love and affection towards you, the schedule below properties are herein conveyed to you ….. Till my lifetime, I shall be in possession of the schedule properties and shall take the yields from it and if necessary I shall have the right to pledge the schedule properties for a sum not exceeding `2000/- and to avail loan on that basis. After my lifetime, Janaki Amma, who is my wife and your mother, shall have the right to possess the property and take income from the property and utilize the same according to the will and wishes of the said Janaki Amma till the end of her lifetime and you have no right to restrain the said rights of Janaki Amma for any reasons. ”

The Court held that this demonstrated that there was consideration, conveyance, imposition of conditions and reservation of life interest by the father satisfying the requirements to classify the document as a “settlement”. The Court laid down that the postponement of delivery by creation of life interest was not an anathema to absolute conveyance in praesenti. Since life interest was reserved by the father and mother, he was holding only an ostensible possession while the true owner was the daughter. Reservation of life interest was permissible in a settlement but that did not affect the already vested rights. Hence, it concluded that the instrument was a settlement. It further held that delivery of possession is not mandatory to validate a gift or a settlement. All that is required to be proved is whether the gift has been acted upon during the lifetime of the donor. In the present case, the Apex Court found that the donee had unilaterally presented the deed for registration and this fact showed that the document was handed over by the father / donor to his daughter. Thus, the fact of acceptance could be derived from the conduct of the parties. The donee was in possession of the original title deed and had hence, accepted and acted upon the gift. Delivery of possession of the property was only one of the methods to prove acceptance but not the sole method. Receipt of original title deeds and registration of the instrument of settlement would amount to an acceptance of the gift and would satisfy all the requirements of the Transfer of Property Act. Once a gift has been completed, then the donor has no right to cancel the same in the absence of any reservation clauses in the deed. The Court thus held that the donor father had no rights to unilaterally cancel the transfer.

EPILOGUE

This is a very good decision which has examined three vital documents ~ gift, settlement and will. The decision has also brought out the interplay and differences amongst these. It also explains how to construct various documents and how to resolve inconsistencies. Anyone interested in a masterclass on construing documents would be advised to study this decision along with the various decisions that it has followed!!

BCAJ Admin

Determination of ALP for Related Party Transactions

INTRODUCTION

“Everything is worth what its purchaser will pay for it”
– Publilus Syrus’ Maxim No. 847

One of the most important roles of the Board of Directors of a listed company and its Audit Committee is the review and approval of Related Party Transactions (RPTs). Related Party Transactions are prescribed under s.188 of the Companies Act, 2013 (“Act”) as well as the SEBI (Listing Obligations and Disclosure Requirements)Regulations, 2015 (“SEBI LODR”). The most crucial element in approving an RPT is determining whether the transaction is on an arms’ length pricing (ALP)? Let us examine some key facets in this respect.

STATUTORY FRAMEWORK

Regulation 2(zc) of the SEBI LODR defines a related party transaction to mean a transaction involving a transfer of resources, services or obligations between a listed entity on one hand and a related party of the listed entity on the other hand, regardless of whether a price is charged and a “transaction” with a related party shall be construed to include a single transaction or a group of transactions in a contract.

Under Regulation 23(2) of the SEBI LODR, all related party transactions and subsequent material modifications, shall require prior approval of the Audit Committee of the listed entity.

S.188 of the Companies Act, 2013 provides that all related party transactions require the approval of the Board of Directors if they are not on an arms’ length basis. The expression “arm’s length transaction” has been defined to mean a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.

The Act / SEBI LODR does not provide any further guidance on this expression. Hence, one may refer to other statutes.

DICTIONARY DEFINITIONS

Various Dictionaries have defined the term arm’s length transaction as follows:

(a) The Black’s Law Dictionary, 6th Edition, defines it to mean a transaction negotiated by unrelated parties, each acting in its own self-interest; the basis for a fair market value determination.

(b) The Shorter Oxford English Dictionary, 5th Edition defines it as dealings between two parties where neither party is controlled by the other.

(c) Merriam-Webster’s 11th Collegiate Dictionary states that arm’s length is the condition or fact that the parties to a transaction are independent and on an equal footing.

(d) The Judicial Dictionary by KJ Aiyar, 13th Edition, states that arm’s length transaction is a transaction between unrelated persons in which there is no improper influence exercisable by one party over another and no conflict of interests.

ALP UNDER INCOME-TAX ACT, 1961

The expression “arm’s length price” features prominently in sections 92-92F of the Income-tax Act, 1961 in relation to transfer pricing provisions.

S.92C of this Act deals with the computation of an arm’s length price. It states that the arm’s length price in relation to a transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors.

The methods prescribed under this section to determine ALP are: —
(a) comparable uncontrolled price method;
(b) resale price method;
(c) cost plus method;
(d) profit split method;
(e) transactional net margin method;

The Chennai ITAT in the case of Iljin Automotive Private Ltd vs. ACIT, (2011) 16 taxmann.com 225 has defined ALP as “What would have been the price if the transactions were between two unrelated parties, similarly placed as the related parties in so far as nature of product, conditions and terms and conditions of the transactions are concerned?”

In Arvind Mills Ltd. vs. ACIT [2011] 11 taxmann.com 67 (Ahd. – ITAT), it was held that the arm’s length principle is based on:

(i) a comparison of the conditions in a controlled transaction with the conditions in transaction between two independent enterprises i.e. uncontrolled transaction,

(ii) subject to adjustments to the price of uncontrolled transaction to carve out differences between these two type of transactions.

Hence, locating proper comparables i.e. comparable uncontrolled transactions is at the heart of an ALP.

Paragraph 1 of Article 9 of the OECD’s Model Tax Convention (which is the basis of bilateral tax treaties) provides as follows:

“(where) conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly”

In Dy. CIT vs. Smt. Baljinder Kaur [2009] 29 SOT 9 (URO), the Chandigarh ITAT held that it was a well settled proposition that the concept of ‘fair market value’ envisaged under the Income-tax Act existence of a hypothetical seller and a hypothetical buyer, in a hypothetical market.

CUP METHOD

The Comparable Uncontrolled Price Method (“CUP method”) is the most direct assessment of whether the arm’s length principle is complied with as it compares the price or value of the transactions. As it is the most direct method, it should, be preferred to the other methods. Under the CUP method, the arm’s length price of an RPT is equal to the price paid in comparable uncontrolled sales including adjustments, if any.

In the case of M/s. Schutz Dishman Biotech Pvt. Ltd., Ahmedabad, ITA 554 / AHD / 2006, the Ahmedabad ITAT held that the CUP method is the most suitable method for determining ALP if market conditions in the territory of sale are the same.

Rule 10B of the Income-tax Rules, 1962 states that in determining the ALP, the comparable uncontrolled price method is a method, by which the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified. Thus, the steps for determining ALP are as follows:

(i) Identify the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction or a number of such transactions.

(ii) Adjust such price for differences, if any, between the RPT and the comparable uncontrollable transactions. Adjustments required only if these could materially affect the price in open market.

The adjusted price arrived at in (ii) above is to be taken as the arm’s length price.

According to Rule 10A(ab), “uncontrolled transaction” means a transaction between enterprises other than associated enterprises or related parties. For instance, A and B are related parties. C and D are independent parties (non-related). A transaction between C and D is an uncontrolled transaction as both A and B are concerned. A transaction between A and C/A and D is an uncontrolled transaction as far as B is concerned. A transaction between B and C/B and D is an uncontrolled transaction as far as A is concerned.

The Rule further states that the comparability of a transaction with an uncontrolled transaction shall be judged with reference to the following, namely:-

(a) the specific characteristics of the property transferred or services provided in either transaction;

(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;

(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions;

(d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.

An uncontrolled transaction shall be comparable to an RPT if —

(i) none of the differences, if any, between the transactions being compared are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or

(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.

In this respect, the United Nations Transfer Pricing Manual defines ‘comparable’ as under:

To be comparable does not mean that the two transactions are necessarily identical.
Instead it means that either none of the differences between them could materially affect the arm’s length price or profit or, where such material differences exist, that reasonably accurate adjustments can be made to eliminate their effect.
Thus, in determining a reasonable degree of comparability, adjustments may need to be made to account for certain material differences between the controlled and uncontrolled transactions.
These adjustments (which are referred to as “comparability adjustments”) are to be made only if the effect of the material differences on price or profits can be ascertained with sufficient accuracy to improve the reliability of the results.

The UN TP Manual also recognises that perfect comparables are often not available in an imperfect world. It is therefore necessary to use a practical approach to establish the degree of comparability between controlled and uncontrolled transactions.

Comparable uncontrollable transactions are of two types:

♦ Internalcomparables – transactions entered into by related parties with unrelated parties. To be considered as an internal CUP also, a transaction has to be an independent transaction, i.e., between two entities, which are independent of each other – Skoda Auto India (P.) Ltd. vs. Asst. CIT [2009] 30 SOT 319 (Pune – Trib.)

♦ External comparables – transactions between third parties (i.e. transactions not involving any related party).

According to the OECD Guidelines, internal comparables would provide more reliable and accurate data than external comparables. This is because external comparables are difficult to obtain, incomplete and difficult to interpret. Hence, internal comparables are to be preferred over external comparables.

VALUATION UNDER THE CENTRAL EXCISE LAW

The concept of valuation in case of a related person also finds mention under the Central Excise Act. In this respect, the decision of the Supreme Court in the case of CCE vs. Detergents India P Ltd, (2015) AIR SCW 3304 is relevant:

“……transactions at arm’s length between manufacturer and wholesale purchaser which yield the price which is the sole consideration for the sale alone is contemplated. Any concessional or manipulative considerations which depress price below the normal price are, therefore, not to be taken into consideration. Judged at from this premise, it is clear that arrangements with related persons which yield a price below the normal price because of concessional or manipulative considerations cannot ever be equated to normal price. But at the same time, it must be remembered that absent concessional or manipulative considerations, where a sale is between a manufacturer and a related person in the course of wholesale trade, the transaction being a transaction where it is proved by evidence that price is the sole consideration for the sale, then such price must form the basis for valuation as the “normal price” of the goods………………”

Thus, as long as an unrelated price is comparable to a related party price, the related party price has been treated as a normal sale price.

VALUATION UNDER GST LAWS

The GST Laws also provide for determination of open market value in certain cases. For levying GST only that value should be used which is that of an unrelated buyer and supplier. The Central Goods and Services Tax (CGST) Rules, 2017 specify that the value of the supply of goods or services or both between related parties shall be the open market value of such supply.

The term “open market value” of a supply of goods or services or both has been defined to mean the full value in money, excluding GST payable by a person in a transaction, where the supplier and the recipient of the supply are not related and the price is the sole consideration, to obtain such supply at the same time when the supply being valued is made.

ICSI’S GUIDANCE NOTE

In this respect, the Guidance Note on Related Party Transactions issued by the Institute of Company Secretaries of India (ICSI) in March 2019 is relevant.

One of the Issues raised by the Guidance Note is “How do you satisfy the criteria of arm’s length pricing?” The Guidance Note replies as follows:

“One may check if there are comparable products in the market. If yes, check the terms of sale/purchase, etc. of similar transactions and try obtaining quotes from other sources. Price in isolation cannot be the only criteria. Terms of sale such as credit terms should also be considered”

The RPT as a whole and the entire bundle of the terms and conditions needs to be considered for determining whether the transaction is on an arm’s length basis. It further states that a simple way to prove that there is no conflict of interest in the RPT is to prove that existence of special relationship between contracting parties has not affected the transaction and its critical terms, including price, quantity, quality and other terms and conditions governing the transaction, by following industry benchmarks, past transactions entered by the company, etc.

Another issue raised by the Guidance Note is “What are the parameters to be considered by the Audit Committee while considering whether a transaction is on arm’s length basis? How should the Audit Committee decide such an issue?” The Guidance Note replies as follows:

“The Act does not prescribe methodologies and approaches which may be used to determine whether a transaction has been entered into on an arm’s length basis. Audit Committee may consider the parameters given in the company’s policy on transactions with related parties. Transfer pricing guidelines given under the Income-tax Act, 1961 may also be used. Depending on the nature of individual transaction, any appropriate method may be used by the Audit Committee”

Thus, the ICSI recommends obtaining quotations from unrelated parties as a basis for ascertaining the ALP and also using the methods under the Income-tax Act for determining the ALP.

SA 550 ON RELATED PARTIES

SA 550 is a Standard on Auditing issued by the ICAI on Related Parties. This Standard also provides guidance to the Auditor on how to verify whether the pricing for an RPT is indeed at an arm’s length:

Comparing the terms of the related party transaction to those of an identical or similar transaction with one or more unrelated parties.
Engaging an external expert to determine a market value and to confirm market terms and conditions for the transaction.
Comparing the terms of the transaction to known market terms for broadly similar transactions on an open market.

RELIANCE ON QUOTATIONS – VALID

In Toll Global Forwarding India (P.) Ltd. vs. Dy. CIT [2014] 51 taxmann.com 342 (Delhi – Trib.) the validity of bona fide quotations as a means of ascertaining ALP was upheld:

“As long as one can come to the conclusion, under any method of determining the arm’s length price, that price paid for the controlled transactions is the same as it would have been, under similar circumstances and considering all the relevant factors, for an uncontrolled transaction, the price so paid can be said to be arm’s length price. The price need not be in terms of an amount but can also be in terms of a formulae, including interest rate, for computing the amount. In any case, when the expression “price which….would have been charged or paid” is used in rule 10AB, dealing with this method, in this method the place of “price charged or paid”, as is used in rule 10B(1)(a), dealing with CUP method, such an expression not only covers the actual price but also the price as would have been, hypothetically speaking, paid if the same transaction was entered into with an independent enterprise. This hypothetical price may not only cover bona fide quotations, but it also takes it beyond any doubt or controversy that where pricing mechanism for associated enterprise and independent enterprise is the same, the price charged to the associated enterprises will be treated as an arm’s length price”

Accordingly, quotations from unrelated parties could serve as a valid basis for determining the arm’s length pricing. However, the terms of the quotes should be similar. For instance, the wife of the company’s Managing Director is selling a key raw material to the company. She runs her own business. The rate charged to the company is on the same basis as that charged by her to other unrelated customers. However, in the case of the company, the entire payment is received by her upfront whereas she provides a 6 months’ credit period to all other buyers. This would not be an arm’s length price.

SEBI’S NEW MINIMUM STANDARDS

Regulation 23(2), (3)and (4) of SEBI LODR requires RPTs to be approved by the audit committee and by the shareholders, if material. Part A and Part B of Section III-B of SEBI Master Circular dated November 11, 20241 (“Master Circular”) specify the minimum information to be placed before the audit committee and shareholders, respectively,for consideration of RPTs. In order to facilitate a uniform approach and assist listed entities in complying with the above mentioned requirements, the IndustryStandardsForum (“ISF”) comprising of the representatives from three industry associations, viz. ASSOCHAM, CII and FICCI, under the aegis of the Stock Exchanges, has formulated industry standards, in consultation with SEBI,for minimum information to be provided for review of the Audit Committee and shareholders for approval of RPTs. This has been mandated by SEBI’s Circular dated 14^th February, 2025.

This SEBI Circular requires that if a valuation or other report of external party has been obtained for an RPT then the same shall be placed before the Audit Committee. If any such report has been considered, it shall also be stated whether the Audit Committee has reviewed the basis for valuation contained in the report and found it to be satisfactory based on their independent evaluation.

Further, in the case of the payment of royalty, information on Industry Peers shall be given as follows:

(i) The Listed Entity will strive to compare the royalty payment with a minimum of three Industry Peers, where feasible. The selection shall follow the following hierarchy:

A. Preference will be given to Indian listed Industry Peers.

B. If Indian listed Industry Peers are not available, a comparison may be made with listed global Industry Peers, if available.

(ii) If no suitable Indian listed/ global Industry Peers are available, the Listed Entity may refer to the peer group considered by SEBI-registered research analysts in their publicly available research reports (“Research Analyst Peer Set”). If theListed Entity’s business model differs from such Research Analyst Peer Set, it may provide an explanation to clarify the distinction.

(iii) In cases where fewer than three Industry Peers are available, the listed entity will disclose, that only one or two peers are available for comparison.

Additional details need to be provided for RPTs relating to sale, purchase or supply of goods or services or any other similar business transaction:

(a) Number of bidders / suppliers / vendors / traders / distributors / service providers from whom bids / quotations were received with respect to the proposed transactionalong with details of process followed to obtain bids – the Circular states that if the number of bids / quotations is less than 3, Audit Committee must comment upon whether the number of bids / quotations received are sufficient.

(b) Best bid / quotation received. If comparable bids are available, disclose the price and terms offered -the Circular states that Audit committee must provide a justification for rejecting the best bid /quotation and for selecting the related party for the transaction.

(c) Additional cost / potential loss to the listed entity or the subsidiary in transacting with the related party compared to the best bid / quotation received – the Audit Committee must justify the additional cost to the listed entity or the subsidiary.

(d) Where bids were not invited, the fact shall be disclosed along with the justification for the same.

(e) Wherever comparable bids are not available, the Company must state what is the basis to recommend to the Audit Committee that the terms of proposed RPT are beneficial to the shareholders.

Similar details are also required for proposed RPTs relating to sale, lease or disposal of assets of the subsidiary or of a unit, division or undertaking of the listed entity, or disposal of shares of the subsidiary or associate.

For proposed RPTs relating to any loans, inter-corporate deposits or advances given by the listed entity or its subsidiary – Comparable interest rates shall be provided for similar nature of transactions. If the interest rate charged to the related party is less than the average rate paid by the related party, then the Audit Committee must provide a justification for the low interest rate charged.

WHAT MUST THE AUDIT COMMITTEE DO?

Considering the above, Audit Committee of a listed entity must carry out the following process when concluding whether or not an RPT is on an arm’s length basis:

(a) Follow the SEBI prescribed industry standards on minimum information to be placed before the Audit Committee.

(b) Ask for independent quotes / bids / tender from non-related parties for the same transaction. The terms and conditions of the transaction must be the same for the related and the non-related parties.

(d) Sometimes, it may not be feasible or practical to obtain independent quotes / bids either due to the specialised nature of the transaction or limited number of entities offering that service/ goods. In such cases, the Audit Committee could rely upon an expert’s opinion as to the ALP determination. While relying on this opinion, it should verify that the expert has considered relevant factors and has given a speaking, well-reasoned opinion. For instance, in one case, a listed company acquired a very large piece of land from a promoter company. The management furnished two expert opinions, one from an international property consultant and the other from a chartered valuer. Based on various market studies, sale instances, registration details, etc., both of them concluded that the price paid by the listed company was on an arm’s length basis.

(e) If appropriate, reliance may also be placed on statutory valuations, such as, stamp duty ready reckoner rates, customs’ valuation assessment, etc.

(f) In case of acquisition of shares, an expert’s valuation report may be relied upon.

(g) Ask the Internal Auditor to verify RPTs and give a certification that they are on an arm’s length basis. The Auditor should examine the process for determining ALP in the RPTs.

EXAMPLES FROM LISTED COMPANIES

The RPT Policies of listed companies throw some light on how the Boards should determine ALP. A few such policies are discussed below:

(a) Infosys Technologies Ltd – the Board will inter alia consider factors such as, nature of the transaction, material terms, the manner of determining the pricing and the business rationale for entering into such transaction and any other information the Board may deem fit.

(b) Wipro Ltd – All RPTs are at arm’s length and are undertaken in the ordinary course of business, i.e., the relationship with the transacting party should not confer on the Company or the transacting party any undue benefit / advantage or undue disadvantage / onerous obligations, that will be unacceptable if such transacting party was not a related party and / or the Company will not enter into a transaction which it will ordinarily not undertake. It also states that there must be no “conflict of interest” while negotiating and arriving at terms of such Related Party Transactions. For this purpose, “Terms” will not be merely confined to ‘price’ or ‘consideration’ but also other terms such as payment terms, credit period, sale whether ex-factory, FOB, CIF etc.

If in doubt, management shall seek advice on “arm’s length” from the Chief Financial Officer, General Counsel, of the Company and / or the Audit Committee, as appropriate. The Audit Committee’s decision on these aspects shall be final. Audit Committee could seek external advice to assist in decision making on these aspects or for that matter in dealing with any issues connected with RPTs.

(c) Grasim Industries Ltd – Terms will be treated as on ‘Arm’s Length Basis’ if the commercial and key terms are comparable and are not materially different with similar transactions with non-related parties considering all the aspects of the transactions such as quality, realizations, other terms of the contract, etc. In case of contracts with related parties for specified period / quantity / services, it is possible that the terms of one-off comparable transaction with an unrelated party are at variance, during the validity of contract with related party. In case the Company is not doing similar transactions with any other non-related party, terms for similar transactions between other non-related parties of similar standing can be considered to establish ‘arm’s length basis’. Other methods prescribed for this purpose under any law can also be considered for establishing this principle.

(d) Tata Steel Ltd – While assessing a proposal put up before the Audit Committee / Board for approval, the Audit Committee / Board may review the following documents / seek the following information from the management in order to determine if the transaction is at an arm’s length or not:

Nature/type of the transaction i.e. details of goods or property to be acquired / transferred or services to be rendered / availed (including transfer of resources) – including description of functions to be performed, risks to be assumed and assets to be employed under the proposed transaction;
Material terms (such as price and other commercial terms contemplated under the arrangement) of the proposed transaction, including value and quantum;
Benchmarking information that may have a bearing on the arm’s length basis analysis, such as:
market analysis, research report, industry trends, business strategies, financial forecasts, etc.;
third party comparable, valuation reports, price publications including stock exchange and commodity market quotations;
management assessment of pricing terms and business justification for the proposed transaction as to why the RPT is in the interest of the Company;
comparative analysis, if any, of other such transaction entered into by the Company.

It also states that for this purpose, the Company will seek external expert opinion, if necessary.

CONCLUSION

Valuation is a very subjective exercise based on highly objective data! Hence, it is often remarked that “value lies in the eyes of the beholder!” This subjectivity takes a more dramatic turn when faced with a transaction which is between parties who are associated or related. In the famous English case of R vs. Sussex Justices, ex parte McCarthy, [1923] All ER Rep 233, Lord Hewart CJ laid down the principle ~ “Not only must Justice be done; it must also be seen to be done”. Similarly, when determining the ALP in case of related transactions,

“Not only must the value be fair; it must also be seen to be fair!”

This is where the Board’s expertise and experience would come in handy. They would need to examine the facts of the RPT and remember Grabel’s Law in each ALP determination:

“Two is Not Equal To Three, Even for Very Large Values of Two!”

BCAJ Admin

Nomination and Remuneration Committee

INTRODUCTION

One of the important committees of the Board of Directors of a listed company is the Nomination and Remuneration Committee (“NRC”). The NRC plays a very important role in the corporate governance of a listed company. Recognising its importance, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”) has prescribed various roles and responsibilities for the NRC. Let us analyse its relevance in the context of a listed entity.

MANDATORY REQUIREMENT UNDER THE ACT’

Under the Act and the LODR, the NRC is a mandatory committee that all listed entities have to constitute. The Companies Act also requires that the following unlisted public companies constitute an NRC:

(i) Public Companies having a paid-up share capital of ₹10 crore or more; or

(ii)Public Companies having a turnover of ₹100 crore or more; or

(iii)Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding ₹50 crore.

The paid-up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of the latest audited financial statements shall be taken into account for the above purpose.

However, despite being covered by the above thresholds, the following companies need not constitute an NRC:

(a) a joint venture

(b) a wholly owned subsidiary; and

ADDITIONAL REQUIREMENTS UNDER THE LODR

In addition to the provisions of the Act, the LODR contains certain additional provisions for the NRC. The NRC must comprise of at least 3 directors of which all directors shall be non-executive directors and at least 2/3 of the NRC shall be independent directors. Non-executive directors would mean those directors who are not drawing any remuneration other than director’s sitting fees and commission. Thus, the members of the NRC would be either independent directors or non-executive non-independent directors. The requirement of having 2/3 of the NRC as independent directors is the same as in the case of the Audit Committee. However, unlike in the case of the Audit Committee (where members must be financially literate), there is no further qualification prescribed for the members of the NRC.

The quorum for a meeting of the NRC is either 2 members or 1/3 of the members of the committee, whichever is greater, including at least 1 independent director in attendance. Thus, if there is no independent director in attendance, then an NRC cannot have a meeting.

The LODR requires that the NRC meets at least once in a financial year. Thus, while the Audit Committee must meet once every quarter, the NRC can meet only once in a financial year.

CHAIRPERSON

The Chairperson of the nomination and remuneration committee must be an independent director, this again is the same as in the case of an Audit Committee. However, the Chairperson of the Company’s Board of Directors cannot be appointed as the Chairperson of the NRC but he can be a member of the NRC. This is so irrespective of whether he is an executive or a non-executive director.

The LODR provides that Chairperson of the NRC may be present at the AGM, to answer the shareholders’ queries. However, the Act states that the chairperson of the NRC constituted under this section or, in his absence, any other member of the committee authorised by him in this behalf shall attend the general meetings of the company.

Thus, unlike in the case of the Audit Committee Chairman, it is not mandatory for him to present at the AGM.It is up to the chairperson to decide who shall answer the shareholders’ queries.

ROLE UNDER ACT

The Act requires that the NRC shall identify persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, recommend to the Board their appointment and removal and shall specify the manner for effective evaluation of performance of Board, its committees and individual directors to be carried out either by the Board, by the Nomination and Remuneration Committee or by an independent external agency and review its implementation and compliance.

It shall formulate the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and other employees. While doing so, the Committee must ensure that—

(a) the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully;

(b) relationship of remuneration to performance is clear and meets appropriate performance benchmarks; and

(c) remuneration to directors, key managerial personnel and senior management involves a balance between fixed and incentive pay reflecting short and long-term performance objectives appropriate to the working of the company and its goals:
The policy shall be placed on the website of the company, if any, and the salient features of the policy and changes therein, if any, along with the web address of the policy, if any, shall be disclosed in the report of the Board of Directors.

ROLE UNDER LODR

The responsibilities of the NRC as laid down under the LODR include the following which are in addition to those laid down under the Act:

(a) Formulation of the criteria for determining qualifications, positive attributes and independence of a director – this could also include additional requirements over and above those mandatorily laid down under the Companies Act, 2013 and the LODR. Listed entities are free to prescribe additional criteria for an independent director. For instance, while the Act prescribes 2 terms of a maximum tenure of 5 years per term, many companies prescribe a maximum tenure of 3 years per term.

For every appointment of an independent director, the NRC is required to evaluate the balance of skills, knowledge and experience on the Board and on the basis of such evaluation, prepare a description of the role and capabilities required of an independent director. The person recommended to the Board for appointment as an independent director shall have the capabilities identified in such description.

For the purpose of identifying suitable candidates, the Committee may:

use the services of an external agencies, if required;
consider candidates from a wide range of backgrounds, having due regard to diversity; and
consider the time commitments of the candidates.

(b) Recommending to the board of directors a policy relating to, the remuneration of the directors, key managerial personnel and other employees – in the case of directors, it would include board fees and directors’ commission. In the case of KMPs and other employees, it would include, salary, bonus, variable pay, employee stock option plans, etc.

(c) Formulation of the criteria for evaluation of performance of independent directors and the board of directors – this could include external evaluation, internal questionnaires, surveys, benchmarking, etc.

(d) Devising a policy on diversity of board of directors – this could include diversity in terms of gender, experience, qualifications, etc.

(e) Identifying persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, and recommend to the board of directors their appointment and removal. Any vacancy in a director must be filled up by the entity within 3 months.

(f) Whether to extend or continue the term of appointment of the independent director, on the basis of the report of performance evaluation of independent directors.

(g) Recommend to the board, all remuneration, in whatever form, payable to senior management. The LODR now expressly provides that remuneration and sitting fees paid by the listed entity or its subsidiary to its director, key managerial personnel or senior management (except those who are part of promoter) shall not require approval of the audit committee provided that the same is not material.

(h) The appointment / re-appointment of a person, including as a managing director or a whole-time director or a manager, who was earlier rejected by the shareholders at a general meeting, shall be done only with the prior approval of the shareholders. For this purpose, the NRC must provide a detailed explanation and justification for recommending such a person for appointment or re-appointment.

For the above purpose, the term “senior management” meansthose officers and personnel of the listed entity who are members of its core management team, excluding the Board of Directors, and shall also comprise all the members of the management one level below the Chief Executive Officer or Managing Director or Whole Time Director or Manager (including Chief Executive Officer and Manager, in case they are not part of the Boardof Directors) and shall specifically include the functional heads, by whatever name called and the persons identified and designated as Key Managerial Personnel (KMP), other than the board of directors, by the listed entity.

Earlier, the NRC only considered appointment and remuneration of the KMP. KMP under s.203 of the Companies Act, 2013 comprises of the MD, Manager, CEO, Whole-time Director, CFO and Company Secretary. However, now even one level below the KMP is covered within the ambit of the NRC. For instance, if there is a change in Vice-President Finance, then the same would have to be placed before the NRC.

When it comes to the appointment of KMP, the provisions of the LODR and the Companies Act are both relevant and should be kept in mind by the NRC:

(a) A whole-time KMP cannot hold office in more than one company except in its subsidiary company.

(b) A KMP can be a non-executive Director of any other company with the prior permission of his Board of Directors.

(c) S.196 of the Act lays down the requirements for a person to be appointed as an MD. For instance, one of the important requirements is that he must be a resident of India and resident for this purpose has been specifically defined under the Act. Another important requirement is that he must not have been sentenced to imprisonment for any period OR to a fine exceeding Rs. 1,000 for the conviction of any offence under 19 specific Laws, one of them is the Income-tax Act, 1961. For instance, if a person has been convicted for an offence relating to Tax Deducted at Source, he may become ineligible to be appointed as an MD of a company. To appoint such a person, prior approval would be required from the Ministry of Corporate Affairs.

(d) A person can be a Managing Director of maximum 2 companies. However, the 2nd company appointing such person as MD must approve his appointment by a Board resolution with the consent of all the directors present at the meeting.

(e) While fixing the managerial remuneration, the Act provides that the total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year shall not exceed 11% of the net profits of that company for that financial year computed in the manner laid down in section 198. The Remuneration payable to non-executive directors cannot exceed 1% of the net profits of the company. However, sitting fees payable for attending Board Meetings is not included in this limit, but the maximum fees payable per committee / board meeting cannot exceed ₹1 lakh.

Further, Schedule V to the Act provides for the maximum managerial remuneration in case of a company that has inadequate profits. The NRC must be cognizant of these provisions when it fixes the remuneration of an MD / Whole-time Director, Director, etc.

(f) The Companies Act provides that if the office of any whole-time KMP is vacated, the resulting vacancy shall be filled up by the Board at a meeting of the Board within a period of 6 months from the date of such vacancy. However, the LODR provides that any vacancy in the office of Chief Executive Officer, Managing Director, WholeTime Director or Manager or CFO shall be filled by the listed entity at the earliest and in any case not later than 3 months from the date of such vacancy. The LODR providing a more stringent requirement will override the provisions of the Act.

(g) The Compliance Officer (Company Secretary) of the Company shall be a whole-time employee of the listed entity, not more than one level below the board of directors and shall be designated as a Key Managerial Personnel.

(h) Any vacancy in the office of the Compliance Officer shall be filled by the listed entity within 3 months.

(i) In case of resignation of an independent director of the listed entity, detailed disclosures shall be made to the stock exchanges by the listed entities within 7 days from the date of his resignation. The NRC should ensure that these disclosures are made.

(j) In case of resignation of KMP, senior management, Compliance Officer or director other than an independent director; the letter of resignation along with detailed reasons for the resignation as given by the key managerial personnel, senior management, Compliance Officer or director shall be disclosed to the stock exchanges by the listed entities within 7 days from the date that such resignation comes into effect. The NRC should ensure that these disclosures are made.

The powers of the NRC were scrutinised by the Bombay High Court in the case of Invesco Developing Markets Fund vs. Zee Entertainment Enterprises Ltd. [2022] 232 COMP CASE 20 (Bombay). The Court held that there is no bar on a shareholder to appoint an Independent Director on the Board of a Company. S. 160 of the Act expressly gave powers to a shareholder to appoint a Director even if the same was not appointed by the NRC. The Court held that if this interpretation were upheld a shareholder of a listed company would not only be disabled from proposing Independent Directors, but such disability would extend to all other Directors. Effectively, even a majority shareholder of a listed Company would not be able to appoint a Director without identification by the NRC. The Court held that this was not the intent or purpose of the Act.

ESOP REGULATIONS

In addition to the Act and the LODR, the Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (“the ESOP Regulations”) also prescribe a role for NRCs of those listed companies that have instituted an ESOP. ESOPs for this purpose, can also be in the form of employee share purchase schemes, stock appreciation rights, etc.

The ESOP Regulations require that a company shall constitute a Compensation Committee for administration and superintendence of the ESOP schemes. However, its NRC can act as this Compensation Committee.

The Compensation Committee shall, inter alia, formulate the detailed terms and conditions of the ESOP schemes. Regulation 5(3) of the ESOP Regulations lays down the terms and conditions of schemes to be formulated by the Compensation Committee.

The Committee must also frame suitable policies and procedures to ensure that there is noviolation of securities laws, including the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 and the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003.

CORPORATE GOVERNANCE REPORT

The corporate governance contained in the company’s Annual Report must contain the following disclosures regarding the NRC:

(a) brief description of terms of reference;

(b) composition, name of members and chairperson;

PENALTY

For any contravention of the provisions of Act relating to an NRC, the company shall be liable to a penalty of ₹5 lakhs and every officer of the company who is in default shall be liable to a penalty of ₹1 lakh. The LODR provides a fine of ₹2,000 per day of non-compliance with respect to the constitution of the NRC.

In the case of Max Heights Infrastructure Ltd, Adjudication Order No. Order/BM/GN/2024-25/30529, SEBI’s Adjudication Officer held that under the LODR, at least 2/3 of the directors of the NRC must be independent directors. However, in that case, the one director was incorrectly classified as an Independent Director and hence, the number of independent director was reduced by 1 compared to what it should have been. Hence the independence requirements of nomination and remuneration committee was not fulfilled.

The Registrar of Companies, NCT of Delhi & Haryana has passed an adjudication order (order no.RoC/D/ADJ/2023/Section 178/PFS/2511-2515). The findings were that a company which was a listed public company was mandatorily required to constitute anNRC and its total strength could not be reduced below 3. As far as the role of the NRC was concerned, the same was spelt out under the Act and it was seminal in identifying persons who were suitable for becoming directors in a company, it was also responsible for laying down the criteria qualifications, positive attributes and independence of a director, besides laying down policies for syncing remuneration with the performance benchmarks. Owing to the withdrawal of a nominee director by the holding company, the NRC became dysfunctional as the number of directors fell below 3. The RoC held in spite of this the company did not show any alacrity in reconstituting the NRC. Accordingly, it held that the company and its MD had failed to discharge their obligation under section 178 of the Companies Act 2013 thereby rendering themselves for penal actions.

CONCLUSION

The NRC is a very vital cog in the corporate governance wheel. It is vested with great powers as regards appointment of the Directors, KMP and senior management. It would also act as an important link between the shareholders and management of the company.

BCAJ Admin

Banning Of Unregulated Lending Activities

INTRODUCTION

Digital Lending platforms, unregulated ‘peer to peer’ lending platforms, lending apps have mushroomed in recent times. Several of these unregulated lending activities have caused a great deal of harm to the financial ecosystem and have also impacted naive and gullible borrowers. Recognising this malaise, the Finance Ministry, Government of India has proposed a Law titled the Banning of Unregulated Lending Activities (“the Law”). The Bill is currently in its draft stage. Let us have a look at this important law that should impact the lending space in India. The Bill states that it is enacted to provide for a comprehensive mechanism to ban the unregulated lending activities other than lending to relative(s) and to protect the interest of borrowers. A few years ago, the Government enacted the Banning of Unregulated Deposit Schemes Act, 2019 to ban unregulated deposit schemes and to protect the interest of depositors. This is a second similar law aimed at banning unregulated lending activities.

The provisions of this Law shall have effect notwithstanding anything contained in any other law for the time being in force, including any law made by any State or Union Territory. Thus, it overrides any other law that is contrary.

UNREGULATED LENDING

The Law applies to unregulated lending activities which are defined in an exhaustive manner to mean lending activities which are not covered under regulated lending activities, carried on by any person whether through digital lending or otherwise. Further, these activities must not be regulated under any other law for time being in force. It even states that the Law shall not apply to lending activities which are exempted under any other law for the time being in force.

LENDING

Interestingly, the all-important term lending has not been defined under the Law. One may draw reference to other similar laws and judicial decisions.

For instance, the Maharashtra Money Lending (Regulation) Act, 2014, defines the term “money lending” to mean the business of advancing loans whether in cash or in kind and whether or not in connection with or in addition to any other business.

The Supreme Court in Ram Rattan Gupta vs. Director of Enforcement, 1966 SCR (1) 651 has held as follows:

“What is the meaning of the expression “lend”? It means in the ordinary parlance to deliver to another a thing for use on condition that the thing lent shall be returned with or without compensation for the use made of it by the person to whom it was lent. The subject-matter of lending may also be money. Though a loan contracted creates a debt, there may be a debt created without contracting a loan; in other words, the concept of debt is more comprehensive than that of loan.”

The Supreme Court in JiwanlalAchariya vs. RameshwarlalAgarwalla, 1967 SCR (1) 93, in the context of the Bihar Money Lenders Act has defined the term loan to mean an advance, `whether of money or in kind, on interest made by a money-lender.’

The Usurious Loans Act, 1918 defines the term loan to mean a loan whether of money or in kind and includes any transaction which is, in the opinion of the Court, in substance a loan.

Black’s Law Dictionary, 6th Edition, West defines the phrase lending or loaning of money to mean transactions creating customary relation of borrower and lender, in which money is borrowed for fixed time on borrower’s promise to repay amount borrowed at stated time in future with interest at fixed rate — Bancock County vs. Citizen’s Bank & Trust Co., 53 Idaho 159, 22 P.2d 674.

DIGITAL LENDING

Lending can also be by Digital Lending which means a remote and automated public lending activity, largely by use of digital technologies for customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service. Thus, digital lending platforms are sought to be covered by this definition.

The phrase “Public lending activity” has been defined in the draft Law to mean the business of financing by any person whether by way of making loans or advances or otherwise of any activity other than its own at an interest, in cash or kind but does not include loans and advances given to relative(s). Interestingly, even the expression “business” has been defined exhaustively to mean an organised activity undertaken by a person with the purpose of making gains or profits, in cash or kind. Thus, profit-motive is an essential factor for a lending activity to be covered under this Law. In addition, the lending activity must be a business for the lender. Hence, if a person gives a loan to his friend / family, it would not be his business (even if the loan is interest-bearing) and hence, it would be outside the purview of this Law. To that effect, this Law is similar to the Money Lending laws.

However, any lending to a relative by a lender would be exempt even if it constitutes his business. Relative for this purpose means spouse, parents, children, members of an HUF, son-in-law and daughter-in-law, step-parents, step-children and step-siblings are also included in this definition.

REGULATED LENDING ACTIVITIES

Regulated Lending Activities have been defined to mean those lending activities that are specified in the Schedule to the Act. It refers to lending activities regulated under the provisions of the following Acts or that are exempted under the same:

Reserve Bank of India Act, 1934, e.g., lending by non-banking financial companies (NBFCs)
Banking Regulation Act, 1949, e.g., lending by Banks
State Bank of India (SBI) Act, 1955
The Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970
Regional Rural Banks (RRB) Act, 1976
Export Import Bank of India (EXIM) Act, 1981 undertaken by EXIM Bank
Multi State Co-operative Societies Act, 2002
National Housing Bank (NHB) Act, 1987
National Bank of Agriculture and Rural Development (NABARD) Act, 1981
National Bank for Financing Infrastructure and Development (NaBFID) Act, 2021
Small Industries Development Bank of India (SIDBI) Act, 1989
Life Insurance Corporation of India (LIC) Act, 1956
Companies Act, 2013, e.g., loans to Directors under s.185
Chit Funds Act, 1982
Limited Liability Partnership Act, 2008
Co-operative Societies Acts of various States / UTs
The State Financial Corporations Act, 1951
State Money Lenders Acts, e.g., lending by money lenders under the Maharashtra Money Lending (Regulation) Act, 2014
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
The Factoring Regulation Act, 2011

LENDER

The term Lender has been defined to mean any person, who undertakes lending activities. Person for this purpose includes-

(a) an individual;

(b) a Hindu Undivided Family;

(d) a trust — it does not specify the type of trust and hence, both public and private trusts would be covered;

(e) a partnership firm;

(f) a limited liability partnership;

(g) an association of persons;

(h) a co-operative society registered under any law for the time being in force relating to co-operative societies;
or

(i) every artificial juridical person, not falling within any of the preceding sub-clauses;

BANNING OF UNREGULATED LENDING ACTIVITIES

Once the Bill becomes an Act, all unregulated lending activities (including digital lending) will be banned. Further, no lender shall, directly or indirectly, promote, operate, issue any advertisement in pursuance of an unregulated lending activity.

The penalty for contravention is imprisonment for a term which shall not be less than 2 years but which may extend to 7 years and with fine which shall not be less than ₹2 lakhs but which may extend to ₹1 crore.

Any lender who lends money whether digitally or otherwise and uses unlawful means to harass and recover the loan, shall be punishable with imprisonment for a term which shall not be less than 3 years but which may extend to 10 years and with fine which shall not be less than ₹5 lakhs but which may extend to twice the amount of loan.

Further, no person shall knowingly make any statement, promise or forecast which is false, deceptive or misleading in material facts or deliberately conceal any material facts, digitally or otherwise to induce another person to apply or take loan from lenders involved in unregulated lending activity. The penalty for this is imprisonment for a term which shall not be less than 1 year but which may extend to 5 years and with fine which may extend to ₹10 lakhs.

The Bill also provides a harsher penalty for repeat offenders. Whoever having been previously convicted of an offence, is subsequently convicted of an offence shall be punishable with imprisonment for a term which shall not be less than 5 years but which may extend to 10 years and with fine which shall not be less than ₹10 lakhs but which may extend to ₹50 crores.

In case of offences by non-individual lenders, every person who, at the time the offence was committed, was in charge of, and was responsible to, the lender for the conduct of its business, as well as the lender, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

The Bill also proposes that investigations can be transferred to the Central Bureau of Investigation if the lender, borrower, or properties are located across multiple states or union territories, or if the total amount involved is large enough to significantly impact public interest.

INFORMATION BY LENDERS

Every lender which commences or carries on its business as such on or after the commencement of this Act shall intimate the Authority constituted under the Act about its business in such form and manner and within such time, as may be prescribed.

DATABASE

The Central Government may designate an Authority to create an online database for information on lenders operating in India and which shall have the facility for public to search information about lenders undertaking regulated lending activities and shall also facilitate reporting of illegal lenders or cloned lenders.

CONCLUSION

This is an important enactment to prevent illegal lending activities and to protect the interests of borrowers. However, as with all Statutes it would have to be ensured that genuine cases are not harassed.

BCAJ Admin

Property Owned By Hindu Females

INTRODUCTION

Is the property of a Hindu Female always her absolute property or does she have a limited rights in certain situations? Does not the Hindu Succession Act, 1956 (“the Act”) empower every Hindu female to own property?

It is interesting to note that these questions are not as completely settled as they appear and the issues have travelled all the way to the Supreme Court on numerous occasions and met with different responses! Thus, while it is quite easy to understand in theory that right to property is a vested right of a Hindu female under the Hindu Succession Act, it becomes quite difficult to understand its implications given the facts and circumstances of a particular case. The issue is thrown into sharper focus by the seeming dichotomy under sub-sections (1) and (2) of section 14 of the Hindu Succession Act, 1956, which deal with property of a Hindu female.

A recent two-Judge Supreme Court decision in the case of Tej Bhan (D) Through LR vs. Ram Kishan (D) through LRs, Civil Appeal No. 6557 of 2022, Order dated 9^th December, 2024 has realised this difference of opinions amongst various decisions of the Apex Court and has directed the Court Registry to place the order before the Hon’ble Chief Justice of India for constituting an appropriate larger bench for reconciling the principles laid down in various judgments of the Supreme Court and for restating the law on the interplay between sub-section (1) and (2) of Section 14 of the Hindu Succession Act.

SECTION 14 OF THE ACT

The Act governs the position of a Hindu intestate, i.e., one dying without making a valid Will. The Act applies to Hindus, Jains, Sikhs, Buddhists and to any person who is not a Muslim, Christian, Parsi or a Jew. The Act overrides all Hindu customs, traditions and usages and specifies the heirs entitled to such property and the order of preference among them.
S.14 which is the crux of the issue needs to be studied closely.

S.14(1) states that any property possessed by a female Hindu, whenever it may be acquired by her, shall be held by her as full owner thereof and not as a limited owner. Thus, the Act lays down in very clear terms that in respect of all property possessed by a Hindu female, she is the full and absolute owner and she does not have a limited / restricted right in the same. The explanation to this sub-section defined the term, “property” to include both movable and immovable property acquired by a female Hindu by inheritance or devise, or at a partition, or in lieu of maintenance or arrears of maintenance, or by gift (from any person, whether a relative or not, before, at or after her marriage), or by her own skill or exertion, or by purchase or by prescription, or in any other manner whatsoever. Thus, an extremely wide definition of property has been given under the Act. Property includes all types of property owned by a female Hindu although she may not be in actual, physical or constructive possession of that property — Mangal Singh & Ors vs. Shrimati Rattno, 1967 SCR (3) 454. The critical words used here are “possessed” and “acquired”. The word “possessed” has been used in its widest connotation and it may either be actual or constructive or in any form recognised by law. In the context in which it has been used in s.14(1) it means the state of owning or having in one’s hand or power – Gummalapura Taggina Matada Kotturuswami vs. Setra Veerayya and Ors. (1959) Supp. 1 S.C.R. 968.The use of the words ‘female Hindu’ is also very wide in scope and is not restricted only to a ‘wife’ — Vidya (Smt) vs. Nand Ram Alias Asoop Ram, (2001) 1 MLJ 120 SC.

In Dindyal & Anr. vs. Rajaram, (1971) 1 SCR 298, it was held that, before any property can be said to be “possessed” by a Hindu woman as provided in s.14(1), two things are necessary (a) she must have a right to the possession of that property and (b) she must have been in possession of that property either actually or constructively. However, this section cannot make legal what is illegal. Hence, if a female Hindu is in illegal possession of any property, then she cannot validate the same by taking shelter under this section.

S.14(2) of the Act carves out an exception to s.14(1) of the Act. It states that nothing contained in sub-section (1) of s.14 shall apply to any property acquired by way of gift or under a will or any other instrument or under a decree or order of a civil court or under an award where the terms of the gift, will or other instrument or the decree, order or award prescribe a restricted estate in such property. Thus, if a female Hindu acquires any property under any instrument and the terms of acquisition, as laid down by such instrument, itself provided for a restricted or a limited estate in the property then she would be treated as a limited owner only. In such an event, she cannot have recourse to s.14(1) and contend that she is an absolute owner.

Whether sub-section (1) or (2) of s. 14 apply to a particular case depends upon the facts of the case — Seth Badri Pershad vs. Smt. Kanso Devi, (1969) 2 SCC 586. In this decision, it was further held that sub-section (2) of Section 14 is more in the nature of a proviso or an exception to Sub-section (1). It can come into operation only if acquisition in any of the methods indicated therein is made for the first time without there being any pre-existing right in the female Hindu who is in possession of the property. It further approved of the observations of the Madras High Court Rangaswami Naicker vs. Chinnammal, AIR 1964 Mad 387 that s.14(2) made it clear that the object of s. 14 was only to remove the disability on women imposed by law and not to interfere with contracts, grants or decrees etc. by virtue of which a women’s right was restricted.

DECISIONS ON S.14

Several decisions of the Supreme Court have analysed s.14(1) and s.14(2) in depth. Some of the important (and conflicting) ones are discussed below.

R.B.S.S. MUNNALAL AND OTHERS VS. S.S. RAJKUMAR,AIR 1962 SC 1493

The Supreme Court held that by s.14(1) the legislature converted the interest of a Hindu female, which under the customary Hindu law would have been regarded as a limited interest, into an absolute interest and by the Explanation thereto gave to the expression “property” the widest connotation. The Court held that the Act conferred upon Hindu females full rights of inheritance, and swept away the traditional limitations on her powers of dispositions which were regarded under the Hindu law as inherent in her estate. She was under the Act regarded as a fresh stock of descent in respect of property possessed by her at the time of her death.

NIRMAL CHAND VS. VIDYAWANTI, (1969) 3 SCC 628

If a lady is entitled to a share in her husband’s properties then the suit properties must be held to have been allotted to her in accordance with s.14(1), i.e., as an absolute owner in spite of the fact that the deed in question mentioned that she would have only a life interest in the properties allotted to her share.

ERAMMA VS. VERRUPANNA, 1966 (2) SCR 626

The Supreme Court held that mere possession of property by a female does not automatically attract s. 14(1) of the Act.

MST. KARMI VS. AMRU, AIR 1971 SC 745

A person died leaving behind his wife. His son pre-deceased him. He gave a life interest through his Will to his Wife. It was held that the life estate given to a widow under the Will of her husband cannot become an absolute estate under the provisions of the Act. S.14(2) would apply to such a situation and it would not become an absolute estate. The female having succeeded to the properties on the basis of her husband’s Will she cannot claim any rights over and above what the Will conferred upon her. This is one of the important decisions which have gone against the tide of conferring absolute ownership on the Hindu female.

V. TULSAMMA VS. SESHA REDDI, (1977) 3 SCC 99

In this landmark case, the Supreme Court clarified the difference between sub-sections (1) and (2) of Section 14, thereby restricting the right of a testator to grant a limited life interest in a property to his wife. case involved a compromised decree arising out of a decree for maintenance obtained by the widow against her husband’s brother in a case of intestate succession. The compromise allotted properties to her as a limited owner. The Supreme Court held that this was a case where properties were allotted in lieu of maintenance and hence, s.14(1) was clearly applicable. Thus, the widow became the absolute owner of these properties.

The Court held that legislative intendment in enacting sub-section (2)was that this subsection should be applicable only to cases where the acquisition of property is made by a Hindu female for the first time without any pre-existing right. Where, however, property is acquired by a Hindu female at a partition or in lieu of her pre-existing right to maintenance, such acquisition would be pursuant to her pre-existing right not be within the scope and ambit of s.14(2) even if the instrument allotting the property prescribes a restricted state in the property. Sub-section (2) must, therefore, be read in the context of sub-section (1) so as to leave as large a scope for operation as possible to sub-section (1) and so read, it must be confined to cases where property is acquired by a female Hindu for the first time as a grant without any pre-existing right, under a gift, will, instrument, decree, order or award, the terms of which prescribe a restricted state in the property. It further held that a Hindu woman’s right to maintenance is a personal obligation so far as the husband is concerned, and it is his duty to maintain her even if he has no property. If the husband has property then the right of the widow to maintenance becomes an equitable charge on his property and any person who succeeds to the property carries with it the legal obligation to maintain the widow. Though the widow’s right to maintenance is not a right to property, it is undoubtedly a pre-existing right in the property, i.e. it is a jus ad rem not jus in rem and it can be enforced by the widow who can get a charge created for her maintenance on the property either by an agreement or by obtaining a decree from the civil court.

SMT. GULWANT KAUR VS. MOHINDER SINGH, AIR 1987 SC 2251 / GURDIP SINGH VS. AMAR SINGH, 1991 SCC (2) 8

The provisions of Section 14(1) of the Act were applied because it was a case where the Hindu female was put in possession of the property expressly in pursuance to and in recognition of the maintenance in her / where the wife acquired property by way of gift from her husband explicitly in lieu of maintenance. This decision was affirmed by a three-Judge bench in Jaswant Kaur vs. Major Harpal Singh, (1989) 3 SCC 572

THOTA SESHARATHAMMA VS. THOTAMANIKYAMMA, (1991) 4 SCC 312

The Apex Court dealt with a life estate granted to a Hindu woman by a Will as a limited owner and the grant was in recognition of pre-existing right. Thulasmma’s decision was followed and s.14(1) was held to apply. The Supreme Court also held that the contrary decision in the case of Mst. Karmi cannot be considered an authority since it was a rather short judgment without adverting to any provisions of Section 14(1) or 14(2) of the Act. The judgment neither made any mention of any argument raised in this regard nor there was any mention of the earlier decisions on this issue.

NAZAR SINGH VS. JAGJIT KAUR, (1996) 1 SCC 35/ SANTOSH VS. SARASWATHIBAI, (2008) 1 SCC 465 / SUBHAN RAO VS. PARVATHI BAI, (2010) 10 SCC 235

Applying Thulasamma’s decision it was held that lands, which were given to a lady by her husband in lieu of her maintenance, were held by her as a full owner thereof and not as a limited owner notwithstanding the several restrictive covenants accompanying the grant. According to the Court, this proposition followed from the words in sub-section (1) of s.14, which insofar as is relevant read: “Any property possessed by a female Hindu … shall be held by her as full owner and not as a limited owner”

SHAKUNTALA DEVI VS. KAMLA AND OTHERS, (2005) 5 SCC 390

A Hindu wife was bequeathed a life interest for maintenance by her husband’s Will with a condition that she would not have power to alienate the same in any manner. As per the Will, after death of the wife, the property was to revert back to his daughter as an absolute owner. It was held that u/s.14(1) a limited right given to the wife under the Will got enlarged to an absolute right in the suit property.

SADHU SINGH VS GURDWARA SAHIB NARIKE, (2006) 8 SCC 75 / SHARAD SUBRAMANAYAN VS. SOUMIMAZUMDAR (2006) 8 SCC 91

The Supreme Court in these well-considered decisions held that the antecedents of the property, the possession of the property as on the date of the Act and the existence of a right in the female over it, however limited it may be, are the essential ingredients in determining whether sub-Section (1) of Section 14 of the Act would come into play. Any acquisition of possession of property by a female Hindu could not automatically attract s.14(1). That depended upon the nature of the right acquired by her. If she took it as an heir under the Act, she took it absolutely. If while getting possession of the property after the Act, under a devise, gift or other transaction, any restriction was placed on her right, the restriction will have play in view of s.14(2) of the Act. Therefore, there was nothing in the Act which affected the right of a male Hindu to dispose of his property by providing only a life estate or limited estate for his widow. The Act did not stand in the way of his separate properties being dealt with by him as he deemed fit. His Will could not be challenged as being hit by s.14(1) of the Act. When he validly disposed of his property by providing for a limited estate to his wife, the widow had to take it as the estate devolved on her. This restriction on her right so provided, was really respected by s.14(2) of the Act. Thus, in this case where the widow had no pre-existing right, the limited estate granted to her under her husband’s Will was upheld u/s. 14(2).

Any acquisition of possession of property (not right) by a female Hindu after the coming into force of the Act, cannot normally attract Section 14(1) of the Act. The Court distinguished Tulsamma’s decision as follows:

“….., it is clear that the ratio in V. Tulasamma vs. Shesha Reddy ………has application only when a female Hindu is possessed of the property on the date of the Act under semblance of a right, whether it be a limited or a pre-existing right to maintenance in lieu of which she was put in possession of the property. Tulasamma ………ratio cannot be applied ignoring the requirement of the female Hindu having to be in possession of the property either directly or constructively as on the date of the Act, though she may acquire a right to it even after the Act.

……….when a male Hindu executes a will bequeathing the properties, the legatees take it subject to the terms of the will unless of course, any stipulation therein is found invalid. Therefore, there is nothing in the Act which affects the right of a male Hindu to dispose of his property by providing only a life estate or limited estate for his widow. The Act does not stand in the way of his separate properties being dealt with by him as he deems fit. His will hence could not be challenged as being hit by the Act.”

The Court concluded that when a male validly disposed of his property by providing for a limited estate to his heir, the wife, she took it as the estate devolved on to her. This restriction on her right, was respected by the Act. It provided in Section 14(2) of the Act, that in such a case, the widow is bound by the limitation on her right and she could not claim any higher right by invoking Section 14(1) of the Act. In other words, conferment of a limited estate which was otherwise valid in law was reinforced by this Act by the introduction of Section 14(2) of the Act and excluding the operation of Section 14(1) of the Act.

JUPUDYPARDHASARATHY VS. PENTAPATI RAMA KRISHNA, (2016) 2 SCC 56

After analysing a host of decisions and the legal principles, the Supreme Court in Jupudy’s case held that the bequest under the Will to the 3rd wife was in the nature of maintenance even though the express words maintenance were not mentioned in the Will. She was issueless and the husband was duty bound to maintain her. Hence, he gave her the house and access to incidental facilities. Accordingly, s.14(1) applied and the limited right stood enlarged into an absolute estate by virtue of a pre-existing right of maintenance. The Court observed that no one disputed the genuineness of the Will and the fact that the 3rd wife continued to enjoy the said property in lieu of her maintenance.

TEJ BHAN’S CASE

A person purchased property under a sale deed executed by the wife of one Kanwar Bhan, the testator, who was the original owner of the property. Kanwar Bhan executed a will that created a life estate in favour of his wife. It stated that she was entitled to maintain herself out of the proceeds from the same but she was not be entitled to mortgage or sell the said land. Once she got the property after her husband’s demise, she executed a sale deed. This was objected to by other claimants under the Will. The lower Courts relied on decision in Tulsamma’s case and held that the property given to the wife of Kanwar Bhan was in the nature of maintenance and such a pre-existing right enlarged into a full estate. Accordingly, it upheld the right of the widow to sell the property. The High Court rejected this stand and held that the widow only had a limited right and hence, the correct principle was as laid down in the case of Sadhu Singh (supra).

CONCLUSION

The Supreme Court in Tej Bhan concluded that there were a large number of decisions which were not only inconsistent with one another on principle but have tried to negotiate a contrary view by distinguishing them on facts or by simply ignoring the binding decision. Accordingly, it was of the view that there must be clarity and certainty in the interpretation of Section 14 of the Act.

S.14(1) is a very important piece of legislation when it comes to ensuring protection of a Hindu female’s rights over property. It ensures that a lady is an absolute owner in respect of her property. However, it is also essential that this provision is used as a shield and not a sword. S.14(2) ensures that what was originally acquired as a limited owner does not automatically enlarge into absolute ownership. One important principle which emerges from the numerous Court cases is that applicability of these two sub-sections has to be tested on the facts of each case and there cannot be one straight-jacketed approach to all cases. One hopes that a Larger Bench of the Apex Court will conclusively settle this issue once and for all.

BCAJ Admin

Audit Committee: Role and Responsibilities

I. INTRODUCTION

The Board of Directors of a company carries out various roles and responsibilities in relation to a company. Many of these responsibilities are through various Board Committees. Of all the Committees of the Board, the Audit Committee is probably the most vital and is entrusted with the maximum tasks and duties. While an Audit Committee is mandatory for a listed company under the provisions of the Companies Act, 2013 (“the Act”) / the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”), it is also mandatory for certain public limited companies under the provisions of the Act. Let us examine the salient facets of this very important Board Committee. Interestingly, neither the Act nor the LODR defines the meaning of the term Audit Committee. The Corporate Governance Institute defines it as

“An audit committee is a committee of a company‘s board of directors that is responsible for overseeing the financial reporting process, internal controls, and audit activities.”

Let us examine the key duties and powers of the Audit Committee.

II. REQUIREMENTS

2.1 Companies Act, 2013

S.177 of the Act states that every listed public company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee. The class of public limited companies prescribed in this respect are:

(i) Public Companies having paid up share capital of ₹10 crore or more; or

(ii) Public Companies having turnover of ₹100 crore or more; or

(iii) Public Companies that have, in the aggregate, outstanding loans, debentures, and deposits, exceeding ₹50 crore.

Thus, as per the Act, all listed companies and the above-mentioned unlisted public limited companies are required to mandatorily constitute an Audit Committee. Private limited companies and unlisted public companies not covered need not have an Audit Committee. However, they may voluntarily choose to have one.

The following types of public companies are exempted from constituting an Audit Committee:

(a) a joint venture

(b) a wholly owned subsidiary; and

2.2 LODR

Under the LODR, every Listed Company must constitute a qualified and independent Audit Committee.

III. COMPOSITION

3.1 The composition of the Audit Committee in the case of listed companies is determined by both the Act and the LODR (the higher requirements would prevail) and in the case of other companies by the Act. These are explained below:

Features

Act

LODR

Number of Members

Minimum 3 Directors

Independent Directors

The majority of members of the Committee should be Independent Directors.

At least 2/3 of the members of the audit committee shall be independent Directors.

In case of a listed entity having equity shares with superior voting rights, the audit committee shall only comprise of independent directors.

Qualifications

The majority of members of the Audit Committee including its Chairperson shall be persons with the ability to read and understand, the financial statements.

All members of the Audit Committee shall be financially literate and at least one member. Shall have accounting or related financial management expertise.

For the purpose of this regulation, “financially literate” means the ability to read and understand basic financial statements i.e. balance sheet, profit and profit and loss account, and statement of cash flows.

A member shall be considered to have accounting or related financial management expertise if he or she possesses experience in finance or accounting, or requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a CEO, CFO, or other senior officers with financial oversight responsibilities.

Chairman

—

The chairperson of the Audit Committee shall be an independent director.

Secretary

—

The Company Secretary shall act as the secretary to the Audit Committee.

Invitees

The auditors of a company and the key managerial personnel shall have a right to be heard in the meetings of the Audit Committee when it considers the auditor’s report but shall not have the right to vote.

The Audit Committee at its discretion shall invite the finance director or head of the finance function, head of the internal audit, and a representative of the statutory auditor and any other such executives to be present at the meetings of the committee:

Provided that occasionally the Audit Committee may meet without the presence of any executives of the listed entity.

Quorum

—

The quorum for audit committee meetings shall either be 2 members or 1/3 of the members of the Audit Committee, whichever is greater, with at least 2 independent directors.

Frequency of Meetings

—

The Audit Committee shall meet at least 4 times in a year and not more than 120 days shall elapse between 2 meetings.

Maximum Number of Audit Committees / Directors

—

A Director can act as a Chairman of a maximum of 5 Audit Committees + Stakeholders’ Committees put together in the case of listed companies. In this case, unlisted public / private / s.8 companies are excluded.

Further, a Director can act as a member / Chairman of not more than 10 Audit Committees + Stakeholders’ Committees put together considering listed and unlisted public companies. For this purpose, private and s.8 companies are excluded.

IV. ROLE AND DUTIES

4.1 The Companies Act prescribes the following roles and responsibilities for every Audit Committee (whether of a listed / unlisted public company):

(i) the recommendation for appointment, remuneration, and terms of appointment of auditors of the company;

(ii) review and monitor the auditor’s independence and performance, and effectiveness of the audit process;

(iii) examination of the financial statement and the auditors’ report thereon;

(iv) approval or any subsequent modification of transactions of the company with a related party (explained in greater detail below);

(v) scrutiny of inter-corporate loans and investments;

(vi) valuation of undertakings or assets of the company, wherever it is necessary;

(vii) evaluation of internal financial controls and risk management systems;

(viii) monitoring the end use of funds raised through public offers and related matters.

(ix) The Audit Committee may call for the comments of the auditors about internal control systems, the scope of the audit, including the observations of the auditors and review of financial statements before their submission to the Board and may also discuss any related issues with the internal and statutory auditors and the management of the company.

(x) The Audit Committee shall have the authority to investigate any matter in relation to the items specified above or referred to it by the Board and for this purpose shall have the power to obtain professional advice from external sources and have full access to the information contained in the records of the company.

4.2 In addition, the LODR prescribes that the audit committee of a listed company shall have powers to investigate any activity within its terms of reference, seek information from any employee, obtain outside legal or other professional advice, and secure attendance of outsiders with relevant expertise if it considers necessary.

The LODR lays down the following additional duties for the Audit Committee of a listed company:

(a) oversight of the listed entity’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient, and credible;

(b) recommendation for appointment, remuneration, and terms of appointment of auditors of the listed entity;

(d) reviewing, with the management, the annual financial statements and auditor’s report thereon before submission to the board for approval, with particular reference to:

matters required to be included in the director’s responsibility statement to be included in the Board of Director’s Report;
changes, if any, in accounting policies and practices and reasons for the same;
Major accounting entries involving estimates based on the exercise of judgment by management;
significant adjustments made in the financial statements arising out of audit findings;
compliance with listing and other legal requirements relating to financial statements;
disclosure of any related party transactions;
modified opinion(s) in the draft audit report;

(e) reviewing, with the management, the quarterly financial statements before submission to the board
for approval;

(f) reviewing, with the management, the statement of uses / application of funds raised through an issue (public issue, rights issue, preferential issue, etc.), the statement of funds utilized for purposes other than those stated in the offer document / prospectus / notice and the report submitted by the monitoring agency monitoring the utilisation of proceeds of a public issue or rights issue or preferential issue or qualified institutions placement, and making appropriate recommendations to the board to take up steps in this matter;

(g) Reviewing and monitoring the auditor’s independence and performance, and effectiveness of the audit process;

(h) approval or any subsequent modification of transactions of the listed entity with related parties;

(i) scrutiny of inter-corporate loans and investments;

(j) valuation of undertakings or assets of the listed entity, wherever it is necessary;

(k) evaluation of internal financial controls and risk management systems;

(l) reviewing, with the management, the performance of statutory and internal auditors, adequacy of the internal control systems;

(m) reviewing the adequacy of the internal audit function, if any, including the structure of the internal audit department, staffing, and seniority of the official heading the department, reporting structure coverage, and frequency of internal audit;

(n) discussion with internal auditors of any significant findings and follow up there on;

(o) Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board;

(p) discussion with statutory auditors before the audit commences, about the nature and scope of the audit as well as post-audit discussion to ascertain any area of concern;

(q) to look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends), and creditors;

(r) approval of the appointment of a chief financial officer after assessing the qualifications, experience, background, etc. of the candidate;

(s) Carrying out any other function as is mentioned in the terms of reference of the audit committee;

(t) reviewing the utilization of loans and/ or advances from/investment by the holding company in the subsidiary exceeding ₹100 crores or 10 per cent of the asset size of the subsidiary, whichever is lower including existing loans / advances / investments existing as of 1st April, 2019;

(u) Consider and comment on the rationale, cost-benefits, and impact of schemes involving merger, demerger, amalgamation etc., on the listed entity and its shareholders.

4.3 Moreover, the LODR provides that the audit committee shall mandatorily review the following information:

(a) Management discussion and analysis of the financial condition and results of operations;

(b) management letters / letters of internal control weaknesses issued by the statutory auditors;

(d) the appointment, removal, and terms of remuneration of the chief internal auditor shall be subject to review by the audit committee.

(e) statement of deviations:

quarterly statement of deviation(s) including the report of the monitoring agency, if applicable, submitted to stock exchanges.
annual statement of funds utilized for purposes other than those stated in the offer document/prospectus/notice.

V. VIGIL MECHANISM

5.1 The Act also states that every listed company or such class or classes of companies, as may be prescribed, shall establish a vigil mechanism for directors and employees to report genuine concerns. The companies prescribed are the following:

(a) the Companies which accept deposits from the public;

(b) the Companies which have borrowed money from banks and public financial institutions in excess of fifty crore rupees.

5.2 The vigil mechanism shall provide for adequate safeguards against victimisation of persons who use such a mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases. The details of the establishment of such mechanism shall be disclosed by the company on its website, if any, and in the Board’s report.

5.3 The companies which are required to constitute an audit committee shall oversee the vigil mechanism through the committee and if any of the members of the committee have a conflict of interest in a given case, they should recuse themselves and the others on the committee would deal with the matter on hand.

5.4 In the case of companies that are not required to mandatorily constitute an Audit Committee, the Board of Directors shall nominate a director to play the role of audit committee for the purpose of vigil mechanism to whom other directors and employees may report their concerns.

5.5 In case of repeated frivolous complaints being filed by a director or an employee, the audit committee or the director nominated to play the role of audit committee may take suitable action against the concerned director or employee including reprimand.

5.7 The LODR also provides that the listed entity shall devise an effective vigil mechanism/whistle-blower policy enabling stakeholders, including individual employees and their representative bodies, to freely communicate their concerns about illegal or unethical practices. The vigil mechanism shall provide for adequate safeguards against the victimization of director(s) employee(s) or any other person who avails the mechanism and also provide for direct access to the chairperson of the audit committee in appropriate or exceptional cases. The details of the establishment of the vigil mechanism / whistle-blower policy shall be disclosed on the website of the listed entity in a separate section. Also one of the functions of the audit committee is to review the functioning of the whistle-blower mechanism.

VI. RELATED PARTY TRANSACTIONS UNDER THE ACT

6.1 One of the most important roles of an audit committee is the review and approval of related party transactions. Related Party Transactions are prescribed under s.188 of the Act.

6.2 Under the Act, the audit committee is required to approve transactions of the company with a related party or any subsequent modification in the same.

6.3 It may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed;

(i) The Audit Committee shall, after obtaining approval of the Board of Directors, specify the criteria for making the omnibus approval which shall include the following, namely:-

(a) the maximum value of the transactions, in the aggregate, which can be allowed under the omnibus route in a year;

(b) the maximum value per transaction that can be allowed;

d) review, at such intervals as the Audit Committee may deem fit, related party transactions entered into by the company pursuant to each of the omnibus approvals made.

(e) transactions that cannot be subject to omnibus approval by the Audit Committee.

(ii) The Audit Committee shall consider the following factors while specifying the criteria for making omnibus approval, namely: –

(a) repetitiveness of the transactions (in the past or in the future);

(b) justification for the need for omnibus approval.

(iii) The Audit Committee shall satisfy itself for transactions of a repetitive nature and that
the company.

(iv) The omnibus approval shall contain or indicate
the following: –

(a) name of the related parties:

(b) nature and duration of the transaction;

(d) the indicative base price or current contracted price and the formula for variation in the price, if any; and

(e) any other information relevant or important for the Audit Committee to make a decision on the proposed transaction. Provided that where the need for related party transaction cannot be foreseen and aforesaid details are not available, the audit committee may make omnibus approval for such transactions subject to their value not exceeding Rs. 1 crore per transaction.

(5) Omnibus approval shall be valid for a period not exceeding 1 financial year and shall require fresh approval after the expiry of such financial year.

(6) Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company.

(7) Any other conditions as the Audit Committee may deem fit.

6.4 In case of transaction, other than related
party transactions referred to in section 188 of the
Act, where the Audit Committee does not approve
such transaction, it shall make its recommendations to the Board.

6.5 In case any transaction involving any amount not exceeding Rs. 1 crore is entered into by a director or officer of the company without obtaining the approval of the Audit Committee and it is not ratified by the Audit Committee within 3 months from the date of the transaction, such transaction shall be voidable at the option of the Audit Committee and if the transaction is with the related party to any director or is authorized by any other director, the director concerned shall indemnify the company against any loss incurred by it:

6.6 The Act also provides that this clause shall not apply to a transaction, other than a related party transaction referred to in section 188, between a holding company and its wholly owned subsidiary company.

VII. RELATED PARTY TRANSACTIONS UNDER LODR

7.1 In addition to the above provisions under the Act, the LODR lays down certain additional duties for the audit committee in relation to related party transactions.

7.2 All related party transactions and subsequent material modifications shall require prior approval of the audit committee of the listed entity. Only those members of the audit committee, who are independent directors, shall approve related party transactions. The audit committee of a listed entity shall define “material modifications” and disclose it as part of the policy on the materiality of related party transactions and on dealing with related party transactions.

7.3 As regards omnibus approvals for related party transactions, the LODR, in addition to the Act, provides that the audit committee shall review, at least on a quarterly basis, the details of related party transactions entered into by the listed entity pursuant to each of the omnibus approvals given. Such omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals after the expiry of
one year.

7.4 A related party transaction to which the subsidiary of a listed entity is a party but the listed entity is not a party, shall require prior approval of the audit committee of the listed entity if the value of such transaction whether entered into individually or taken together with previous transactions during a financial year exceeds 10% of the annual consolidated turnover, as per the last audited financial statements of the listed entity. Thus, even if the listed entity is not directly a party to such transaction, its audit committee would need to approve the transactions of the subsidiary.

7.5 With effect from 1st April, 2023, a related party transaction to which the subsidiary of a listed entity is a party but the listed entity is not a party, shall require prior approval of the audit committee of the listed entity if the value of such transaction whether entered into individually or taken together with previous transactions during a financial year, exceeds 10% of the annual standalone turnover, as per the last audited financial statements of the subsidiary.

7.6 However, for related party transactions of unlisted subsidiaries of a listed subsidiary, the prior approval of the audit committee of the listed subsidiary shall suffice. Thus, these would not require prior approval of the Audit Committee (if any) of the unlisted subsidiary.

7.7 The LODR also provides an exemption from the approval provisions for related party transactions in the following cases:

(a) transactions entered into between two government companies;

(b) transactions entered into between a holding company and its wholly-owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval;

(c) transactions entered into between two wholly-owned subsidiaries of the listed holding company, whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.

VIII. SEBI’S ORDERS

8.1 SEBI has passed some Adjudication Orders which have dealt with the issue of the role of the Audit Committee and its members. Some of the important ones have been highlighted below.

8.2 SEBI in its Adjudication Order in the case of Kwality Ltd, [ADJUDICATION ORDER No. Order/BS/SL/2024-25/30612-30613] has held that a member of Audit Committee it is the responsibility of the Audit Committee member to ascertain that there is proper internal risk control prevailing in the system. Before forwarding the audit report to the Board of directors in the Board Meeting, the Audit Committe should have raised concerns regarding net-off entries, writing off-trade receivables recovery process followed by the company for substantial over dues, granting capital advances, transactions entered in the nature of sales and purchases with customers and vendors, related parties, the internal control system for capital expenditure bills, material scheduling, credit assessment of entities, etc. The role of audit committee members is to exercise oversight of the listed entity’s financial reporting and the disclosure of its financial information to ensure that the financial statement is correct, sufficient, and credible as well as to the adequacy of internal control systems, etc.

8.3 In the case of Fortis Healthcare Limited [ADJUDICATION ORDER NO. Order/GR/KG/2022-23/16420-16458], the Adjudication Officer of SEBI has held that the formation and constitution of an audit committee is not a discretionary affair for a listed company, but rather a statutorily mandated formation. The said committee has statutorily mandated and therefore, inescapable obligations to perform. The obligation cast upon an audit committee is not merely towards the immediate company and its shareholders, but to the public and the economy at large. It is supposed to act as an objective and dispassionate internal oversight over the financial affairs of the company. In that sense, it can be considered as the first-level overseer of the financial health of a company. Further, if such a company is a listed company, then the role of an audit company is all the more significant since a listed company is entitled to raise capital from the public at large and the work of an audit committee is directly related to the capacity of a listed company to raise the said capital. The said capacity of a listed company to raise capital is largely dependent on the show of its performance and the audit committee’s primary mandate is certification of such performance. It is in this context, that the statutory role of an audit committee is premised. Therefore, the position of a member of an audit committee (especially in the case of a listed company) is not similar to that of other Directors in the same company. A member of an audit committee must possess the wherewithal to discharge various functions. An Audit Committee has been given significant powers under the successive Companies Acts/Listing Agreements to perform its role. The Audit Committee can ask the head of the finance function, head of an internal audit, and representative of the statutory auditors, to seek information from any employee, and obtain outside legal or other professional advice if it is considered necessary. If a member of the audit committee lacked the competence to understand the nuances of high-value financial transactions, the same ought to have been brought on record by the concerned member at the time of his/her induction into the audit committee or even better, the concerned individual ought to have desisted from being a part of the audit committee. Similarly, placing blind reliance on other officials of the company in the matters of its financial affairs, defeats the very purpose of the formation of an audit committee, as is evident from the submissions of the aforesaid three notices in this case. The Order held that the board of directors of the company has entrusted the audit committee with an onerous duty to see that the financial statements are correct and complete in every respect. In this background, the members of the audit committee cannot take shelter under the verifications made by the internal auditor and other professionals.

8.4 In the case of Southern Ispat and Energy Ltd. (ADJUDICATION ORDER NO: Order/GR/PU/2022-23/16559-16566) the Adjudication Officer held that the Chairman of the Audit Committee had an added responsibility to monitor the end-use of the funds that were raised by the issue of the GDRs and also ensuring their transfer to the accounts of the company in India.

IX. CONCLUSION

The Audit Committee is a very vital cog in the corporate governance wheel. A great deal of responsibility and power is cast upon this committee and members of the audit committee would be well advised to handle their role with more accountability.

BCAJ Admin

Would IBC Prevail Over The PMLA?

INTRODUCTION

One of the recent issues which has gained prominence under the Insolvency & Bankruptcy Code, 2016 (“the Code”) is that in case of a company undergoing a Corporate Insolvency Resolution Process (“CIRP”), would the Prevention of Money Laundering Act (PMLA) or an attachment under it have priority over the Code? Both the PMLA and the Code are special statutes that operate in the financial domain. The PMLA is an Act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto. The IBC, on the other hand, is an Act to amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximisation of value of assets of such persons, and balance the interests of all the stakeholders. Of late, these two Statutes have been at loggerheads and an interesting battle is brewing between them.

PRIOR OFFENCES

The issue comes into focus if the violations were committed by the previous management of the corporate debtor which is undergoing insolvency resolution. Once a resolution applicant has submitted a resolution plan and the same has been blessed by the NCLT under the IBC, can the past offences of the corporate debtor continue to haunt the new management? If the IBC is a single-window clearance, then would not the acquirer not be liable for any offences to which it was not a party? Similarly, if under the PMLA, there is an attachment of assets of the corporate debtor, can such attachment continue once the CIRP is successful?

S.238 OF THE CODE

S.238 of the Code contains a non-obstante clause which states that the provisions of the Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. The Supreme Court in PCIT vs. Monnet Ispat& Energy Ltd., [2019] 107 taxmann.com 481 (SC) has categorically held that:

“Given Section 238 of the Insolvency and Bankruptcy Code, 2016, it is obvious that the Code will override anything inconsistent contained in any other enactment…..”.

DOCTRINE OF CLEAN SLATE

The doctrine of a “clean” or a “fresh slate” as was originally propounded by the Supreme Court in Committee of Creditors of Essar Steel Ltd. vs. Satish Kumar Gupta (2020) 8 SCC 531. Itheld that a successful resolution applicant could not suddenly be faced with “undecided” claims after the resolution plan submitted by him had been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who would successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knew exactly what had to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant did on a fresh slate.

MORATORIUM

Once the insolvency resolution petition against the corporate debtor is admitted by the National Company Law Tribunal (NCLT) and after the corporate insolvency resolution process commences, the NCLT declares a moratorium prohibiting the institution or continuation of any suits against the debtor; execution of any judgment of a Court / authority; any transfer of assets by the debtor; recovery of any property against the debtor. The moratorium continues till the resolution process is completed. Thus, total protection is offered to the debtor against any suits / proceedings. The Supreme Court in P. Mohanraj vs. Shah Brothers Ispat P Ltd, [2021] 125 taxmann.com 39 (SC) has explained that the object of a moratorium provision such as s.14 of the Code was to see that there was no depletion of a corporate debtor’s assets during the insolvency resolution process so that it could be kept running as a going concern during this time, thus maximising value for all stakeholders.

INSERTION OF S.32A IN THE CODE

Inspite of the above non-obstante clause, an additional non-obstante clause was added in the form of s.32A in the Code, by the Amendment Act of 2020 w.e.f. 28^th December, 2019. The said section deals with Liability of the corporate debtor for Past Offences.

The section provides that notwithstanding anything to the contrary contained in this Code or any other law for the time being in force, the liability of a corporate debtor for an offence committed prior to the commencement of the CIRP shall cease, and the corporate debtor shall not be prosecuted for such an offence from the date the resolution plan has been approved by the NCLT, if the resolution plan results in the change in the management or control of the corporate debtor to a person who was –

(a) Not a promoter or in the management or control of the corporate debtor or a related party of such a person; or

(b) Not a person with regard to whom the relevant investigating authority has, reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court:

It further provides that if a prosecution had been instituted during the CIRP it shall stand discharged from the date of approval of the resolution plan.

No action shall be taken against the property of the corporate debtor in relation to an offence committed prior to the commencement of the CIRP, where such property is covered under a resolution plan approved by the NCLT, which results in the change in control of the corporate debtor / sale / liquidation assets to anunconnected person (as defined above).

The Standing Committee on Finance while dealing with that Bill and the proposed Section 32A noted that this amendment was to safeguard the position of the resolution applicants by ring-fencing them from prosecution and liabilities under offences committed by erstwhile promoters. There was a need for treating the company or the Corporate Debtor as a cleansed entity for cases which resulted in change in the management or control of the corporate debtor to anunrelated person. The Committee felt that a distinction must be drawn between the corporate debtor which may have committed offences under the control of its previous management, prior to the CIRP, and the corporate debtor that is resolved, and taken over by an unconnected resolution applicant. While the corporate debtor’s actions prior to the commencement of the CIRP must be investigated and penalised, the liability must be affixed only upon those who were responsible for the corporate debtor’s actions in this period. However, the new management of the corporate debtor, which has nothing to do with such past offences, should not be penalised for the actions of the erstwhile management of the corporate debtor.

The Supreme Court in Manish Kumar vs. UOI, [2021] 225 COMP CASE 1 (SC) has explained that that section is intended to give a clean break to the successful resolution ~ while, on the one hand, the corporate debtor is freed from the liability for any offence committed before the commencement of the CIRP, the statutory immunity from the consequences of the commission of the offence by the corporate debtor is not available and the criminal liability will continue to haunt the persons, who were in in-charge of the assets of the corporate debtor, or who were responsible for the conduct of its business or those who were associated with the corporate debtor in any manner, and who were directly or indirectly involved in the commission of the offence, and they will continue to be liable. The provision is carefully thought out. It is not as if the wrongdoers are allowed to get away. They remain liable. The extinguishment of the criminal liability of the corporate debtor is apparently important to the new management to make a clean break with the past and start on a clean slate.. The provision deals with reference to offences committed prior to the commencement of the CIRP.

ISSUE OF PRIMACY

The issue of primacy between the PMLA and IBC was well discussed by the Delhi High Court in its judgment in the case of Nitin Jain Liquidator PSL Limited Versus Enforcement Directorate, 2022 (287) DLT 625. It held that both the PMLA as well as IBC employed non- obstante clauses by virtue of Sections 71 and 238 respectively. Both enactments underwent amendments with PMLA seeing the passing of Finance (No. 2) Act, 2019 and the IBC which was amended by virtue of the Act of 2020 pursuant to which Section 32A came to be included in the statute book. The Court held that the two statutes essentially operated over distinct subjects and subserved separate legislative aims and policies. While the authorities under the IBC were concerned with the timely resolution of debts of a corporate debtor, those under the PMLA were concerned with the criminality attached to the offence of money laundering and to move towards confiscation of properties that may be acquired by commission of offences specified therein. Where in the exercise of their respective powers a conflict arose, it was for the Courts to discern the legislative scheme and to undertake an exercise of reconciliation enabling the authorities to discharge their obligations to the extent that the same did not impinge or encroach upon a facet which stood reserved and legislatively mandated to be exclusively controlled and governed by one of the competing statutes. The Court concluded that the power to attach as conferred by Section 5 of the PMLA would cease to be exercisable once any one of the measures specified in the Code came to be adopted and approved by the NCLT. It held that the bar that stood created under s.32A operated and extended only insofar as the properties of the corporate debtor were concerned. This injunctiondid not apply or extend to the persons in charge of the corporate debtor or the rights otherwise recognised to exist and vested in the respondent to proceed against other properties.

IBC OVERRIDES THE POWER TO ATTACH UNDER PMLA

The Gujarat High Court in AM Mining India P Ltd vs. UOI,R/Special Civil Application No. 808 of 2023, Order dated 24^th August, 2023,has held that s.32A constituted the pivot by virtue of being the later act and thus governed the extent to which the non-obstante clause enshrined in the IBC would operate and hence, excluded the operation of the PMLA. When faced with a situation where both the special legislations incorporated non-obstante clauses, it was the duty of the Court to discern the true intent and scope of the two legislations. Even though the IBC and Section 238 constituted the later enactment when viewed against the PMLA which came to be enforced in 2005, the Court was of the opinion that the extent to which the latter was intended to capitulate to the IBC was an issue which must be answered on the basis of Section 32A. Through Section 32A, the Legislature has authoritatively spoken of the terminal point whereafter the powers under the PMLA would not be exercisable.The protection granted under the IBC would override the power of the Enforcement Directorate to attach the properties under the PMLA Act. Further Section 238 of the Act provided that the provisions of IBC would override anything inconsistent with any other law. Though the PMLA had similar provision under Section 71, the same was subservient to the provisions of IBC Act, since IBC Act was enacted after PMLA Act. When there were two enactments of non-obstante clauses, the enactment which was subsequent in time overruled the other in line with the ratio as laid down in Bank of India vs. Ketan Parekh and Ors., reported in (2008) 8 SCC 148. A decision similar to that of the Gujarat High Court has been rendered by the Delhi High Court in Rajiv Chakarborty Resolution Professional of EIEL vs. Directorate of Enforcement, W.P.(C) 9531/2020, Order dated 11^th November, 2022.

OFFENCES COMMITTED PRIOR TO CIRP

The decision of the Bombay High Court in the case of Shiv Charan vs. Adjudicating Authority, WP (L) No. 9943 of 2023 & WP (L) No. 29111 of 2023, decided on 1^st March, 2024 is quite interesting. In this case, four years prior to the commencement of the CIRP, various First Information Reports alleging, among others, offences of cheating and criminal breach of trust had been filed against the Corporate Debtor and its erstwhile promoters. The offences alleged, being “Scheduled offences” under the PMLA, an Enforcement Case Information Report (ECIR) was filed by the ED. Four bank accounts of the Corporate Debtor and 14 flats constructed by it were attached. The attachment continued even after the commencement of the CIRP, and further continued even after approval of the resolution plan. It was the continuation of such attachment which was disputed before the Bombay High Court.

The Bombay High Court upheld the supremacy of the Code and held that in view of s.32A, the liability of the corporate debtor for an offense committed prior to commencement of the CIRP shall cease. The corporate debtor is explicitly protected from being prosecuted any further for such an offense, with effect from the approval of the resolution plan. Once the ingredients of Section 32A(1) be met, it enables an automatic discharge from prosecution, for the corporate debtor alone. The provision takes care to ensure that the immunity is available only to the corporate debtor and not to any other person who was in management or control or was in any manner, in charge of, or responsible to, the corporate debtor for conduct of its business, or was associated with the corporate debtor in any manner, and directly or indirectly involved in the commission of the offense being prosecuted. Such others who are charged for the offense would continue to remain liable to prosecution. Effectively, all other accused remain on the hook and it is the corporate debtor who alone gets the statutorily-stipulated immunity, and that too only when a resolution plan is approved under Section 31, and such resolution plan entails a clean break from those who conducted the affairs in the past at the time when the offense was committed.

The Court laid down that the Code protected the property of the corporate debtor from any attachment and restraint in proceedings connected to the offence committed prior to the commencement of the CIRP. The provision explicitly stipulated that an “action against the property” of the corporate debtor, from which immunity would be available, “shall include the attachment, seizure, retention or confiscation of such property under such law” as applicable. It held that as a matter of law, once the resolution plan is approved with the attendant conditions set out in s.32A being met, further prosecution against the corporate debtor and its properties, would cease.

It laid down that the NCLT had all powers to direct the ED to raise its attachment in relation to the attached properties of the corporate debtor once a resolution plan that qualified for immunity under Section 32A was approved, and those very properties were the subject matter of the resolution plan. Once a resolution plan with the ingredients that qualified for immunity under Section 32A was approved, quasi-judicial authorities including the Adjudicating Authority under the PMLA, 2002 must take judicial notice of the development and release their attachment on their own. This was the only means of ensuring that the rule of law as stipulated in Section 32A of the IBC, 2016 ran its course. It had no hesitation in holding that there was no scope whatsoever for the attachment effected by the ED over the Attached Properties to continue once the Approval Order came to be passed.

MORATORIUM DOES NOT IMPACT ATTACHMENT

However, the Delhi High Court in Rajiv Chakarborty Resolution Professional of EIEL (supra)and the Madras High Court in Joint Director, Directorate of Enforcement Vs. Asset Reconstruction Company India Ltd, Writ Petition No.29970 of 2019 have held that it would be incorrect to state that the moratorium under s.14 of the Code would shut out an attachment under PMLA. A moratorium is on a different footing as compared to a resolution plan approved under the Code. Attachment under the PMLA was not an attachment for debt but principally a measure to deprive an entity of property and assets which comprised proceeds of crime.The passing of attachment orders neither result in confiscation of those properties nor do those properties come to vest in the Union Government upon such orders being made. The attached property comes to vest in the Union Government only upon the passing of such an order as may be passed by the Special Court under the PMLA. The Court concluded that the provisional attachment of properties would in any case not violate the primary objectives of Section 14 of the IBC. However, it added that through Section 32A of the Code, the Legislature had authoritatively spoken of the terminal point whereafter the powers under the PMLA would not be exercisable. It led to the erection of an impregnable wall which cannot be breached by invocation of the provisions of the PMLA.

CONCLUSION

The Courts have made an attempt to interpret both Statutes harmoniously. Holding a new acquirer guilty of offences which he was not party to would defenestrate the very objective of the Code. As observed by the Courts, this was a cleansing machine in which the corporate debtor began on a clean slate and hence, the PMLA would have to yield to the Code!

BCAJ Admin

Debentures – An Analysis

INTRODUCTION

Debentures are one of the most popular and common forms of instruments by which a company can raise funds. In spite of that, there is a lot of confusion and many myths surrounding them. The interesting part is that several laws deal with debentures and this has added to the complexity. Dealing with all of them in detail, as well as the tax issues concerning debentures would be a mammoth exercise but let us understand some of the key regulatory aspects pertaining to debentures.

MEANING UNDER THE COMPANIES ACT

The Companies Act, 2013 (“the Act”) defines debentures in an inclusive manner as including debenture stock, bonds, or any other instrument of a company evidencing a debt, whether or not constituting a charge on the assets. Thus, the Act places bonds and debentures on the same footing. The word debt is not defined under the Act. A simple but clear definition of the word is found in Webb vs. Stenton [1883] 11 Q.B.D. 518, wherein it was defined as “……a debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation, debitum in praesenti, solvendum in futuro.”. The Supreme Court in Kesoram Industries & Cotton Mills Ltd. vs. CIT, [1966] 59 ITR 767 (SC) has defined it as being applicable to a sum of money which has been promised at a future day as to a sum now due and payable. Debts were of two kinds: solvendum in praesenti and solvendum in futuro . . . A sum of money which was certainly and in all events payable was a debt, without regard to the fact whether it be payable now or at a future time. A sum payable upon a contingency, however, was not a debt or did not become a debt, until the contingency had happened.

The Full Bench of the Monopolies & Restrictive Trade Practices Commission in D.G. (I&R) vs. Deepak Fertilizers & Petrochemicals Corpn. Ltd., [1994] 1 SCL 239 (MRTPC — Delhi) has given an elaborate definition of debentures. It held that a debenture is a choice in action and is in the nature of actionable claim and as such is subject to equities. It held that “Choices in action is a term which has its origin in English law and would ordinarily include, debts, benefits of the contract, damages for breach or tort, stocks, shares, and debentures”. Ordinarily a debenture constituted a charge on the undertaking of the company or some part of its property, but there may be debentures without any such charge, and under the law, it was not necessary that the debentures should create a charge. It also relied on the UK Commentary, Palmer on Company Law which stated that in modern commercial usage, a debenture denoted an instrument issued by the company, normally but not necessarily called on the face of it a debenture, and providing for the payment of a specified sum at a fixed rate with interest thereon. The Bench further held that Debentures were clearly not shares. They were simply specialty debts due from the company, which may or may not be secured by a charge on the company’s assets. A debenture-holder as such was not a member, but a creditor of the company. He had no share in the capital of the company, and his right to payment was not dependent on its profits. He had not, as a shareholder had, a voice in the management of the company’s affairs. Debentures were borrowed money capitalized for purposes of convenience. It further held that shareholders were the owners of the company till the company was folded up fully while debenture holders were only creditors of the company, sometimes secured and sometimes unsecured, and that too for a defined period. The rights of the shareholders and debenture holders were different as also were their remedies. A debenture was thus like a certificate of loan or a loan bond evidencing the fact that the company was liable to pay a specified amount with interest and although the money raised by the debentures became a part of the company’s capital structure it did not become share capital. Debentures are neither ‘stock’, nor ‘shares’.

Another important case dealing with debentures is the Supreme Court in Narendra Kumar Maheshwari vs. UOI, 1989 AIR(SC) 2138. It held that a debenture has been defined to mean essentially an acknowledgment of debt, with a commitment to repay the principal with interest. A debenture may be secured or unsecured. A compulsorily convertible debenture does not postulate any repayment of the principal. Therefore, it does not constitute a debenture in its classic sense. Even a debenture, which is only convertible at option has been regarded as a hybrid debenture. A non-convertible debenture need not be always secured.

Under the Companies Act, 2013, a debenture is not a loan. Unlike the 1956 Act, the 2013 Act does not state that a loan includes debentures. Hence, an investment in debentures would no longer be treated as a loan.

TYPES OF DEBENTURES

Debentures could be of various types:

(a) Listed or unlisted — even private limited companies are eligible to list their debentures on stock exchanges;

(b) Convertible (optionally / partly / fully / compulsorily) or non-convertible debentures (NCDs). The Supreme Court in Sahara India Real Estate Corpn. Ltd. vs. SEBI, [2012] 25 taxmann.com 18 (SC) has held that hybrid securities generally means securities that have some of the attributes of both debt securities and equity securities which, in terms of a debenture, encompass; and it has an element of indebtedness and element of equity stock as well. It held that optionally fully convertible debentures were hybrid securities but remained within the definition of the term ‘securities’ in section 2(h) of the Securities Contract Regulation Act;

(d) Transferrable or non-transferrable;

(e) Debenture stock where separate certificates for different debentures are not issued but one consolidated certificate is issued for the entire value raised by the debentures;

(f) Secured or unsecured- one myth prevalent is that unsecured debentures cannot be issued. Nothing could be further than the truth. If the debentures are secured, then charge creation formalities under the Act must also be fulfilled.

(g) Fixed term or perpetual debentures — unlike preference shares, the Companies Act does not prescribe any fixed tenure for debentures. Debentures can also be perpetual in nature. This is one of the most interesting facets of debentures. The issuer could also have an early call option under which perpetual debentures could be redeemed at the discretion of the issuer.

PROCEDURE FOR ISSUE OF DEBENTURES

S.71 of the Companies Act deals with the issue of debentures. In addition, Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014 deals with certain procedures such as the issue of secured debentures, appointing of debenture trustees in case of secured debentures, etc. S.42 of the Act read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 with a private placement of debentures.

If a company issues convertible debentures, then in addition to the above, it must comply with the provisions of s.62(1) of the Act read with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 pertaining to issue of shares on preferential basis. This Rule applies to an issue of fully / partly / optionally convertible debentures.

DEBENTURE REDEMPTION RESERVE

The Act requires the creation of a Debenture Redemption Reserve (DRR) for the purposes of redemption of debentures. The DRR is created out of the profits of the company available for dividend payment. Different limits of DRR are prescribed based on the type of company and type of debentures. For instance, for unlisted companies, the DRR is 10 per cent of the value of debentures. DRR is only required if there is a profit. Further, DRR is only required up to the non-convertible portion of a debenture.

ARE DEBENTURES DEPOSITS?

The Companies (Acceptance of Deposit) Rules, 2014 state that secured debentures / compulsorily convertible debentures would be outside the purview of the definition of deposit under s.73 of the Companies Act. The amount raised by the issue of debentures should not exceed the market value of assets on which security is created. If the debentures are compulsorily convertible debentures, then they must be converted within 10 years.

Further, listed non-convertible debentures would also not be treated as deposits. This means that optionally convertible / partly convertible, unsecured, unlisted debentures would constitute a deposit under the Act unless they can be exempted under other exemption clauses of Rule 2(1) of the above-mentioned Rules.

ARE DEBENTURES SECURITIES?

The Securities Contracts (Regulation) Act, of 1956 defines “securities” to include debentures, debenture stock, or other marketable securities of a like nature in or of any incorporated company or other body corporate. Thus, debentures are securities.

ARE DEBENTURES GOODS?

The Monopolies &Restrictive Trade Practices Commission in J.P. Sharma vs. Reliance Petrochemicals Ltd. [1991] 70 Comp. Cas. 378 (MRTPC) has held that in the definition of ‘goods’, as given in section 2(vii)of the Sale of Goods Act, debentures as such are not included though stocks and shares have been included. In Deepak Fertilizers (Supra), it was held that a debenture was issued to a debenture holder in accordance with the Companies Act and thereafter, a certificate of debenture was issued. Before a certificate of debenture was issued, a charge had to be created and the Certificate of Registration, endorsed on the debenture certificate. Debenture certificate in its deliverable state came into existence only then. It held that up to the stage of allotment, the money received by the company from the subscribers was merely subscription money and had to be kept in a separate account in accordance with provisions of the Companies Act. At this stage, the question of selling or trading in the debentures could not arise. Till the debentures were, therefore, actually allotted, the question of the company having issued debentures as transferable property did not arise as the debenture holder did not have any domain over the debentures. Accordingly, it concluded that debentures could not be regarded as ‘goods’.

The same view has been taken by the Supreme Court in R.D. Goyal vs. Reliance Industries Ltd (2003) 1 SCC 81. It held that debentures would not come within the purview of the definition of goods as it was simply an instrument of acknowledgement of debt by the company whereby it undertook to pay the amount covered by it and till then it undertook further to pay interest thereon to the debenture-holders.

DEBENTURES AND IBC

The Supreme Court in Pioneer Urban Land & Infrastructure Ltd. vs. UOI, [2019] 108 taxmann.com 147 (SC) observed that debenture holders were financial creditors under the Insolvency & Bankruptcy Code, 2016.

In T. Prabhakarv. S Krishnan (Nippon Life India AIF Management Ltd.), [2022] 135 taxmann.com 346 (NCLAT — Chennai) it has been held that to sustain an application under the Code, an applicant ought to establish an existence of ‘debt’ which is due from the ‘corporate debtor’. The NCLAT held that a debenture holder was undoubtedly a ‘financial creditor’. There was no fetter in Law for the ‘debenture holder’ to file an application seeking to initiate corporate insolvency resolution without adding the ‘debenture trustee’.

DEBENTURES UNDER FEMA

The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 deal with FDI in an Indian company. It states that “equity instruments” means equity shares, convertible debentures, preference shares, and share warrants issued by an Indian company. “Convertible debentures” are defined to mean fully, compulsorily and mandatorily convertible debentures. Thus, partly / optionally / non-convertible debenture is treated as debt under these Rules and would be governed by the Foreign Exchange Management (Debt Instruments) Regulations, 2019 or the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018. For instance, permission is given for FPIs to invest in listed / unlisted NCDs issued by Indian companies; for NRIs / OCIs to invest in listed NCDs on repatriation / non-repatriation basis. Any other debenture would be treated as an External Commercial Borrowing and would be governed by the applicable ECB Regulations. This would include, rupee-debentures, rupee-bonds and masala bonds (Rupee denominated bonds listed on overseas exchanges).

STAMP DUTY

The Indian Stamp Act, of 1899 levies a duty @ 0.005 per cent on the issue of debentures. The earlier requirement of these debentures being marketable debentures has since been removed. The earlier confusion of whether debentures could be chargeable to duty as bonds has been removed and now, they would only be covered under the Article dealing with debentures. Transfer of debentures now attracts duty @ 0.0001 per cent.

DEBENTURES AND SEBI REGULATIONS

The SEBI (Issue and Listing of Non-convertible Securities) Regulations, 2021 deal with the procedure for listing of debt securities, which are non-convertible with a fixed maturity period. These include bonds, debentures, green debt securities, perpetual debt instruments, etc., issued by a private / public / listed company a Real Estate Investment Trust (REIT), or an Infrastructure Investment Trust (InvIT).

If a company whose equity shares are listed wishes to issue convertible debentures, then the issue of the same would be treated as a preferential issue and would be governed by the provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

DEBENTURES AND NBFC DIRECTIONS

NBFCs are permitted to issue Debentures. However, they need to consider whether the issuance would be a public deposit and hence, would the NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016 apply? For instance, the definition of public deposit excludes any amount raised by secured debentures or which would be compulsorily convertible into equity shares. Further, any amount raised by issuance of NCDs with maturity > 1 year and minimum subscription of ₹1 crore / investor would also be excluded from this definition.

In addition, the RBI (Non-banking Financial Company — Scale Based Regulation) Directions, 2023 contain certain directions. For instance, NBFCs-Middle Layer can augment their capital funds of issuing perpetual debt instruments. Such debt would be eligible for inclusion as Tier 1 Capital to the extent of 15 per cent of total Tier 1 Capital.

DEBENTURES ARE ACTIONABLE

CLAIMS

The Transfer of Property Act, 1882 defines an actionable claim to mean a claim to any debt, other than a debt secured by mortgage of immoveable property or by hypothecation or pledge of moveable property, or to any beneficial interest in moveable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent. The Supreme Court in R.D. Goyal (supra) has held that debentures, having regard to the definition of ’actionable claim’ as defined in s. 3 of the Transfer of Property Act, would constitute actionable claims except where they are secured by mortgage of immovable property or hypothecation or pledge of immovable property.

Under s.130 of this Act, the transfer of an actionable claim can be only by the execution of a written instrument, and thereupon all the rights and remedies of the transfer or shall vest in the transferee. However, the Act also provides that these provisions would not apply to debentures which are by law or custom negotiable.

The Constitution Bench of the Supreme Court in Standard Chartered Bank vs. Andhra Bank, 2006 (6) SCC 94 has held as follows:

“A debenture is an actionable claim. However, Section 137 of the Transfer of Property Act exempts debentures inter alia from the provisions of Sections 130 to 136 of the TP Act. Thus, with respect to debentures, there is no prescribed mode of transfer of property under the TP Act.”

ARE DEBENTURES NEGOTIABLE INSTRUMENTS?

Is a debenture a type of a negotiable instrument? There is no express provision on this. However, an old decision of the Bombay High Court in the case of Mercantile Bank of India Limited vs. Capt. Vincent L. D’Silva, AIR 1928 Bom 436 held that debentures issued did not have the ordinary form of a negotiable instrument and were not negotiable instruments either under the Negotiable Instruments Act, 1881 or otherwise in the absence of evidence of custom or usage.

One of the types of debentures that can be issued is a bearer debenture, i.e., anyone who holds it can claim interest on due dates and repayment of principal on maturity. A register of holders of bearer debentures is not maintained by the issuer. While there is no express provision on this, considering the wordings of the Negotiable Instruments Act, of 1881 it could be construed that a bearer debenture would be covered within the definition of a bearer promissory note and hence, would become a negotiable instrument.

CONCLUSION

An issue of Debentures requires adherence to various myriad laws. When the tax and accounting issues are added, one gets an entire spectrum of provisions that should be kept in mind while raising funds by the use of debentures.

BCAJ Admin

NBFCs: Scale-Based Regime

INTRODUCTION

Non-Banking Financial Companies or NBFCs are often called shadow banks since they perform quasi- banking activities. Considering their importance from a financial system perspective, the RBI strictly regulates NBFCs. However, a one-size fits all NBFCs approach was often considered very oppressive to the smaller NBFCs. Recognising this anomaly, the RBI in 2023 issued the Reserve Bank of India (NBFC Scale-Based Regulation) Directions, 2023 (“the Directions”). What the Directions seek to do is to classify NBFCs into four layers: Base, Middle, Upper and Top. As the layer increases, the quantum of compliance and regulations increase. Hence, a Top Layer NBFC would have maximum regulations whereas a Base Layer NBFC would have least compliances and regulations. Let us examine some facets of this scale-based classification.

DETERMINATION OF NBFC STATUS

Any company which carries on the business of a non- banking financial institution as its principal business as defined in section 45-I(c) read with section 45-I(f) of the RBI Act, 1934 shall be treated as an NBFC and requires registration under section 45-IA of the RBI Act. However, certain companies have been exempted by the RBI from registering as NBFCs, even though they otherwise satisfy all the tests. These include, a merchant banking company, a stock broker, a venture capital company, an insurance broker, a Core Investment Company not accepting public funds, etc.

PRINCIPAL BUSINESS TEST

The term “principal business” has not been defined in the RBI Act, 1934. Hence, in order to identify a company as an NBFC, the Principal Business Criteria as set forth in Press Release dated 8th April, 1999 shall be referred, which considers both the assets and the income pattern as evidenced from the last audited balance sheet of the company. These criteria areas under:

A company will be treated as an NBFC, if its Financial Assets (e.g., investments, stock of shares, loans and advances, etc.) appearing in the Balance Sheet are more than 50 per cent of its total assets (netted off by intangible assets) and Income (e.g., dividend, interest, capital gains from financial assets, etc.) from financial assets appearing in the Profit and Loss Statement is more than 50 per cent of its gross income. Both these tests are required to be satisfied as the determinant factor for determining principal business of a company.

For this purpose, investments in bank fixed deposits are not treated as financial assets and receipt of interest income on fixed deposits with banks is not treated as income from financial assets as these are not covered under the activities mentioned in the definition of “financial institution” in section 45-I(c) of the RBI Act, 1934.

AUDITOR’S REPORT

Under the Master Direction – Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 2016, the auditor’s report on the accounts of an NBFC shall include a statement on:

(a) Whether it is conducting Non-Banking Financial Activity without a valid Certificate of Registration (CoR) granted by the RBI?

(b) If it has a CoR, then whether that NBFC is entitled to continue to hold such CoR in terms of its Principal Business Criteria?

Every NBFC must submit a certificate from its Statutory Auditor that it is engaged in the business of non-banking financial institution which requires it to hold a CoR under section 45-IA of the RBI Act and that it is eligible to hold it. A certificate from the Statutory Auditor in this regard with reference to the position of the company as at end of the financial year ended 31st March may be submitted to the Regional Office of the Department of Non-Banking Supervision under whose jurisdiction the NBFC is registered, within one month from the date of finalisation of the balance sheet and in any case not later than 30th December of that year.

Where, in the auditor’s report, the statement regarding any of the above items is unfavourable or qualified, the report shall also state the reasons for such unfavourable or qualified statement. Where the auditor is unable to express any opinion on any of the items, his report shall indicate such facts together with reasons thereof. In case of an adverse / qualified report, it shall be the obligation of the auditor to make a report containing the details of such unfavourable or qualified statements and/or about the non-compliance, as the case may be, in respect of the company to the concerned Regional Office of RBI.

In addition to the above, the provisions of the Companies (Auditor’s Report) Order, 2020 are also relevant in this aspect. One of the questions which the Auditor is required to address is ‘Whether the company is required to be registered under section 45-IA of the Reserve Bank of India Act, 1934 and if so, whether the registration has been obtained?’ Connected to this is the second question of ‘Whether the company has conducted any Non-Banking Financial or Housing Finance activities without a valid CoR from the Reserve Bank of India as per the Reserve Bank of India Act, 1934?’

The Guidance Note on CARO 2020 issued by the ICAI throws some light on the audit of NBFCs. It states that the auditor should examine the transactions of the company with relation to the activities covered under the RBI Act 1934 and directions related to NBFCs. The auditor should examine the financial statements with reference to the business of a non-banking financial institution, as defined in the RBI Act, 1934.

Thus, a great deal of onus has been cast on the auditor in terms of determining whether or not a company is an NBFC. Accordingly, it is essential that knowledge of the RBI Act and NBFC Directions is a very crucial aspect for any auditor. If an auditor is ignorant about these provisions and ends up making an error in his reporting, he could face penal consequences.

CLASSIFICATION MATRIX

The regulatory structure for NBFCs comprises four layers based on their size, activity and perceived riskiness.

(a) NBFCs in the lowest layer are known as NBFCs-Base Layer (NBFCs-BL). The Base Layer shall comprise of (a) non-deposit taking NBFCs below the asset size of ₹1,000 crore and (b) NBFCs undertaking the activities of NBFC- Peer to Peer Lending Platform (NBFC-P2P), NBFC-Account Aggregator (NBFC-AA), Non-Operative Financial Holding Company (NOFHC) and (iv) NBFCs not availing public funds and not having any customer interface. The NBFCs which were earlier called NBFC-ND (i.e., non-systemically important non-deposit taking NBFC) would now be referred to as NBFC-BL. A non-systemically important NBFC was one which had an asset size of less than ₹500 crore. Correspondingly, systemically important NBFCs were those which had an asset size of ₹500 crore or more.

For the purpose of NBFCs not availing public funds, “Public Funds” include funds raised either directly or indirectly through public deposits, inter-corporate deposits, bank finance and all funds received from outside sources such as funds raised by issue of Commercial Papers, debentures, etc. However, it excludes funds raised by Compulsorily Convertible Preference Shares / Debentures convertible into equity shares within a period not exceeding five years from the date of issue.

(b) NBFCs in the middle layer are known as NBFCs- Middle Layer (NBFCs-ML). The Middle Layer shall consist of (a) all deposit taking NBFCs (NBFCs-D), irrespective of asset size, (b) non-deposit taking NBFCs with asset size of ₹1,000 crore and above and (c) NBFCs undertaking the following activities (i) Standalone Primary Dealer (SPD),
(ii) Infrastructure Debt Fund-NBFC (IDF-NBFC), (iii) Core Investment Company (CIC), (iv) Housing Finance Company (HFC) and (v) NBFC-Infrastructure Finance Company (NBFC-IFC). Hence, all CICs irrespective of size would always be NBFCs-ML. All NBFCs which were earlier referred to as NBFC-D (i.e., deposit taking NBFC) and NBFC-ND-SI (systemically important non-deposit taking NBFC) shall now mean NBFC-ML or NBFC-UL, depending upon their size.

(c) NBFCs in the upper layer are known as NBFCs Upper Layer (NBFCs-UL). The Upper Layer shall comprise of those NBFCs which are specifically identified by the Reserve Bank as warranting enhanced regulatory requirement based on a set of parameters and scoring methodology as provided by the RBI. The top 10 eligible NBFCs in terms of their asset size shall always reside in the upper layer, irrespective of any other factor. Currently, the RBI has identified 15 NBFCs as NBFCs-UL. Once an NBFC is categorised as NBFC-UL, it shall be subject to enhanced regulatory requirement, at least for a period of five years from its classification in this layer, even in case it does not meet the parametric criteria in the subsequent year/s. In other words, it will be eligible to move out of the enhanced regulatory framework only if it does not meet the criteria for classification for five consecutive years. Within three years of identification as NBFC-UL, such NBFCs must be mandatorily listed.

Once an NBFC is identified for inclusion as NBFC-UL, the NBFC shall be advised about its classification by the RBI, and it will be placed under regulation applicable to the Upper Layer. For this purpose, the following timelines shall be adhered to:

Within three months of being advised by the RBI regarding its inclusion in the NBFC-UL, the NBFC shall put in place a Board-approved policy for adoption of the enhanced regulatory framework and chart out an implementation plan for adhering to the new set of regulations.
The Board of Directors shall ensure that the stipulations prescribed for the NBFC-UL are adhered to within a maximum time period of 24 months from the date of advice regarding classification as an NBFC-UL from the RBI.
The roadmap as approved by the Board towards implementation of the enhanced regulatory requirement shall be submitted to the RBI and shall be subject to supervisory review.

(d) The Top Layer is ideally expected to be empty and is known as NBFCs-Top Layer (NBFCs-TL). This layer can get populated if the RBI is of the opinion that there is a substantial increase in the potential systemic risk from specific NBFCs in the Upper Layer. Such NBFCs shall move to the Top Layer from the Upper Layer. As of now, none of the NBFCs-UL have been upgraded to NBFCs-TL.

CLASSIFICATION OF MULTIPLE NBFCS IN ONE GROUP

If a Group has more than one NBFC, then classification is not on a standalone basis. The total assets of all the NBFCs in the Group shall be consolidated to determine the threshold for their classification in the Middle Layer. If the consolidated asset size of the NBFCs in the Group is r1,000 crore and above, then each NBFC-ICC, NBFC- MFI, NBFC-Factor and NBFC engaged in micro finance business, lying in the group shall be classified as an NBFC in the Middle Layer. However, this consolidation provision is not applicable for determining NBFC-UL.

For this purpose, “Companies in the group” means an arrangement involving two or more entities related to each other through any of the following relationships: Subsidiary – parent (defined in terms of AS 21), Joint venture (defined in terms of AS 27), Associate (defined in terms of AS 23), Promoter–promotee [as provided in the SEBI (Acquisition of Shares and Takeover) Regulations, 1997] for listed companies, a related party (defined in terms of AS 18), common brand name and investment in equity shares of 20 per cent and above.

The Statutory Auditors are required to certify the asset size (as on 31st March) of all NBFCs in the Group every year. The certificate shall be furnished to RBI’s Department of Supervision under whose jurisdiction NBFCs are registered.

NBFC-ML STATUS

Once an NBFC reaches an asset size of ₹1,000 crore or above, it shall be treated as an NBFC-ML, despite not having such assets as on the date of last balance sheet. All such non-deposit taking NBFCs shall comply with the regulations / directions issued to NBFCs-ML from time to time, as and when they attain an asset size of ₹1,000 crore, irrespective of the date on which such size is attained. If the asset size of an NBFC falls below ₹1,000 crore in a given month, which may be due to temporary fluctuations and not due to actual downsizing, the NBFC shall continue to meet the reporting requirements and shall comply with the extant directions as applicable to NBFC-ML, till the submission of its next audited balance sheet to the RBI and a specific dispensation from the RBI in this regard.

Net Owned Fund Requirements

₹10 crore is the Net Owned Fund (NOF) requirement for an NBFC-ICC, NBFC-MFI and NBFC-Factor to commence or carry on the business of non-banking financial institution. The RBI has permitted NBFCs-BL to gradually ramp up their NOF:

Type of NBFC	Starting NOF	NOF needed by 31st March, 2025	NOF needed by 31st March, 2027
NBFC-ICC	₹2 crore	₹5 crore	₹10 crore
NBFC-MFI	₹5 crore	₹7 crore	₹10 crore
NBFC-Factor	₹5 crore	₹7 crore	₹10 crore

NBFCs failing to achieve the prescribed level within the stipulated period are not eligible to hold the Certificate of Registration (CoR) as NBFCs.

For NBFC-P2P, NBFC-AA and NBFC not availing public funds and not having any customer interface, the NOF requirement is ₹2 crore. For NBFC-IFC and IDF-NBFC, the NOF requirement is ₹300 crore.

The leverage ratio of NBFCs (except NBFC-MFIs, NBFCs-ML and above) shall not be more than 7 at any point of time. Leverage ratio means the total Outside Liabilities divided by Owned Fund.“Owned Fund” means aggregate of paid-up equity capital, compulsorily convertible preference shares, free reserves, share premium and capital reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset as reduced by accumulated loss balance, book value of intangible assets and deferred revenue expenditure, if any.

AUDITOR’S APPOINTMENT

NBFCs can appoint Auditors for a continuous period of three years, subject to the firms satisfying the eligibility norms each year. The time gap between any non-audit works (services mentioned at section 144 of Companies Act, 2013, internal assignments, special assignments, etc.) by the Auditors for the Entities or any audit / nonaudit works for its group entities should be at least one year, before or after its appointment as Auditors. However, non-deposit taking NBFCs with asset size below ₹1,000 crore can avoid the above restrictions of rotating auditors after three years.

CONCLUSION

The scale-based regime is a welcome move by the RBI since it regulates NBFCs based on their size. The larger an NBFC, the stricter the regime. Probably, the time has come for other regulators and laws to also consider a scale-based regime. For instance, listed companies could be subject to listing obligations and disclosures based on their market capitalisation. Till such time as we have a horses for courses approach, this is a step in the right direction by the RBI!

BCAJ Admin

Burden of Proof in Case of Cheque Bouncing Cases

INTRODUCTION

Section 138 of the Negotiable Instruments Act, 1881 (“the Act”) is a very well-known provision even amongst laymen. It imposes a punishment in the form of an imprisonment in case a cheque, which has been issued, bounces. Whilst this is a very simplistic explanation of this very important provision, a very vital ingredient is what is the burden of proof in case of a cheque bouncing case and who is it on? The Supreme Court in its verdict in the case of Rajesh Jain vs. Ajay Singh, 2023 AIR(SC) 5018 has laid down clear-cut guidelines on the same. In the case on hand, the accused had borrowed funds from the complainant and was not returning the same. Finally, he issued a post-dated cheque which bounced on presentation. Accordingly, the complainant filed a case under Section 138 of the Act.

The Trial Court held that the only question which remained for determination was whether a legally valid and enforceable debt existed qua the complainant and the cheque in question was issued in discharge of the said liability / debt? The Trial Court answered the issue in the negative. It held that the complainant had failed to prove his case beyond reasonable doubt. It has been observed that the defence led by the accused has created a doubt regarding the truthfulness of the complainant’s case. Accordingly, the Trial Court dismissed the case against the accused.

The Punjab & Haryana High Court also found no merit in the appeal and upheld the order of acquittal passed by the Trial Court. The High Court reasoned that the accused had discharged his onus in rebutting the statutory presumption raised under Section 139 of the Act. The onus, then, once again had shifted to the complainant to prove that the cheque had been issued in respect of a legally enforceable debt, and the complainant had failed in discharging the onus to prove that cheque was issued in respect of a legally enforceable debt.

The matter, thus, travelled up to the Supreme Court.

The Apex Court held that the limited question to be considered was whether the accused could be said to have discharged his ‘evidential burden’, for the lower courts to have concluded that the presumption of law supplied by the Act had been rebutted?

ESSENCE OF SECTION 138

At the outset, one must understand the essence of Section 138 of the Act. In Gimpex Private Limited vs. Manoj Goel (2022) 11 SCC 705, the Supreme Court had explained the ingredients forming the basis of the offence under Section 138 of the Act as follows:

(a) The drawing of a cheque by person on an account maintained by him with the banker for the payment of any amount of money to another from that account;

(b) The cheque being drawn for the discharge in whole or in part of any debt or other liability;

(d) The return of the cheque by the drawee bank as unpaid either because the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount;

(e) A notice by the payee or the holder in due course making a demand for the payment of the amount to the drawer of the cheque within 30 days of receipt of information from the bank in regard to the return of the cheque; and

(f) The drawer of the cheque failing to make payment of the amount of money to the payee or the holder in due course within 15 days.

In K. Bhaskaran vs. Sankaran Vaidhyan Balan, (1999) 7 SCC 510 the Apex Court had summarised the constituent elements of the offence in fairly similar terms by holding:
“14. The offence Under Section 138 of the Act can be completed only with the concatenation of a number of acts. The following are the acts which are components of the said offence:

(1) drawing of the cheque,

(2) presentation of the cheque to the bank,

(3) returning the cheque unpaid by the drawee bank,

(4) giving notice in writing to the drawer of the cheque demanding payment of the cheque amount,

(5) failure of the drawer to make payment within 15 days of the receipt of the notice.”

BURDEN OF PROOF

The Court laid down principles of burden of proof and held that there were two senses in which the phrase “burden of proof” was used in the Indian Evidence Act, 1872:

(a) One was the burden of proof arising as a matter of pleading — this was called the “legal burden” and it never shifted during a case. The legal burden was the burden of proof which remained constant throughout a trial. It was the burden of establishing the facts and contentions which supported a party’s case. If, at the conclusion of the trial, a party failed to establish these to the appropriate standards, he would lose to stand. The incidence of the burden was clear from the pleadings and usually, it was incumbent on the plaintiff or complainant to prove what he pleaded or contended.

(b) The other was the one which deals with the question as to who has first to prove a particular fact — this was called the “evidential burden” and it shifted from one side to the other, Kundanlal vs. Custodian Evacuee Property (AIR 1961 SC 1316). The evidential burden could shift from one party to another as the trial progressed according to the balance of evidence given at any particular stage; the burden rested upon the party who would fail if no evidence at all, or no further evidence, as the case may be was adduced by either side.

PRESUMPTIONS

The Court next explained the meaning of presumptions — it literally meant “taking as true without examination or proof”. Presumptions were of two kinds: presumptions of fact and of law.

Presumptions of fact were inferences logically drawn from one fact as to the existence of other facts. Presumptions of fact were rebuttable by evidence to the contrary.

Presumptions of law may be rebuttable or irrebuttable (conclusive presumptions), so that no evidence to the contrary may be given. A rebuttable presumption of law was a legal rule to be applied by the Court in the absence of conflicting evidence. Rebuttable presumptions could be further bifurcated into discretionary presumptions (“may presume”) and compulsive or compulsory presumptions (“shall presume”).

EVIDENCE UNDER SECTION 139

The Court further held that Section 139 of the Act was an example of a reverse onus clause and required the accused to prove the non-existence of the presumed fact, i.e., that cheque was not issued in discharge of a debt / liability.

It held that the Act provided for two presumptions: Section 118 and Section 139:

(a) Section 118 of the Act inter alia directed that it shall be presumed, until the contrary was proved, that every negotiable instrument was made or drawn for consideration.

(b) Section 139 of the Act stipulated that “unless the contrary is proved, it shall be presumed, that the holder of the cheque received the cheque, for the discharge of, whole or part of any debt or liability”. The Court held that the “presumed fact” directly related to one of the crucial ingredients necessary to sustain a conviction under Section 138. As per the Court, Section 139 of the Act, which took the form of a “shall presume” clause was illustrative of a presumption of law. Because Section 139 required that the Court “shall presume” the fact stated therein, it was obligatory on the Court to raise this presumption in every case where the factual basis for the raising of the presumption had been established. However, this did not preclude the person against whom the presumption is drawn from rebutting it and proving the contrary as was clear from the use of the phrase “unless the contrary is proved”.

The Court also held that it will necessarily presume that the cheque had been issued towards discharge of a legally enforceable debt / liability in two circumstances.

Firstly, when the drawer of the cheque admitted issuance / execution of the cheque and secondly, in the event where the complainant proved that cheque was issued / executed in his favour by the drawer. The circumstances set out above form the fact(s) which bring about the activation of the presumptive clause. [Bharat Barrel vs. Amin Chand] [(1999) 3 SCC 35].

In Bir Singh vs. Mukesh Kumar, (2019) 4 SCC 197, the Supreme Court held that that presumption took effect even in a situation where the accused contended that “a blank cheque leaf was voluntarily signed and handed over by him to the complainant”. Therefore, the Court concluded that mere admission of the drawer’s signature, without admitting the execution of the entire contents in the cheque, was now sufficient to trigger the presumption. It further held that as soon as the complainant discharged the burden to prove that a cheque was issued by the accused for discharge of debt, the presumptive device under Section 139 of the Act helped shift the burden on the accused. The effect of the presumption, in that sense, was to transfer the evidential burden on the accused of proving that the cheque was not received by the bank towards the discharge of any liability. Until this evidential burden was discharged by the accused, the presumed fact will have to be taken to be true, without expecting the complainant to do anything further.

REBUTTAL

The Apex Court held that in order to rebut the presumption and prove to the contrary, it was open to the accused to raise a probable defence wherein the existence of a legally enforceable debt or liability could be contested. The words “until the contrary is proved” occurring in Section 139 did not mean that accused must necessarily prove the negative that the instrument was not issued in discharge of any debt / liability, but the accused had the option to ask the Court to consider the non-existence of debt / liability so probable that a prudent man ought, under the circumstances of the case, to act upon the supposition that debt / liability did not exist, Basalingappa vs. Mudibasappa (AIR 2019 SC 1983).

Thus, as per the Court, the accused had two options:

(a) Proving that the debt / liability did not exist. This was to lead defence evidence and conclusively establish with certainty that the cheque was not issued in discharge of a debt / liability.

(b) Prove the non-existence of debt / liability by a preponderance of probabilities by referring to the particular circumstances of the case. The preponderance of probability in favour of the accused’s case could be even 51:49 and arising out of the entire circumstances of the case, which included the complainant’s version in the original complaint, the case in the legal / demand notice, complainant’s case at the trial, as also the plea of the accused in the reply notice, his statement at the trial as to the circumstances under which the promissory note / cheque was executed. All of them could raise a preponderance of probabilities justifying a finding that there was “no debt / liability”.

It also held that the nature of evidence required to shift the evidential burden did not have to necessarily be direct evidence, i.e., oral or documentary evidence or admissions made by the opposite party; it could comprise circumstantial evidence or presumption of law or fact.

The accused may adduce direct evidence to prove that the instrument was not issued in discharge of a debt / liability and, if he did so, then the burden again shifted to the complainant. At the same time, the accused may also rely upon circumstantial evidence and, if the circumstances so relied upon were compelling enough, then the burden again shifted to the complainant. It was open for him to also rely upon presumptions of fact. The burden of proof may shift by presumptions of law or fact.

It further alluded that once the accused gave evidence to the satisfaction of the Court that on a preponderance of probabilities there existed no debt / liability in the manner pleaded in the complaint, the burden shifted back to the complainant and the presumption “disappeared” and does not haunt the accused any longer. The onus having now shifted to the complainant, he was now obliged to prove the existence of a debt / liability as a matter of fact and his failure to prove would result in dismissal of his complaint case. Thereafter, the presumption under Section 139 did not again come to the complainant’s rescue. Once both parties have adduced evidence, the Court had to consider the same and the burden of proof lost all its importance, Basalingappa vs. Mudibasappa, AIR 2019 SC 1983; Rangappa vs. Sri Mohan (2010) 11 SCC 441.

FINDINGS OF THE COURT

In the backdrop of the above legal analysis, the Supreme Court examined the conduct of the accused to ascertain whether there was evidence against him or had he rebutted it?

It noted the following fallacies and inconsistencies in the conduct of the accused:

(a) He neither replied to the demand notice nor has led any rebuttal evidence in support of his case.

(b) He had suggested that an employee of his had colluded with the complainant and falsely given a blank cheque containing his signature to the complainant. This was denied by the employee and the evidence was not sustained in cross-examination. Further, the Court noted that no action had been taken by way of registering a police complaint in order to prosecute the alleged illegal conduct of his blank cheque having been misused.

(c) The Court noted that on an overall consideration of the record, it found that the case set up by the accused was thoroughly riddled with contradictions. It was apparent on the face of the record that there was not the slightest of credibility perceivable in the defence set up by the accused.

(d) It also noted that the accused in some of his statements agreed that he had taken a loan from the complainant, but later on he stated that he had no financial dealings with the complainant.

(e) The Court observed that the signature on the cheque having not been disputed, and the presumption under Sections 118 and 139 having taken effect, the complainant’s case satisfied every ingredient necessary for sustaining a conviction under Section 138.

The case of the defence was limited only to the issue as to whether the cheque had been issued in discharge of a debt / liability. The Court concluded that the accused having miserably failed to discharge his evidential burden, that fact will have to be taken to be proved by force of the presumption, without requiring anything more from the complainant.

The Supreme Court also held that there was a fundamental flaw in the way both the lower Courts proceeded to appreciate the evidence on record. Once the presumption under Section 139 was given effect to, the Courts ought to have proceeded on the premise that the cheque was, indeed, issued in discharge of a debt / liability. The entire focus would then necessarily have to shift on the case set up by the accused, since the activation of the presumption had the effect of shifting the evidential burden on the accused.

The nature of inquiry would then be to see whether the accused has discharged his onus of rebutting the presumption. If he failed to do so, the Court can straightaway proceed to convict him, subject to satisfaction of the other ingredients of Section 138. If the Court found that the evidential burden placed on the accused has been discharged, the complainant would be expected to prove the said fact independently, without taking aid of the presumption. The Court would then take an overall view based on the evidence on record and decide accordingly.The course of action when the courts concluded that the signature had been admitted should have been to inquire into either of the two questions (depending on the method in which accused has chosen to rebut the presumption):

(a) Had the accused led any defence evidence to prove and conclusively establish that there existed no debt / liability at the time of issuance of cheque?

(b) In the absence of rebuttal evidence being led the inquiry would entail: Had the accused proved the nonexistence of debt / liability by a preponderance of probabilities by referring to the “particular circumstances of the case”?

The Supreme Court came down heavily on the Trial Court’s perverse approach. According to the Trial Court, the question to be decided was “whether a legally valid and enforceable debt existed qua the complainant and the cheque in question was issued in discharge of said liability / debt”. The Supreme Court observed:

“When the initial framing of the question itself being erroneous, one cannot expect the outcome to be right.”

The onus instead of being fixed on the accused had been fixed on the complainant. Lack of proper understanding of the nature of the presumption in Section 139 and its effect resulted in an erroneous Order being passed by the Trial Court.

It next took up the erroneous approach by the High Court. The High Court had found that the complainant has proved the issuance of cheque, which (as per the Apex Court) meant that the presumption would come into immediate effect. Further, the High Court rightly observed that the burden was on the accused to rebut such presumption.

However, as per the Supreme Court, in the very next paragraph, the High Court found that the accused had rebutted the presumption by putting questions to the complainant. There was no elucidation of material circumstances / basis on which the High Court could have reached such a conclusion. The Supreme Court held that the High Court rather shockingly concluded that:

“If the complainant had given loans on various dates, he must have maintained some document qua that, because it was not a one-time, loan but loan along with interest accrued on the principal, ….”

Therefore, according to the High Court, “the burden was primarily on the complainant to prove the debt amount”. This as per the Apex Court was a fundamental error. The High Court had questioned the want of evidence on part of the complainant in order to support his allegation of having extended loan to the accused, when it ought to have instead concerned itself with the case set up by the accused and whether he had discharged his evidential burden by proving that there existed no debt / liability at the time of issuance of cheque.

Finally, the Supreme Court set aside the acquittal verdict given by the High Court and allowed the complaint filed under Section 138 of the Act and convicted the accused.

CONCLUSION

This decision has explained very clearly the process of alluding evidence in cases of cheque bouncing and when and how the onus shifts from one party to another.

BCAJ Admin

Arbitration Clauses in Unstamped Agreements

INTRODUCTION

An agreement often contains a clause for arbitration. An agreement is an instrument under the meaning of the Stamp Act and if it falls within the Articles contained in the Schedule to the Stamp Act, then the agreement needs to be stamped. An interesting question arose as to what would be the status of the arbitration clause in an event where the underlying agreement itself is inadequately stamped? Would the reference to arbitration survive since the main agreement itself is not properly stamped? A seven-judge Bench has given its final opinion on this issue in the case of Re Interplay Between Arbitration Agreements Under the Arbitration and Conciliation Act 1996 And The Indian Stamp Act 1899 Curative Pet(C) No. 44/2023 In R.P.(C) No. 704/2021 In C.A. No. 1599/2020.

Judicial History

A three-judge Bench of the Supreme Court in its decision N N Global Mercantile (P) Ltd. vs. Indo Unique Flame Ltd. (2021) 4 SCC 379 held that an arbitration agreement, being separate and distinct from the underlying commercial contract, would not be rendered invalid, unenforceable, or non-existent. The Court held that the non-payment of stamp duty would not invalidate even the underlying contract because it is a curable defect.

However, this decision of the Supreme Court was at variance with an earlier decision of a co-ordinate bench of the Court in the case of Vidya Drolia vs. Durga Trading Corporation (2021) 2 SCC 1. In that case, the Court had held that an agreement evidenced in writing has no meaning unless the parties can be compelled to adhere and abide by the terms. A party cannot sue and claim rights based on an unenforceable document. Thus, there are good reasons to hold that an arbitration agreement exists only when it is valid and legal. A void and unenforceable understanding is no agreement to do anything. Existence of an arbitration agreement means an arbitration agreement that meets and satisfies the statutory requirements of both the Arbitration Act and the Contract Act and when it is enforceable in law. Accordingly, it was concluded that an arbitration agreement does not exist if the agreement is illegal or does not satisfy mandatory legal requirements. It concluded that an invalid agreement is no agreement.

Reference to Larger Bench

The Supreme Court in NN Global (supra) noted the earlier contrary decision and hence, referred the matter to a larger five-judge bench of the Supreme Court. The question framed was whether non-payment of stamp duty would also render the arbitration agreement contained in such an instrument, as being non-existent, unenforceable, or invalid, pending payment of stamp duty on the substantive contract/instrument.

The five-judge Bench in N N Global Mercantile (P) Ltd. vs. Indo Unique Flame Ltd 8 (2023) 7 SCC 1,by a majority of 3:2, held that the earlier decision in NN Global (supra) did not represent the correct position of law. It concluded that:

(a) An unstamped instrument containing an arbitration agreement was void under the Contract Act;

(b) An unstamped instrument, not being a contract and not enforceable in law, could not exist in law. The arbitration agreement in such an instrument could be acted upon only after it was duly stamped;

(c) The “existence” of an arbitration agreement contemplated under the Arbitration Act was not merely a facial existence or existence in fact, but also “existence in law”;

(d) The Court acting under the Arbitration Act could not disregard the mandate of the Stamp Act requiring it to examine and impound an unstamped or insufficiently stamped instrument; and

(e) The certified copy of an arbitration agreement must clearly indicate the stamp duty paid.

Curative Petition

Subsequent to the above five-judge Bench Decision, several other cases reached other three-judge and five-judge Benches of the Apex Court on the same issue. Considering the larger ramifications and consequences of the five-judge decision in the 2nd NN Global Case, a curative petition was referred to a seven-judge Constitution Bench of the Supreme Court. It was requested to reconsider the correctness of the view of the five-judge Bench.

Verdict of seven-Judge Bench

Scheme of Stamp Act

The Court analysed the entire framework of the Indian Stamp Act, of 1899 (which was the charging Stamp Act in the case at point). It noted that section 17 of the Stamp Act provided that all instruments chargeable with duty and executed by any person in India shall be stamped before or at the time of execution. Section 62 inter alia penalised a failure to comply with Section 17. However, despite the mandate that all instruments chargeable with the duty must be stamped, many instruments were not stamped or are insufficiently stamped. The parties executing an instrument may, contrary to the mandate of law, attempt to avoid the payment of stamp duty and may therefore refrain from stamping it. Section 33 provided that every person who has authority to receive evidence (either by law or by consent of parties) shall impound an instrument which is, in their opinion, chargeable with duty but which appears to be not duly stamped. The power under Section 33 may be exercised when an instrument is produced before the authority or when they come across it in the performance of their functions. In terms of Section 35, an instrument which was not duly stamped was inadmissible in evidence for any purpose and it shall not be acted upon, registered, or authenticated. The Collector was conferred with the power to impound an instrument under Section 33. If any other person or authority impounded an instrument, it must be forwarded to the Collector under clause (2) of Section 38. The Collector may also levy a penalty, as provided.

It noted that in terms of Section 42 of the Stamp Act, an instrument was admissible in evidence once the payment of duty and a penalty (if any) was complete. Once an instrument has been endorsed, it may be admitted into evidence, registered, acted upon or authenticated as if it had been duly stamped.

Section 36 of the Stamp Act provided that where an instrument was admitted in evidence, the admission of an instrument was not to be questioned at any stage of the same suit or proceeding on the ground that the instrument was not duly stamped.

Difference between inadmissibility and voidness

It held that the admissibility of an instrument in evidence was distinct from its validity or enforceability in law. The Contract Act provided that an agreement not enforceable by law was said to be void. The admissibility of a particular document or oral testimony, on the other hand, refers to whether or not it can be introduced into evidence. An agreement can be void without its nature as a void agreement having an impact on whether it may be introduced in evidence. Similarly, an agreement can be valid but inadmissible in evidence.

A very important distinction was made by the Court as follows:

“When an agreement is void, we are speaking of its enforceability in a court of law. When it is inadmissible, we are referring to whether the court may consider or rely upon it while adjudicating the case. This is the essence of the difference between voidness and admissibility.”

Unstamped does not mean Void

The Court held that the effect of not paying duty or paying an inadequate amount rendered an instrument inadmissible and not void. Non-stamping or improper stamping did not result in the instrument becoming invalid. The Stamp Act did not render such an instrument void. The non-payment of stamp duty was accurately characterised as a curable defect. The Stamp Act itself provided for the manner in which the defect may be cured and set out a detailed procedure for it. The Court observed that there was no procedure by which a void agreement can be “cured.”

The Supreme Court held that in Hindustan Steel Ltd. vs. Dilip Construction Co. (1969), 1 SCC 597 held that the provisions of the Stamp Act clearly provided that an instrument could be admitted into evidence as well as acted upon once the appropriate duty had been paid and the instrument was endorsed.

The Court held that the negative stipulations in Sections 33 and 35 of the Stamp Act were specific, albeit not so absolute as to make the instrument invalid in law. A “void ab initio” instrument, which was stillborn, had no corporeality in the eyes of law. It did not confer or give rights or create obligations. However, an instrument which was “inadmissible” existed in law, albeit could not be admitted in evidence by such person, or be registered, authenticated or be acted upon by such person or a public officer till it was duly stamped.

An instrument which is void ab initio or void, could not be validated by mere consent or waiver unless consent or waiver undid the cause of invalidity. However, after due stamping as per the Stamp Act, the unstamped or insufficiently stamped instrument could be admitted in evidence, or be registered, authenticated or be acted upon by such person.

It held that to hold that an insufficiently stamped instrument did not exist in law will cause disarray and disruption.

Harmonious Construction

The Court stated that the challenge before it was to harmonize the provisions of the Arbitration Act and the Stamp Act. The object of the Arbitration Act was to inter alia ensure an efficacious process of arbitration and minimize the supervisory role of courts in the arbitral process. On the other hand, the object of the Stamp Act was to secure revenue for the State. It was a cardinal principle of interpretation of statutes that provisions contained in two statutes must be, if possible, interpreted in a harmonious manner to give full effect to both the statutes — Jagdish Singh vs. Lt. Governor, Delhi, (1997) 4 SCC 435. The challenge, therefore, before the Court was to preserve the workability and efficacy of both the Arbitration Act and the Stamp Act.

Supremacy of Arbitration Act

The Apex Court laid down an important principle that the Arbitration Act was legislation enacted to inter alia consolidate the law relating to arbitration in India. It will have primacy over the Stamp Act and the Contract Act in relation to arbitration agreements.

The Arbitration Act was a special law and the Indian Contract Act and the Stamp Act were general laws and it was a settled proposition that a general law must give way to a special law — LIC vs. D.J. Bahadur 7 (1981) 1 SCC 315.

The issue in this case was not whether all agreements were rendered unenforceable under the provisions of the Stamp Act but whether arbitration agreements, in particular, were unenforceable. Hence, the special law in this case was the Arbitration Act. The Court held that the Arbitration Act was a special law in the context of the case because it governed the law on arbitration, including arbitration agreements — Section 2(1)(b) and Section 7 of this statute defined an arbitration agreement. In contrast, the Stamp Act defined ‘instruments’ as a whole and the Contract Act defined ‘agreements’ and ‘contracts.’ As observed by the Supreme Court in Bhaven Construction vs. Sardar Sarovar Narmada Nigam Ltd (2022) 1 SCC 75, “the Arbitration Act is a code in itself’.

It further observed that the Arbitration Act contained a non-obstante clause in section 5 by virtue of which must take precedence over any other law for the time being in force. Any intervention by the courts (including impounding an agreement in which an arbitration clause is contained) was, therefore, permitted only if the Arbitration Act provided for such a step, which it did not. The five-judge Bench held that this non-obstante clause did not mean that the operation of the Stamp Act, in particular, the power to impound would not have any play. The Constitutional Bench of the Supreme Court disagreed with this view and held that section 5 was rendered otiose by the aforesaid interpretation. The Court held that it must be cognizant of the fact that one of the objectives of the Arbitration Act was to minimise the supervisory role of courts in the arbitral process.

It also held that Parliament was aware of the Stamp Act when it enacted the Arbitration Act. Yet, the latter did not specify stamping as a pre-condition to the existence of a valid arbitration agreement.

The Arbitral Tribunal had full Powers

The Supreme Court held that section 16 of the Arbitration Act, empowered the arbitral tribunal to rule on its own jurisdiction. This included the authority to decide the existence and validity of the arbitration agreement. As per Section 16, an arbitration agreement was an agreement independent of the other terms of the contract, even when it was only a clause in the underlying contract. The section specifically stated that a decision by the arbitral tribunal holding the underlying contract to be null and void did not lead to ipso jure the invalidity of the arbitration clause. The existence of an arbitration agreement was to be ascertained with reference to the requirements of the Arbitration Act. In a given case the underlying contract may be null and void, but the arbitration clause may exist and be enforceable. The invalidity of an underlying agreement may not, unless relating to its formation, result in invalidity of the arbitration clause in the underlying agreement.

The Court held that it was the arbitral tribunal and not the court which may test whether the requirements of a valid contract and a valid arbitration agreement were met. If the tribunal found that these conditions were not met, it would decline to hear the dispute any further. If it found that a valid arbitration agreement existed, it may assess whether the underlying agreement was a valid contract.

The Court held that once the arbitral tribunal has been appointed, the Tribunal will act in accordance with the law and proceed to impound the agreement under Section 33 of the Stamp Act if it sees fit to do so. It has the authority to receive evidence by consent of the parties, in terms of Section 35 of the Stamp Act. The procedure under Section 35 may be followed thereafter. The arbitral tribunal continues to be bound by the provisions of the Stamp Act, including those relating to its impounding and admissibility. The interpretation of the law in this judgment ensures that the provisions of the Arbitration Act are given effect while not detracting from the purpose of the Stamp Act.

The interests of revenue were not jeopardised in any manner because the duty chargeable must be paid before the agreement in question was rendered admissible and the dispute between the parties adjudicated. The question was at which stage the agreement would be impounded and not whether it would be impounded at all.

The seven-judge Bench held that the decision of the five-judge Bench in N N Global 2 (supra) gave effect exclusively to the purpose of the Stamp Act. It prioritised the objective of the Stamp Act, i.e., to collect revenue at the cost of the Arbitration Act). The impounding of an agreement which contained an arbitration clause at the stage of the appointment of an arbitrator under Section 11 (or Section 8 as the case may be) of the Arbitration Act will delay the commencement of arbitration. It was a well-known fact that Courts were burdened with innumerable cases on their docket. This had the inevitable consequence of delaying the speed at which each case progressed. Arbitral tribunals, on the other hand, dealt with a smaller volume of cases. They were able to dedicate extended periods of time to the adjudication of a single case before them. It concluded that if an agreement was impounded by the arbitral tribunal in a particular case, it was far likelier that the process of payment of stamp duty and a penalty (if any) and the other procedures under the Stamp Act were completed at a quicker pace than before courts.

Conclusive Findings

The Supreme Court summarised its findings as follows:

(a) Agreements which are not stamped or are inadequately stamped are inadmissible in evidence under Section 35 of the Stamp Act. Such agreements are not rendered void or void ab initio or unenforceable;

(b) Non-stamping or inadequate stamping is a curable defect;

(c) An objection as to stamping does not fall for determination under Sections 8 or 11 of the Arbitration Act. The concerned court must examine whether the arbitration agreement prima facie exists;

(d) Any objections in relation to the stamping of the agreement fall within the ambit of the arbitral tribunal; and

(e) The five-judge decision in NN Global stood overruled on this issue.

Epilogue

This is a very good decision by the Apex Court which will uphold arbitrations rather than referring disputes to lengthy and time-consuming Court procedures.

BCAJ Admin

Related Party Transactions: The Purpose & Effect Test

INTRODUCTION

Related Party Transactions (“RPTs”) are a very significant matter for listed companies. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“the LODR”) have laid down strict guidelines on how listed companies should deal with RPT. The idea always is that the minority shareholders of the listed entity should be protected and not be put at a disadvantage in any manner. The LODR has undergone a fundamental change with the introduction of the Purpose and Effect Test for RPTs. Let us examine what are the consequences of this change.

WHO IS A RELATED PARTY?

As per Regulation 2(zb) of the LODR, a “related party” means a related party as defined under sub-section (76) of section 2 of the Companies Act, 2013 or under the applicable accounting standards. S.2(76) defines the following persons as a related party for a company:

(i) a director or his relative;

(ii) a key managerial personnel or his relative;

(iii) a firm, in which a director, manager or his relative is a partner;

(iv) a private company in which a director or manager or his relative is a member or director;

(v) a public company in which a director or manager is a director or and holds along with his relatives, more than 2 per cent of its paid-up share capital;

(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;

(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:

(viii) any body corporate which is—

(A) a holding, subsidiary or an associate company of such company;

(B) a subsidiary of a holding company to which it is also a subsidiary;or

(ix) a director (other than an Independent Director) / Key Managerial Personnel of the Holding Company and will include his relative.

Ind AS 24 (para 9) on Related Party Disclosures contains additional definitions on the meaning of the term related party.

In addition, the LODR provides that:

(a) any person or entity forming a part of the promoter or promoter group of the listed entity; or

(b) any person or any entity, holding equity shares of 10 per cent or more, with effect from April 1, 2023 in the listed entity either directly or on a beneficial interest basis as provided under section 89 of the Companies Act, 2013, at any time, during the immediate preceding financial year;

shall be deemed to be a related party.

WHAT IS A RELATED PARTY TRANSACTION?

As per Regulation 2(zc) of the LODR, a “related party transaction” means “a transaction involving a transfer of resources, services or obligations between:

(i) a listed entity or any of its subsidiaries on one hand and a related party of the listed entity or any of its subsidiaries on the other hand; or

(ii) a listed entity or any of its subsidiaries on one hand, and any other person or entity on the other hand, the purpose and effect of which is to benefit a related party of the listed entity or any of its subsidiaries, with effect from 1st April, 2023

regardless of whether a price is charged and a “transaction” with a related party shall be construed to include a single transaction or a group of transactions in a contract.”

Hence, with effect from 1st April, 2023, a transaction by a listed entity with an unrelated entity would also be treated as an RPT, if the purpose and effect of such unrelated transaction is to benefit a related party of the listed entity. When one reads this definition, three cumulative factors emerge:

(i) There must be a transaction between a listed entity and an unrelated entity;

(ii) There must be a purpose and effect of this transaction; and

(iii) Such purpose and effect must be to benefit a related party of the listed entity or its subsidiary.

Accordingly, if an unrelated party is interposed in a transaction with no commercial rationale other than to indirectly confer a benefit upon a related party, then such transaction would also fall within the purview of an RPT.

EXAMPLE

Goods Ltd, a listed company supplies engineering equipment to Works P Ltd, a construction / EPC company. Works P Ltd is entirely unrelated to Goods Ltd, the listed company. This EPC company uses the aforesaid engineering equipment for a turnkey contract for Tower Ltd, one of the related parties of the listed company. Thus, there are two on the face of it unrelated transactions ~ one between Goods Ltd and Works P Ltd and the other between Works P Ltd and Tower Ltd. However, as per the new definition a transaction by a listed entity with an unrelated entity would also be treated as an RPT, if the purpose and effect of such unrelated transaction is to benefit a related party of the listed entity. Thus, if the purpose and effect of Goods Ltd supplying equipment to Works P Ltd was to benefit Tower Ltd, then the transaction between Works P Ltd and Goods Ltd would also become a related party transaction for Goods Ltd, the listed company. Accordingly, in that event, it would have to ensure compliances which a listed company needs to undertake for a related party transaction (detailed below).

BACKGROUND

SEBI had constituted a Working Group on Related Party Transactions which submitted its Report in January 2020. One of the findings of the Report was that Shell or apparently unrelated companies, controlled directly or indirectly, by such persons were purportedly used to siphon off large sums of money through the use of certain innovative structures, thereby circumventing the regulatory framework of RPT. It recommended broadening the definition of RPTs to include transactions which are undertaken, whether directly or indirectly, with the intention of benefitting related parties. The Report stated that this concept is also captured in the legislation of other jurisdictions, such as the U.K.

SEBI had also issued a Memorandum dated November 2021 to review the regulatory provisions with respect to Related Party Transactions. This stated that it was desirable to include transactions with unrelated parties, the purpose and effect of which was, to benefit the related parties of the listed entity or any of its subsidiaries. It was important to consider the substance of the relationship and not merely the legal form as a part of good governance practice. Hence, the doctrine of substance over legal form has now found its way into the SEBI Regulations also.

MEANING OF TERMS

Interestingly, while the Regulation uses some important terms it does not define them. To apply this definition it also becomes very crucial to better understand the meaning of the two terms “purpose” and “effect”. It is important to bear in mind that the presence of both is mandatory for this definition to get attracted. While the terms are two, the purpose is more important than the effect.

MEANING OF ‘PURPOSE’

Black’s Law Dictionary, 6th Edition defines this term to mean that which one sets before him to accomplish or attain; an end, intention or aim, object, plan, project. The term is synonymous with ends sought, an object to be attained, an intention, etc.

P Ramanatha Aiyar’s The Law Lexicon, 4th Edition defines the word Purpose to mean that which a person sets before himself as an object to be reached or accomplished, the end or aim to which the view is directed in any plan, manner or execution, end or the view itself, design, intention.

In Kevalchand Nemchand Mehta v CIT, [1968] 67 ITR 804 (Bom) it was held that the word purpose implied “the thing intended or the object and not the motive behind the action.”

In Ormerods (India) (P.) Ltd. v CIT, [1959] 36 ITR 329 (Bom) it was held that Purpose may, in some context, suggest object; and purpose may sometimes: suggest motive for a transaction. The word purpose has to be read in its legal sense to be gathered from the context in which it appears. The meaning, as far as possible should be found out from the language of the section itself and without attributing to the Legislature a precise appreciation of the technical appropriateness of its own. But whatever way one reads the word “purpose” it cannot certainly mean a motive for a transaction.

In Smt. Padmavati Jaykrishna v CIT, (1975) 101 ITR 153 (Guj) the Court held that Purpose meant a design of effecting something. Motive was a force which impels a person to adopt a particular course of action. It was highly subjective in character and could be found out mainly from a course of conduct. But purpose was more apparent and had immediate connection with the result which is brought about.

In Newton v Federal Commissioner of Taxation, Privy Council of Australia, [1958] ALR 833 the Court held that the purpose of a contract, agreement or arrangement must be what it was intended to effect and that intention must be ascertained from its terms. These terms may be oral or written or may have to be inferred from the circumstances but, when they have been ascertained, their purpose must be what they effect. “The word ‘purpose’ meant, not motive, but the effect which it is sought to achieve the end in view. The word ‘effect’ meant the end accomplished or achieved.”

MEANING OF ‘EFFECT’

Black’s Law Dictionary, 6th Edition defines effect to mean to do, to make, to bring to pass, to execute, enforce, accomplish.

P Ramanatha Aiyar’s The Law Lexicon, 4th Edition defines it as a result which follows a given act; consequence, event; something caused or produced as a result.

MEANING OF ‘BENEFIT’

The pivot on which this definition hinges is whether such a transaction confers a “benefit” upon a related party of the listed entity. The word benefit has been defined in P Ramanatha Aiyar’s The Law Lexicon, 4th Edition to mean “advantage, profit, gain,..”

In State Of Gujarat & Ors vs Essar Oil Ltd., (2012) 1 SCALE 397, the Supreme Court has defined the term “benefit” as follows:

“Now the question is what constitutes a benefit. A person confers benefit upon another if he gives to the other possession of or some other interest in money, land, chattels, or performs services beneficial to or at the request of the other, satisfies a debt or a duty of the other or in a way adds to the other’s security or advantage. He confers a benefit not only where he adds to the property of another but also where he saves the other from expense or loss. Thus the word “benefit” therefore denotes any form of advantage”

Hence, one possible view is that unless there is some benefit / advantage to the related party of the listed entity which would otherwise not have been available to it, the aforesaid definition should not apply. The idea behind enacting the purpose and effect test is to catch those transactions which are not in the ordinary course of business but which are inspired by the sole or dominant motive of benefiting a related party. One or more layers of unrelated parties have been interposed in the transaction but the chain between the listed entity, and the related party as the eventual beneficiary, is clear and visible. To apply this test, the effect of benefiting the related party must be both clear and direct. One touchstone for determining whether there is a benefit is whether the transaction with the unrelated party is in the ordinary course of business / on an arm’s length pricing for the listed entity? If yes, then there would not be any case for stating that there is a benefit which has been extended by the listed entity to the related party.

The above principle draws support from the UK’s Financial Conduct Handbook on which the aforesaid SEBI LODR definition of related party transaction is based. Para 7.3.3 of this Handbook expressly states that the purpose and effect test would not apply to a transaction or arrangement in the ordinary course of business between a listed entity and an unrelated entity which is concluded on normal market terms. However, it may be noted that such an express exemption is not found in the LODR.

Similarly, the Federal Court of Appeal of Canada, in The Queen v Ellan Remai (2009) FCA, 340 has also stated that:

“..whether the terms of a transaction reflect “ordinary commercial dealings between parties acting in their own interests” is not a separate requirement of the legal tests for determining if a transaction is at arm’s length. Rather, the phrase is a helpful definition of an arm’s length transaction…”

Comparable wordings are found in Chapter X-A of the Income-tax Act, 1961 dealing with General Anti-Avoidance Rules or GAAR. According to this, an impermissible avoidance agreement would be one which lacks commercial substance and creates rights which are not on an arm’s length basis. Having an accommodating party in a transaction shows that there is lack of commercial substance. An accommodating party is one who is interposed and the main purpose of that is to claim a (tax) benefit. Thus, the GAAR provisions use the word main purpose to determine whether a party is an accommodating party. This is an entity used to create an illusion of commercial substance to circumvent anti-avoidance rules. The Supreme Court in VNM Arunachala Nadar v CEPT (1962) 44 ITR 352 (SC) has held that whether or not the main purpose of a transaction was defeating anti-avoidance provisions was more a question of fact than a mixed question of fact and law.

COMPLIANCES FOR RPTs

In the event that the purpose and effect test is applicable, then the listed company would need to ensure the following compliances for the RPTs:

(a) All related party transactions and subsequent material modifications shall require prior approval of the audit committee of the listed entity. Only those members of the audit committee, who are independent directors, can approve related party transactions.

(b) A related party transaction to which the subsidiary of a listed entity is a party but the listed entity is not a party, shall require prior approval of the audit committee of the listed entity if the value of such transaction whether entered into individually or taken together with previous transactions during a financial year exceeds 10 per cent of the annual consolidated turnover, as per the last audited financial statements of the listed entity.

(c) With effect from 1st April, 2023, a related party transaction to which the subsidiary of a listed entity is a party but the listed entity is not a party, shall require prior approval of the audit committee of the listed entity if the value of such transaction whether entered into individually or taken together with previous transactions during a financial year, exceeds 10 per cent of the annual standalone turnover, as per the last audited financial statements of the subsidiary.

(d) All material related party transactions and subsequent material modifications shall require prior approval of the shareholders through resolution and no related party shall vote to approve such resolutions whether the entity is a related party to the particular transaction or not.

A transaction with a related party shall be considered material, if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceeds ₹1,000 crores or 10 per cent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity, whichever is lower. In addition, the Board of the listed company is required to formulate a Policy on Materiality of Related Party Transactions and on dealing with related party transactions, including clear threshold limits for the same.

WHAT CAN AUDIT COMMITTEES DO?

It may so happen that a listed company transacts with an unrelated party, which in the ordinary course of its business, transacts with a related party of the listed company. At a later date, the listed company realises this but by now prior approval of the Audit Committee has not been obtained for the related party transaction. What can the Audit Committee do in such a case?

Listed Companies could be asked to supply their suppliers / dealers with a list of related parties and instructed that if the suppliers / dealers intend to transact with any of those related parties, then they should first approach the listed companies. This would pre-empt a scenario of the listed company coming to know at a subsequent stage that a dealer has transacted with one of its related parties.

Secondly, when it is faced with a purpose and effect type of RPT, the Audit Committee should examine the nature of benefit, if any, to the related party. The terms of the contract between the listed entity and the unrelated entity, the pricing, the reasonableness, comparison with unrelated transactions, is it in the ordinary course of business, economic substance, etc., are some of the tests which could be applied.

CONCLUSION

Related Party Transactions cannot be done away with altogether. What is important is that they are disclosed adequately and they do not confer any undue benefits on related parties. The purpose and effect test is an important step by SEBI in this respect. Listed companies would be well advised to pay heed to compliances related to RPTs. A slip up could prove very costly!

BCAJ Admin

Minor’s Dealings – Major Implications

INTRODUCTION

Readers may be aware that the minimum age to vote (under the Constitution of India); for driving (under the Motor Vehicle Act, 1988); for women to get married (under the Prohibition of Child Marriage Act, 2006) is 18 years, etc. Thus, the law places several restrictions on what a minor can and cannot do. However, can a minor enter into contracts, either directly or through his guardian? Can a minor own property / asset? Several such issues crop when dealing with minors. Let us examine some of these questions which could have major ramifications.

MEANING OF A MINOR

The Majority Act, 1875 states that every person domiciled in India shall attain the age of majority on his completing the age of 18 years. In computing the age of any person, the day on which he was born is to be included as a whole day and he shall be deemed to have attained majority at the beginning of the 18th anniversary of that day.Thus,any person below the age of 18 years is a minor.

In addition, the Hindu Minority and Guardianship Act, 1956 lays down the law relating to minority and guardianship of Hindus and the powers and duties of the guardians. It overrides any Hindu custom, tradition or usage in respect of the minority and guardianship of Hindus. According to this law also, a “minor” means a person who has not completed the age of 18 years. The Act applies to:

(i) Any person who is a Hindu, Jain, Sikh or Buddhist by religion.

(ii) Any person who is not a Muslim, Christian, Parsi or a Jew.

(iii) Any person who becomes a Hindu, Jain, Sikh or Buddhist by conversion or reconversion.

(iv) A legitimate / illegitimate child whose one or both parents are Hindu, Jain, Sikh or Buddhist by religion. However, in case only one parent is a Hindu, Jain, Sikh or Buddhist by religion, then the child must be brought up by such parent as a member of his community, family, etc.

GUARDIAN OF MINORS

In India the Guardians and Wards Act, 1890, lays down the law relating to guardians of a minor. A guardian means a person having the care of the minor or of his property, or of both the minor and his property and a ward is defined to mean a minor for whose benefit or property, or both, there is a guardian. A guardian stands in a fiduciary relation to his ward and he must not make any profit out of his office.

CONTRACTS BY MINORS

S.3 of the Indian Contract Act, 1872 states that only a person who has attained the age of majority is competent to contract. The Privy Council, in Mohori Bibee vs. Dharamdas Ghose, (1903) 30 Cal 539, held that contracts involving minors are void ab initio. The Court also held that even if a minor intentionally misrepresents his age, he can still plead minority as a defence to avoid liability. This protects minors from incurring liabilities, as the law deems them incompetent to contract.

In Krishnaveni vs. M.A. Shagul Hameed, Civil Appeal arising out of SLP P(C) No.23655/2019, the Supreme Court held that a minor is not competent to enter into an agreement. It is void as per Section 11 of the Indian Contract Act, 1872. Therefore, the suit founded on the strength of such a void agreement is liable to be dismissed. The Court below declined to accept the said stand on the ground that a minor can be a beneficiary under an agreement.

In Mathai Mathai vs. Joseph Mary Alias Marykutty Joseph (2015) 5 SCC 622, the Court opined that a minor could not have entered into a valid contract in her own name and she ought to be represented either by her natural guardian or a guardian appointed by the Court in order to lend legal validity to the contract in question. This decision has further held that the Indian Contract Act,1872 clearly states that for an agreement to become a contract, the parties must be competent to contract, wherein age of majority is a condition for competency. A deed of mortgage is a contract and it cannot be held that a mortgage in the name of a minor is valid, simply because it is in the interests of the minor unless she is represented by her guardian. The law cannot be read differently for a minor who is a mortgagor and a minor who is a mortgagee as there are rights and liabilities in respect of the immovable property would flow out of such a contract for both of them.

WILL BY A MINOR?

Since a minor is not competent to contract, he cannot even make a Will for his property. The Privy Council in K. Vijayaratnam v Mandapaka Sundarsana Rao, 1925 AIR(PC) 196 has taken a similar view. The Indian Succession Act, 1925 now expressly provides that a minor cannot make a Will. The Act does permit a father to appoint a guardian for his minor child. However,a guardian cannot make a Will for his minor child.Thus, if a minor owning assets dies then he would always die intestate. If such a minor is a Hindu then his property would devolve as per the Hindu Succession Act, 1956.

It may be noted that a minor can be the beneficiary of a private trust created under the Indian Trusts Act, 1882. Every person capable of holding property can be a beneficiary and a minor is capable of holding property. The Full Bench of the Madras High Court in A.T. Raghava Chariar vs O.A. Srinivasa Raghava Chariar, AIR 1917 Madras 630,has held that a minor can be a transferee of property, whether such transfer is by way of sale, mortgage, lease, exchange or gift.

PROPERTY FOR BENEFIT OF HINDU MINOR

The Hindu Minority and Guardianship Act places certain restrictions on the powers of a natural guardian of a Hindu minor. The restrictions on the powers of the natural guardian are as follows:

(a) The natural guardian of a Hindu minor has the power to do all acts which are necessary or reasonable and proper for the minor’s benefit or for the realisation, protection or the benefit of the minor’s estate. However, the natural guardian cannot bind the minor by a personal covenant. Thus, the natural guardian of a minor can acquire property, whether by lease or by purchase, for the minor’s benefit.

(b) The most important restriction placed by the Act on the natural guardian relates to his immovable property. A natural guardian cannot without the prior permission of the Court enter into the following transactions, for or on behalf of the minor:

(i) Mortgage or charge or transfer, by way of sale, gift, exchange or in any other mode, any part of the immovable property of the minor.

(ii) Lease any part of the immovable property of the minor for a period exceeding five years or for a term which would extend to a period more than one year beyond his majority.

Even if the above transactions are for the purported benefit of the minor, the natural guardian would require the prior permission of the Court. The permission must be obtained before entering into the transaction. Any transaction involving disposal of the minor’s immovable property without obtaining the Court’s prior permission for the purposes mentioned above is voidable at the instance of the minor or any person claiming under him. Thus, the transaction is not void ab initio but voidable at the minor’s option. The Court would only grant the permission to the natural guardian, if it is proved that the disposal is a necessity or it is for an advantage to the minor. If the Court is not satisfied on this count, then it would not grant a permission for the disposal.

However, it may be noted that the Supreme Court in Sri Narayan Bal and Others vs. Sridhar Sutar and Others (1996) 8 SCC 54 has held that the above provisions do not envisage a natural guardian of an undivided interest of a Hindu minor in a joint Hindu family property. The above provisions, with the object of saving the minor’s separate individual interest from being misappropriated require a natural guardian to seek permission from the Court before alienating any part of the minor’s estate, but do not affect the right of the Karta or the head of the branch to manage and from dealing with the joint Hindu family property. Hence, the Court held that the above provisions will have no application when a Karta of the HUF alienates joint Hindu property even if one or more coparceners are minor.

GIFTS RECEIVED BY MINORS

While a minor cannot make a gift, there is no bar on him receiving one. A minor suffers disability from entering into a contract but he is thereby not incapable of receiving property. Section 127 of the Transfer of Property Act, 1882 throws light on the question of validity of transfer of property by gift to a minor. It recognises the minors capacity to accept the gift without intervention of guardian, if it is possible, or through him. It states that a donee who is not competent to contract (e.g., a minor) and accepting property burdened by any obligation is not bound by his acceptance. But if, after becoming competent to contract and being aware of the obligation, he retains the property given, he becomes so bound.

The Supreme Court in K.Balakrishnan vs. K. Kamalam, 2004 (1) SCC 581 has held that this clearly indicates that a minor donee, who can be said to be in law incompetent to contract under Section 11 of the Contract Act is, however, competent to accept a non-onerous gift. Acceptance of an onerous gift, however, cannot bind the minor. If he accepts the gift during his minority of a property burdened with obligation and on attaining majority does not repudiate but retains it, he would be bound by the obligation attached to it. Thus, it clearly recognised the competence of a minor to accept the gift. It held that the position in law, thus, under the Transfer of Property Act read with the Indian Contract Act was that the acquisition of property being generally beneficial, a child can take property in any manner whatsoever either under intestacy or by Will or by purchase or gift or other assurance inter vivos, except where it is clearly to his prejudice to do so. A gift inter-vivos to a child cannot be revoked. There was a presumption in favour of the validity of a gift of a parent or a grandparent to a child, if it was complete. When a gift was made to a child, generally there was presumption of its acceptance because express acceptance in his case was not possible and only an implied acceptance could be excepted.

HUFs AND MINORS

Minors can be coparceners in their father’s / grandfather’s HUF. Coparcenery is acquired by birth and there is no bar that only major individuals can be coparceners. However, a minor coparcener cannot be a Karta of an HUF since he has no capacity to contract. In a case where the only coparcener surviving after the father’s death was a minor, the Supreme Court allowed his mother (who was not a coparcener of the HUF) to act as the guardian Karta / manager till such time as the son turned major — Shreya Vidyarthi vs. Ashok Vidyarthi AIR 2016 SC139.

SHARES IN THE NAMES OF MINORS

A minor can hold shares in a company through his guardian — Dewan Singh v Minerva Films Ltd (10958) 28 Comp Cases 191 (Punj). The Articles may impose restrictions on the voting rights of a minor but there cannot be any restrictions on the transfer of shares in favour of a minor — Master Gautam Padival vs. Karnataka Theatres (2000) 100 Comp. Cases 124 (CLB). The Department of Company Affairs (as it was then known) has issued a Circular in September 1963 under the Companies Act 1956, stating that a minor cannot be a subscriber to Memorandum of Association since he cannot enter into any contract. However, there is no objection to his owning shares since in the event of such purchase there will be no covenant subsequent on the part of the minor. The name of the guardian and not that of the minor should be shown on the Register of Members.

Just as a minor can have a bank account, a Demat account can also be opened in the name of a minor. The account will be operated by a guardian till the minor becomes major. The guardian has to be the father or in his absence mother. In absence of both, father or mother, the guardian can be appointed by court. A minor cannot be a joint holder in a demat account.

A minor can apply for securities in an IPO. A minor cannot enter into a contract with a stock broker to purchase or sell any security. However, a Trading account can be opened in the name of the minor only for the sole purpose of sale of securities which minor has possessed by way of investment in IPO, inheritance, corporate action, off-market transfers under the following reason:

Gifts
Transfer between family members
Implementation of Government / Regulatory Directions or Orders

Such an account will be operated by the natural guardian till the minor becomes a major. The minor’s demat / trading account can be continued when the minor becomes major. However, on attaining majority, the erstwhile minor should confirm the account balance and complete the formalities as are required for opening a demat / trading account to continue in the same account.

CAN MINOR BECOME A PARTNER?

Under the Indian Partnership Act, 1930, a person who is a minor cannot be a partner in a partnership firm, but, with the consent of all the partners for the time being, he may be admitted to the benefits of partnership. Such minor has a right to such share of the property and of the profits of the firm as may be agreed upon, and he may have access to and inspect and copy any of the accounts of the firm. His share is liable for the acts of the firm, but the minor is not personally liable for any such act. The minor cannot sue the partners for accounts or payment of his share of the property or profits of the firm except when severing his connection with the firm, and in such casethe amount of his share shall be determined by avaluation.

At any time within six months of his attaining majority, or of his obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later, such person may give public notice that he has elected to become or that he has elected not to become a partner in the firm, and such notice shall determine his position as regards the firm. However, if he fails to give such notice, he shall become a partner in the firm on the expiry of the said 6 months.

Where any person has been admitted as a minor to the benefits of partnership in a firm, the burden of proving the fact that such person had no knowledge of such admission until a particular date after the expiry of 6 months of his attaining majority, shall lie on the persons asserting that fact. Where such person becomes a partner,–

(a) his rights and liabilities as a minor continue up to the date on which he becomes a partner, but he also becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership, and

(b) his share in the property and profits of the firm shall be the share to which he was entitled as a minor.

Where he elects not to become a partner,–

(a) his rights and liabilities shall continue to be those of a minor up to the date on which he gives a public notice,

(b) his share shall not be liable for any acts of the firm done after the date of the notice, and

It may be noted that the Limited Liability Partnership Act, 2008 does not have similar provisions for minors being admitted to the benefits of an LLP.

RENUNCIATION OF CITIZENSHIP BY PARENTS

The Citizenship Act, 1955 provides that if any Indian citizen renounces his citizenship, then every minor child of that person also automatically ceases to be an Indian citizen. However, after attaining majority such minor can resume Indian citizenship by making a declaration within one year of becoming a major.

CAN MINORS MAKE REMITTANCES UNDER THE LRS?

Yes. Minors are also eligible to make remittances abroad under the RBI’s Liberalised Remittance Scheme of US$250,000. The RBI has clarified that in case of a minor, Form A2 must be signed by the minor’s natural guardian. It should be noted that the minor’s remittances would not be deducted from his parent’s individual limits.

INCOME-TAX AND MINORS

The provisions relating to clubbing of income of minors with that of their parent under s.64 of the Income-tax Act are quite well known. However, one issue which has garnered attention in recent times is that should the parents also disclose foreign assets owned by the minors in their own Return of Income? Thus, should the Schedule FA of the parent’s Income-tax Return also club disclosures for the foreign assets owned by the minor?

When it comes to minor, the Tribunal has held that only gifts received from defined relatives of the minor himself would be exempt from the purview of s.56(2)(x) of the Income-tax Act. The Mumbai ITAT in the case of ACIT vs. Lucky Pamnani, [2011] 129 ITD 489 (Mum) has held that when minors receive gifts, relationship of the donor should be with reference to the minor who was to be treated as ‘the individual’. With reference to the minor, if the donor was not a defined relative of such minor, then merely because his income is clubbed in the hands of his father, under s.64, a relative of the father does not become a relative of the minor. Accordingly, gifts received from uncle of the father were taxed in the hands of the minor since such a donor was not a relative of the minor, though he was a relative of the father.

CONCLUSION

Due care should be taken in dealing with assets / properties related to minors. A minor slip-up could have major ramifications.

BCAJ Admin

Reconciling Inconsistencies in a Document

INTRODUCTION

“To err is human” so the saying goes. Human error and mistakes could creep in even after due care and caution. Agreements / documents could be the subject matter of such mistakes. One often comes across inconsistencies in a document where the earlier part is at contradistinction to the later part. In such a scenario, how does one reconcile such discrepancies? The Supreme Court in a recent decision in the case of Bharat Sher Singh Kalsia vs. State of Bihar, Criminal Appeal No. 523 of 2024 (Special Leave Petition (CRL.) No. 6562 of 2021), Order dated 31^st January, 2024, had an occasion to consider this issue. Let us analyse the position in this respect based on this as well as other decisions.

FACTS OF BHARAT SHER (SUPRA)

A Power of Attorney was granted in respect of an immovable property for its management and maintenance. It was provided therein that the Power of Attorney holder shall pursue litigation, file a plaint after obtaining signature of the land owners / principals of the Power of Attorney. Clause 3 of the Power of Attorney entitled the Power of Attorney holder to execute any type of Deed and to receive consideration on behalf of the landowners / executors of the Power of Attorney and get such Deed registered. Clauses 3 and 11 read with Clause 5 gave full authority to the Power of Attorney holder to sell the property, get the Sale Deed registered and receive consideration. Clause 15 empowered the holder to present for registration all the sale deeds or other documents signed by the owner.

The plea of the respondents was that a perusal of the Power indicated that as per Clause 3, the Power of Attorney holder was authorised to execute any type of deed, to receive consideration in this behalf and to get the registration done thereof. Clause 11 of the Power of Attorney further made it clear that the Power of Attorney holder had the authority to sell movable or immovable property including land, livestock, trees etc. and receive payment of such sales on behalf of the land-owners / principals. However, Clause 15 of the Power of Attorney stated that the Power of Attorney holder was authorised to present for registration the sale deed(s) or other documents signed by the landowners / principals and admit execution thereof before the District Registrar or the Sub Registrar or such other officer as may have authority to register the said deeds and documents, as the case may be, and take back the same after registration. The dispute resolved over whether the Power of Attorney holder had power to sell the property or only had a limited power to register the sale documents executed by the landowners. In short, which clauses prevailed, Clauses 3 and 11 or Clause 15?

COURT’S VERDICT IN BHARAT SHER (SUPRA)

The Supreme Court held that it was required to interpret harmoniously as also logically the effect of a combined reading of the impugned three clauses. Its endeavour would, in the first instance, necessarily require the Court to render all three clauses as effective and none as otiose. In order to do so, the Court would test as to whether all the three clauses could independently be given effect to and still not be in conflict with the other clauses. It dissected the three clauses as follows:

(a) Clause 3 pertained to execution of any type of deed and receiving consideration, if any, on behalf of the land-owners / principals and to get the registration thereof carried out. Basically, this took care of any type of deed by which the Power of Attorney holder was authorised to execute and also receive consideration and get registration done on behalf of the land-owners / principals.

(b) Clause 11 of the Power of Attorney dealt specifically with regard to sale of movable or immovable property including land and receiving payments of such sales on behalf of the landowners / principals. Thus, Clauses 3 and 11 of the Power of Attorney together authorised the Power of Attorney holder to execute deeds, including of / for sale, receive consideration in this regard and proceed to registration upon accepting consideration for and on behalf of the land-owners / principals.

(c) Clause 15 of the Power of Attorney stated that the holder was authorised to present for registration the sale deeds or other documents signed by the landowners/ principals and admit execution thereof. The Apex Court held that it was in addition to Clauses 3 and 11 of the Power of Attorney and not in derogation thereof. The Power of Attorney holder had been authorised to execute any type of deed and receive consideration and get registration done, which included sale of movable/ immovable property on behalf of the land-owners/ principals. In addition, the land-owners / principals had also retained the authority that if a Sale Deed was/ had been signed by them, the very same Power of Attorney holder was also authorised to present it for registration and admit to execution before the authority concerned.

The Court observed this was not a situation where the land-owners / principals had executed a Sale Deed in favour of any third party prior to the Sale Deed executed and registered by the Power of Attorney-holder. Further, it held that if the Power of Attorney-holder had gone ahead himself and registered a different or a subsequent Sale Deed, the matter would be entirely different. There was no contradiction between Clauses 3, 11 and 15 of the Power of Attorney. To restate, Clause 15 of the Power of Attorney was an additional provision retaining authority for sale with the land-owners / principals themselves and the process whereof would also entail presentation for registration and admission of its execution by the Power of Attorney-holder. The Court opined that all three clauses were capable of being construed in such a manner that they operated in their own respective fields and were not rendered nugatory.

RECONCILIATION PRINCIPLE

The Supreme Court also reiterated the principle that states that when different clauses in a document or a Deed or a Contract cannot be reconciled, the earlier clauses would prevail over the later clauses. The Privy Council of Canada in Forbes vs. Git [1922] 1 A.C. 256 has explained this as follows:

“The principle of law to be applied may be stated in few words. If in a deed an earlier clause is followed by a later clause which destroys altogether the obligation created by the earlier clause, the later clause is to be rejected as repugnant and the earlier clause prevails. In this case the two clauses cannot be reconciled and the earlier provision in the deed prevails over the later. Thus, if A covenants to pay 100 and the deed subsequently provides that he shall not be liable under his covenant, that later provision is to be rejected as repugnant and void, for it altogether destroys the covenant. But if the later clause does not destroy but only qualifies the earlier, then the two are to be read together and effect is to be given to the intention of the parties as disclosed by the deed as a whole. …”

The above Privy Council decision has been approved by a Three-Judge Bench of the Supreme Court in Radha Sundar Dutta vs. Mohd. Jahadur Rahim, AIR 1959 SC 24. In that case, the Court held that it is a settled rule of interpretation that if there be admissible two constructions of a document, one of which will give effect to all the clauses therein while the other will render one or more of them nugatory, it is the former that should be adopted on the principle expressed in the maxim “ut res magis valeat quam pereat”. This maxim means that it is better for a thing to have an effect than for it to become void. However, where the maxim cannot be implemented, then if there is a conflict between the earlier clause and the later clauses of a document by which it is not possible to give effect to all of them, then the rule of construction was well-established that it is the earlier clause that must override the later clauses and not vice versa.

The Delhi High Court in Sunil Kumar Chandra vs. M/s Spire Techpark Pvt Ltd, 2023/DHC/000492 has held that it has been held in a catena of judgments by the Hon’ble Supreme Court that where there exists any iota of inconsistency between two provisions of a same instrument, the former clause shall prevail over the latter one. It referred to the Supreme Court’s decision Ramkishorelal vs. Kamal Narayan; 1963 Supp (2) SCR 417 wherein the Court held as follows:

“12. The golden Rule of construction, it has been said, is to ascertain the intention of the parties to the instrument after considering all the words, in their ordinary, natural sense. ….. It is clear, however, that an attempt should always be made to read the two parts of the document harmoniously, if possible; it is only when this is not possible, e.g., where an absolute title is given is in clear and unambiguous terms and the later provisions trench on the same, that the later provisions have to be held to be void.”

INFIRMITY IN CLAUSES IN A WILL

What happens if a Will suffers from such an infirmity, i.e., the Clauses in a Will are at variance with each other? The Supreme Court had an occasion to consider such a situation in Mauleshwar Mani vs. Jagdish Prasad, 2002 (2) SCC 468. In this case, the testator bequeathed all his assets and properties to his wife with the power of alienation but in a later part of the Will, he bequeathed the same also in favour of his grandsons. The Court observed that the first part of the “Will” provided that after the death of the testator or author of the Will, his wife was entitled to the entire assets and properties with the right of transfer. The second part of the will is that after the death of his wife, the grandsons would inherit the property. Here, what the Court was concerned with was whether the wife acquired an absolute estate or a limited estate under the Will. Thus, the issue before the Court was whether the subsequent bequest in favour of the grandsons was valid considering the earlier absolute interest created by the testator in favour of his wife. The Court held that the general rule of construction of a Will was that a Will had to be read in its entirety and effort should be made that no part of it was excluded or made redundant. It was the duty of the court to reconcile if there was any apparent inconsistency in a Will.

The Apex Court held that it was obvious that the testator conferred an estate by providing that the wife would be entitled to get the property with right of alienation. Where the property was given by a testator with a right of alienation, such bequeath was a conferment of an absolute estate. The Will, therefore, gave an unlimited and an absolute estate to the wife. It held that where an absolute estate was created by a Will, the clauses in the Will which were repugnant to such absolute estate could not cut down the estate; but they must be held to be invalid. It laid down the following legal principle:

(a) Where under a Will, a testator had bequeathed his absolute interest in the property in favour of his wife, any subsequent bequest which was repugnant to the first bequeath would be invalid;

(b) Where a testator had given a restricted or limited right in his property to his widow, it was open to the testator to bequeath the property after the death of his wife in the same Will.

Once the testator has given an absolute right and interest in his entire property to a person, he could not again bequeath the same property in favour of the second set of persons in the same Will. The object behind is that once an absolute right is vested in the first person, the testator cannot change the line of succession of the first person. Where a testator confers an absolute right on anyone, the subsequent bequest for the same property in favour of other persons would be repugnant to the first bequest in the Will and would be held invalid. Accordingly, it concluded that under the Will, the wife had got an absolute estate and, therefore, subsequent bequest in the same Will in favour of the grandsons was repugnant to the first bequest and, therefore, invalid.

In Madhuri Ghosh vs. Debobroto Dutta, AIR 2016 SC 5242, the Supreme Court held that the position is clear that where an absolute bequest has been made in a Will in respect of certain property to certain persons, then a subsequent bequest made qua the same property later in the same Will to other persons will be of no effect.

Interestingly, the Indian Succession Act, 1925 deals with the construction of Wills. S. 88 provides that where two clauses of gifts in a Will are irreconcilable, so that they cannot possibly stand together, the last shall prevail. The section gives an Illustration that the testator by the first clause leaves his estate to A and by the last clause leaves it to B and not to A. In this case, B will have it. In Kailvelikkal Ambunh1 (Dead) vs. H. Ganesh Bhandary, 1995 (5) SCC 444, the Court explained that a Will may contain several clauses and the latter clause may be inconsistent with the earlier clause. In such a situation, the last intention of the testator is given effect to and it is on this basis that the latter clause is held to prevail over the earlier clause. This is regulated by the well-known maxim “cum duo inter se pugnantia reperiuntur in testamento itltinium ratum est” which means that if in a Will there are two inconsistent provisions, the latter shall prevail over the earlier. Thus, s.88 is at variance with the aforesaid Supreme Court decisions.

The commentary “The Indian Succession Act”, Paruck, 11th Edition, Lexis Nexis, seeks to reconcile the dichotomy between s. 88 and the decisions and states that this section does not apply where in fact there is a conflict between the earlier and later clauses and it is not possible to give effect to all of them. Then the rule of construction is well established that it is the earlier clause that must override the later clause and not vice versa.

CONCLUSION

The old adage “better safe than sorry” would clearly be useful in all cases when drafting documents. Pay attention to inconsistencies, especially when preparing a Will. A small slip could lead to years of wasteful litigation between the beneficiaries of the Will. Similarly, when drafting contracts, any error could prove very expensive to either party.

BCAJ Admin

Direct Listing of Indian Companies On International Exchanges

INTRODUCTION

New-age Indian companies often had a grouse that they were unable to get a good valuation for certain sunrise sectors in the Indian capital markets. These companies were unable to list on foreign stock exchanges and the only option available for them was to use the ADR / GDR route where Depository Receipts were issued against the Indian shares and these Receipts were listed on stock exchanges in the USA, Singapore, Luxembourg, etc. However, this has not proved to be a very successful model.

Recognising this demand from several of India’s start-up companies, the Indian Government has now permitted Indian companies to directly list their equity shares on certain international stock exchanges. Thus, instead of issuing shares in Rupees, Indian companies can directly issue these in Dollars, Euros, etc. This has become possible due to the Gujarat International Financial Tec-City (“GIFT City”), International Financial Service Centre (IFSC). One of the most salient features of the GIFT City is that any entity set up here would be treated as a Person Resident outside India under the Foreign Exchange Management Act, 1999. Thus, while the GIFT City is physically located in India, it is for all regulatory purposes treated as a foreign territory. Let us understand how Indian companies can now directly list their securities on an international stock exchange.

ENABLING LEGISLATION

S.23(3) of the Companies Act, 2013 was amended to provide that a prescribed class of public companies may issue such class of securities and list them on permitted stock exchanges in permissible foreign jurisdictions as may be prescribed.

In 2021, the International Financial Services Centre Authority or IFSCA (the nodal regulatory authority for the GIFT City, IFSC) notified the International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021 (“the IFSCA Regulations”). These Regulations govern an initial public offer of securities by an unlisted Indian company as well as a follow-on public offer of securities by a listed Indian company and their subsequent listing on a stock exchange located within the GIFT City IFSC.

Subsequent to this amendment to the Act, the Ministry of Corporate Affairs has notified the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024.

The Ministry of Finance has consequently, notified an amendment to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 which contains the Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme (“the Scheme”). These two Rules put together contain the enabling mechanism for the direct listing of securities in permissible international exchanges.

WHO CAN LIST?

Public limited companies, whether listed or unlisted, are allowed to issue and list their shares on an international exchange. The current Rules only allow unlisted public Indian companies to list their shares on an international exchange. SEBI is in the process of issuing the operational guidelines for listed public Indian companies. Private limited companies are expressly prohibited from listing abroad.

WHAT IS THE ELIGIBILITY CRITERIA?

The Scheme provides that a public Indian company shall be eligible to issue equity shares in permissible jurisdiction, if

(a) the public Indian company, any of its promoters, promoter group or directors or selling shareholders are not debarred from accessing the capital market by the appropriate regulator;

(b) none of the promoters or directors of the public Indian company is a promoter or director of any other Indian company which is debarred from accessing the capital market by the appropriate regulator;

(d) the public Indian company is not under inspection or investigation under the provisions of the Companies Act, 2013;

(e) none of its promoters or directors is a fugitive economic offender.

WHO IS INELIGIBLE?

In addition, the Rules provide that the following companies would be ineligible:

(a) it is a section 8 company (i.e., a company operating as a charitable foundation) or it is a Nidhi company;

(b) it is a company limited by guarantee and also has share capital;

(d) it has a negative net worth (paid-up share capital + free reserves + securities premium but excluding revaluation reserve, amalgamation reserve, depreciation write-back reserve);

(e) it has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holder or any other secured creditor or it has made good such default and a period of two years has not yet elapsed;

(f) an application for winding-up / corporate insolvency resolution process is pending;

(g) it has defaulted in filing its Annual Return under the Companies Act or filing its Accounts with the RoC.

ELIGIBLE JURISDICTIONS AND EXCHANGES

As of now, direct listing is only possible in the GIFT City and on any of two international exchanges which are operating within the GIFT City ~ India International Exchange, NSE / International Exchange. It is possible that with the passage of time, more jurisdictions / exchanges would be added. Both the aforesaid exchanges are international exchanges, i.e., shares are listed in terms of foreign currencies and not in INR terms. These international exchanges operate for 20 hours a day!

MECHANISM OF OFFERING

Eligible Indian public companies can make an Initial Public Offering (IPO) or an Offer for Sale (OFS) by its shareholders and get their shares listed on the above exchanges. Similarly, listed companies can make a Follow-On Public Offering (FPO) or an OFS. Listed companies for this purpose mean a company which has listed its equity shares and / or debt instruments on Indian stock exchanges. Hence, even debt-listed companies would be treated as listed companies. It may be noted that the Scheme seems to permit even Private Companies which are debt-listed to opt for direct listing but the Companies Act permits only Public Companies.

The IFSCA Regulations provide that an issuer shall be eligible to make an initial public offer only if:

(a) the issuer has an operating revenue of at least US$ 20 million in the preceding financial year; or

(b) the issuer has an average pre-tax profit, based on consolidated audited accounts, of at least US$ 1 million during the preceding 3 financial years; or

The issue size shall not be less than USD 15 million or any other amount as may be specified by IFSCA.

In case of an offer for sale, the securities must have been held by the sellers for a period of at least 1 year prior to the date of filing of the draft offer document. Listed Indian companies may avail of a fast-track listing of their shares on the IFSC Stock Exchanges.

The issuer unlisted company must file a Prospectus in e-Form LEAP-1 within 7 days after the same has been finalised and filed with the international stock exchange. The Form will be required to be filed in the MCA-21 Registry electronically for record purposes.

The issuer company would be obliged to follow the Ind AS accounting standards.

The Indian company which issues and lists its equity shares on international exchange must also ensure compliance with other laws relating to the issuance of equity shares, including, the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992, the Depositories Act, 1996, the Foreign Exchange Management Act, 1999, the Prevention of Money-laundering Act, 2002 and the Companies Act, 2013.

FEMA RESTRICTIONS

The direct listing by the Indian companies would be treated as raising of Foreign Direct Investment (FDI) in Non-Debt Instruments by the issuing Indian company. Hence, the following conditions apply:

It cannot be in companies operating in sectors where FDI is prohibited, e.g., tobacco / gambling;
It is only up to the sectoral caps, if any, prescribed for FDI, e.g., 49% for FM Radio companies;
If issued to a holder who is from a land border country (e.g., China) with India, then his investment would be subject to prior Government Approval;
Persons resident in India cannot invest in such securities listed on the international exchange since that would be a case of round-tripping. Thus, LRS would not be possible in direct listing cases;
Indian Mutual Funds are not eligible to invest in such direct listing;
Existing Indian shareholders can make an OFS of their existing shares under the direct listing scheme;
Eligible investors would be NRIs / OCIs / FPIs, etc.;
The issue would be counted towards the foreign holding in the issuer company since it is a form of FDI;
The Indian company may or may not opt for listing on the Indian exchanges. That is a choice which has been given to the issuer. It has the flexibility of raising both INR and foreign currency-denominated capital.

PRICING OF ISSUES

In the case of an FPO / OFS by an equity-listed company, the direct issue shall be at a price, not less than the price applicable in case of a preferential issue under the SEBI (Issue of Capital and Disclosure Requirement) Regulations. However, if it is an issue by an unlisted public company, the IPO / OFS shall be determined by a book-building process as permitted by the said International Exchange and shall not be less than the fair market value under the FEMA Rules / Regulations. The FEMA Regulations specify that an issue / transfer of shares shall be at a price not less than the fair market value arrived at on an arm’s length pricing on the basis of any internationally accepted valuation methodology. Hence, methods such as DCF, Earnings Multiple, P/E Multiple, Comparable Company, Net Asset Value, etc., may be considered.

TAXATION

Any transfer of prescribed securities by a non-resident on an international exchange located in the GIFT City is not regarded as a transfer u/s. 47 for the purposes of capital gains of the Income-tax Act. For this purpose, Notification No. S.O. 986(E) [NO. 16/2020/F.NO. 370142/22/2019-TPL], DATED 5-3-2020 as amended from time to time, has notified a foreign currency-denominated equity share of a company which is listed on a recognised stock exchange located in any IFSC. Thus, the transfer of such shares by a non-resident would not be subject to capital gains tax in India.

The Indian companies paying dividends on such shares would need to withhold tax at source at rates specified in Treaties or the Act.

CONCLUSION

Direct Listing without listing in India marks an exciting chapter in India’s capital markets. Only time will tell whether this Scheme is a success or does it turn out to be an also-ran like ADRs / GDRs. However, the Government has taken the right step by framing the enabling legislation and the ball is now in the court of the Indian entrepreneurs to seize this opportunity. Maybe as a second step, the floodgates to other exchanges could be opened up. This would be one more step towards full capital convertibility of the Indian Rupee.

BCAJ Admin

Shares ~ Nominee Vs. Will: And The Winner Is……?

INTRODUCTION

Problems of inheritance and succession are inevitable especially in a country like India where many businesses are still family owned or controlled. Many 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. SEBI has made it mandatory for all investors to compulsorily opt for nomination in demat accounts or expressly opt out of the same. The deadline for the same was 31st December, 2023, and those for holders who did not nominate or opt out of nomination by 31st December, 2023, their demat account were frozen.

A question which often arises is which is superior — the Will or the nomination made by the deceased owner. While the position was quite clear that a nominee was not superior to the legal heirs / a Will, a judgment rendered in the context of shares in a company had taken a contrary view. The Supreme Court in Shakti Yezdani vs. Jayanand Jayant Salgaonkar, Civil Appeal No. 7107 of 2017, Order Dated 14th December, 2023, has settled the matter once and for all!

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 with 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 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.

The position of a nominee in a flat in a co-operative housing society was analysed by the Supreme Court in Indrani Wahi vs. Registrar of Co-operative Societies, CA NO. 4646 of 2006(SC). The Court held that the possession of the flat must be handed over by the society immediately to the nominee till such time as the succession issue (under a Will or intestate) is legally settled.

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.

FOR SHARES AND DEMAT ACCOUNTS — IS NOMINEE SUPERIOR?

S.109A of the Companies Act, 1956, was added by the Amendment Act of 1999. S.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, becomes 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 s.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 depository participant 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 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 under 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).

A TWIST IN THE TALE?

Another Single Judge of the Bombay High Court, 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.

BOMBAY HIGH COURT DIVISION BENCH VERDICT

The Single Judge’s decision in Jayanand Jayant Salgaonkar vs. Jayashree Jayant Salgaonkar was appealed before the Division Bench of the Bombay High Court in Appeal No. 313/2015. The Division Bench observed that the object and provisions of the Companies Act were neither to provide a mode of succession nor to deal with succession at all. The Division Bench felt that the consistent view in the various judgments of the Supreme Court and the Bombay High Court must be followed and those did not warrant any departure. Accordingly, it declared that the nominee of a holder of a share or securities was not entitled to the beneficial ownership of the shares or securities which were the subject matter of nomination to the exclusion of all other persons who are entitled to inherit the estates of the holders as per the law of succession. It concluded that a bequest made in a Will executed in accordance with the Indian Succession Act, 1925 in respect of shares or securities of the deceased, superseded the nomination made under the provision of S. 109A of Companies Act and Bye-law 9.11 framed under the Depositories Act, 1996.

SUPREME COURT’S VERDICT

The Apex Court in its recent decision in the case of Shakti Yezdani (supra) has upheld the verdict of the Division Bench of the Bombay High Court. It held that reading the provision of nomination within the Companies Act with the broadest possible contours, it was not possible to say that the same dealt with the matter of succession in any manner. It referred to various decisions (cited above) which had dealt with the precedence of a Will over nomination in the context of various assets such as, bank account, insurance policy, provident fund, etc. It concluded that in all cases, the usual mode of succession was not to be impacted by such a nomination. The legal heirs therefore had not been excluded by virtue of nomination.

Importantly, the Court concluded that the presence of the three elements i.e., the term ‘vest’, the provision excluding others as well as a non-obstante clause under S.109A of the Companies Act, 1956 did not persuade the Court to hold any different view. The concept of nomination, if interpreted differently than was understood, would cause major ramifications and create a significant impact on disposition of properties left behind by deceased nominators. It referred to the use of the term ‘vest’ and held (after referring to various decisions) that it had a variable meaning and the mere use of the word ‘vest’ in a statute did not confer absolute title over the subject matter. Byelaw 9.11.1 under the Depositories Act, 1996 provided for ‘vesting’ of the securities held in the demat account unto the nominee on the death of the beneficial owner. The Court concluded that the vesting of the shares/securities in the nominee under the Companies Act, 1956 and the Depositories Act, 1996 was only for a limited purpose, i.e., to enable the Company to deal with the securities thereof, in the immediate aftermath of the shareholder’s death and to avoid uncertainty as to the holder of the securities.

It next dealt with the use of the non-obstante clause in s.109 of the Companies Act, 1956 (similar wordings are found in s.72 of the Companies Act, 2013) and held that use of the non-obstante clause, served a singular purpose of allowing the company to vest the shares upon the nominee to the exclusion of any other person, for the purpose of discharging of its liability against diverse claims by the legal heirs of the deceased shareholder. This arrangement was until the legal heirs had settled the affairs of the testator and were ready to register the transmission of shares, by due process of succession law.

It also held that the Companies Act does not lay down a line of succession. The ‘statutory testament’ by way of nomination was not subject to the same rigours as was applicable to the formation and validity of a Will under the succession laws. The Companies Act did not deal with succession nor did it override the laws of succession. It was beyond the scope of the company’s affairs to facilitate succession planning of the shareholder. In case of a Will, it was upon the administrator or executor under the Indian Succession Act, 1925, or in case of intestate succession, the laws of succession to determine the line of succession. The Court observed that the object of introduction of nomination facilities for shares was only to provide an impetus to the investment climate and ease the cumbersome process of obtaining various letters of succession, from different authorities upon the shareholder’s death.

The Court’s final verdict read as follows:

“Consistent interpretation is given by courts on the question of nomination, i.e., upon the holder’s death, the nominee would not get an absolute title to the subject matter of nomination, and those would apply to the Companies Act, 1956 (pari materia provisions in Companies Act, 2013) and the Depositories Act, 1996 as well.”

In following earlier decisions on nomination, the Court invoked the doctrine of stare decisis et non quieta movere, which means “to stand by decisions and not to disturb what is settled”. Thus, the line of judicial thinking on nomination in the case of shares / demat account was the same as earlier Court judgements on other asset classes.

EPILOGUE

The Court has thankfully prevented a major upheaval in estate planning, as is understood. The Court made a very important and telling observation that an individual dealing with estate planning or succession laws understood nomination to take effect in a particular manner and expected the implication to be no different for devolution of securities per se. Therefore, an interpretation otherwise would inevitably lead to confusion and possibly complexities, in the succession process, something that ought to be eschewed.

BCAJ Admin

Effect of Unregistered Documents

INTRODUCTION

A transfer of a movable property can be affected by mere delivery and possession. However, any transfer of interest in an immovable property requires an instrument which is duly registered. What happens when such an instrument which needs to be registered is not registered? Can it transfer any interest or can it be used for any other purpose? Can it attract income-tax liability on the transferor? What would be the position under the Stamp Act on such unregistered instruments? These are some of the very interesting questions in this respect which have been answered by different decisions of the Supreme Court and High Courts. This article analyses some of the key principles and pronouncements on this very important facet of conveyancing law.

REGISTRATION ACT

The Registration Act, 1908 (“the Act”) provides for the registration of various documents. Under the Act, certain documents are subject to compulsory registration while for certain documents registration is optional. Under the Act, instruments which create, declare, assign, limit or extinguish any right, title or interest (vested or contingent) in any immovable property, exceeding ₹100 in value, need to be compulsorily registered. Similarly, leases of immovable properties which are made on a yearly basis exceeding a term of one year or reserving a yearly rent.

Documents containing contracts to transfer for consideration any immovable property in Part Performance of a Contract u/s. 53A of the Transfer of Property Act, 1882, which was executed on or after 24th September, 2001 must be compulsorily registered. It has been further provided that if such documents are not registered, then they shall not have any effect for the purposes of s. 53A of the Transfer of Property Act, 1882. A corresponding amendment has also been made to the Transfer of Property Act. In this respect, the decision in Rambhau Namdeo Gajre vs. Narayan Bapuji Dhotra, 2004 (8) SCC 614 is relevant wherein it held:

“Protection provided under Section 53A of the Act to the proposed transferee is a shield only against the transferor. It disentitles the transferor from disturbing the possession of the proposed transferee who is put in possession in pursuance to such an agreement. It has nothing to do with the ownership of the proposed transferor who remains full owner of the property till it is legally conveyed by executing a registered sale deed in favour of the transferee. Such a right to protect possession against the proposed vendor cannot be pressed in service against a third party.”

In addition to the Registration Act which specifies registration of certain documents, some other Statutes also provide for registration of documents pertaining to immovable properties. For instance, s. 54 of the Transfer of Property Act, 1882 provides that sale is a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised. Such a transfer, in the case of tangible immovable property of the value of ₹100 and upwards, or in the case of a reversion or other intangible thing, can be made only by a registered instrument. It further provides that a contract for the sale of immovable property is a contract that a sale of such property shall take place on terms settled between the parties and it does not, of itself, create any interest in or charge on such property. In Narandas Karsondas vs. S.A. Kamtam (1977) 3 SCC 247, the Supreme Court observed:

“A contract of sale does not of itself create any interest in, or charge on, the property. This is expressly declared in Section 54 of the Transfer of Property Act. See Rambaran Prosad v. Ram Mohit Hazra [1967] 1 SCR 293. The fiduciary character of the personal obligation created by a contract for sale is recognised in Section 3 of the Specific Relief Act, 1963, and in Section 91 of the Trusts Act. The personal obligation created by a contract of sale is described in Section 40 of the Transfer of Property Act as an obligation arising out of contract and annexed to the ownership of property, but not amounting to an interest or easement therein.”

U/s. 107 of the Transfer of Property Act, 1882, a lease of immovable property from year to year for any term exceeding one year or reserving a yearly rent can be made only by way of a registered instrument. It further provides that all other leases of immovable property may be made by a registered instrument or by an oral agreement accompanied by delivery of possession.

EFFECT OF NON-REGISTRATION

U/s. 49 of the Act, any document which is required to be registered and is not registered shall not affect any immovable property, comprised in the document, or be received as evidence of any transaction affecting such property. S. 50 provides that registered documents shall in respect of the property they comprise, take effect against every unregistered document relating to the same property.

However, an unregistered document pertaining to immovable property and which is required to be compulsorily registered either under the Act or under the Transfer of Property Act shall still be admitted as evidence in a suit for specific performance or as evidence for any collateral transaction which does not require a registered instrument.

SC IN SURAJ LAMPS

The Supreme Court’s decision in the case of Suraj Lamp & Industries (P) Ltd. vs. State of Haryana, (2012) 1 SCC is of great significance in this respect. In that decision, the issue was the legality of the transfer of immovable property in the National Capital Region by executing an unregistered Agreement of Sale + an unregistered General Power of Attorney from the seller to the buyer and a Will executed by the Seller in favour of the buyer bequeathing the property to the buyer as a safeguard against the consequences of the death of the vendor before the transfer. This hybrid system was devised as an alternative to obtaining a registered and stamped conveyance for the property. The Court was faced with the validity of such an arrangement.

Ill-effects – The Court frowned on such hybrid arrangements and held that its consequences were disturbing and far-reaching, adversely affecting the economy, civil society and law and order. Firstly, it enabled large scale evasion of income tax, wealth tax, stamp duty and registration fees thereby denying the benefit of such revenue to the government and the public. Secondly, such transactions enabled persons with undisclosed wealth / income to invest their black money and also earn profit / income, thereby encouraging the circulation of black money and corruption. These transactions also had disastrous collateral effects. For example, when the market value increased, many vendors (who effected power of attorney sales without registration) were tempted to resell the property taking advantage of the fact that there was no registered instrument or record in any public office thereby cheating the purchaser. Such power of attorney sales indirectly led to the growth of the real estate mafia and the criminalisation of real estate transactions.

Agreement to Sale – The Supreme Court next considered the effect of an unregistered agreement to sell. It held that a transfer of immovable property by way of sale could only be by a deed of conveyance (sale deed). In the absence of a deed of conveyance (duly stamped and registered as required by law), no right, title or interest in an immoveable property could be transferred. Any contract of sale (agreement to sell) which was not registered would fall short of the requirements of sections 54 and 55 of the Transfer of Property Act and would not confer any title nor transfer any interest in an immovable property (except to the limited right granted under section 53A of that Act). According to that Act, an agreement of sale, whether with possession or without possession, was not a conveyance. Section 54 of the TP Act enacted that a sale of immovable property could only be made by a registered instrument and an agreement of sale did not create any interest or charge on its subject matter.

Power of Attorney – It then considered the scope of a Power of Attorney and held that a power of attorney was not an instrument of transfer in regard to any right, title or interest in an immovable property. The power of attorney was the creation of an agency whereby the grantor authorised the grantee to do the acts specified therein, on behalf of the grantor, which when executed were binding on the grantor as if done by him.

Will – Lastly, it is considered the essence of a Will. According to the Court, a Will was the testament of the testator. It was a posthumous disposition of the estate of the testator directing the distribution of his estate upon his death. It was not a transfer inter vivos, i.e., between living persons. The two essential characteristics of a Will were that it was intended to come into effect only after the death of the testator and was revocable at any time during the lifetime of the testator. So long as the testator was alive, a Will was not worth the paper on which it was written, as the testator could at any time revoke it. In the case under review, the seller was an individual and the buyer was a company. The seller had executed a Will in favour of the buyer. The Supreme Court observed:

“Execution of a Will by an individual bequeathing an immovable property to a company, is also incongruous and absurd.”

It is respectfully submitted that the above statement of the Court made in the context of the case needs reconsideration. There is no bar as to who can be a beneficiary under a Will. In this context the decision of the Supreme Court in Krishna Kumar Birla vs. Rajendra Singh Lodha, (2008) 4 SCC 300, is relevant. It was concerned with a Will being affected in favour of a `stranger’. It held that why an owner of the property executed a Will in favour of another was a matter of his / her choice. She had a right to do so. The court was only concerned with the genuineness of the Will. If it was found to be valid, no further question as to why she did so would be completely out of its domain. It concluded that a Will may be executed even for the benefit of anyone including animals.

SUBSEQUENT CASES

The above decision of Suraj Lamps has been endorsed by several subsequent Supreme Court decisions, including the latest one in Shakeel Ahmed vs. Syed Akhlaq Hussain, CA 1598/2023, Order dated 1st November, 2023, which it has again held that the law is well settled that no right, title or interest in an immovable property can be conferred without a registered document. It also held that the decision of Suraj Lamps is retrospective in nature since it emanates from various Statutes and earlier judgments on the same point. Hence, the principles laid down therein applied even to unregistered agreements to sale executed prior to the date of the decision, i.e., before 2009.

On facts similar to those found in Suraj Lamps, the Karnataka High Court in Smt. K. Shashikala vs. ACIT, [2023] 147 taxmann.com 315 (Kar)has held that in order to attract Section 2(47)(v) of the IT Act, it is absolutely essential that the sale agreement should be a registered agreement to sale. In the absence of the same, there was no transfer under the Income-tax Act by the land owner in favour of the buyer and hence, there was no liability to capital gains tax.

UNREGISTERED JDA

In the case of CIT vs. Balbir Singh Maini, [2017] 86 taxmann.com 94 (SC),the Supreme Court considered whether capital gains arose to the land owner by executing an unregistered joint development agreement (JDA). The Court negated this argument and analysed the provisions of s. 2(47) of the Income-tax Act along with s.53A of the Transfer of Property Act. It held that it was well-settled law that the protection provided under Section 53A was only a shield, and could only be resorted to as a right of defence. An agreement of sale which fulfilled the ingredients of Section 53A was not required to be executed through a registered instrument. The Court held that this position was changed by the Registration and Other Related Laws (Amendment) Act, 2001. Amendments were made simultaneously in Section 53A of the Transfer of Property Act and Sections 17 and 49 of the Indian Registration Act. By the aforesaid amendment, the words “the contract, though required to be registered, has not been registered, or” in Section 53A of the 1882 Act were omitted. Simultaneously, Sections 17 and 49 of the 1908 Act were amended, clarifying that unless the document containing the contract to transfer for consideration any immovable property (for the purpose of Section 53A of the 1882 Act) was registered, it shall not have any effect in law, other than being received as evidence of a contract in a suit for specific performance or as evidence of any collateral transaction not required to be effected by a registered instrument.

The Supreme Court held that the effect of the aforesaid amendment was that, on and after the commencement of the Amendment Act of 2001, if an agreement, like the JDA, was not registered, then it had no effect in law for the purposes of Section 53A. In short, there was no agreement in the eyes of law which could be enforced under Section 53A of the Transfer of Property Act. Thus, in order to qualify as a “transfer” of a capital asset under Section 2(47)(v) of the Act, there must be a “contract” which can be enforced in law under Section 53A of the Transfer of Property Act. A reading of Section 17(1A) and Section 49 of the Registration Act showed that in the eyes of the law, there was no contract which could be taken cognizance of, for the purpose specified in Section 53A. Hence, it concluded that there was no contract in the eyes of law in force under Section 53A after 2001 unless the said contract was registered. This being the case, and it being clear that the said JDA was never registered, since the JDA had no efficacy in the eyes of the law, no “transfer” under the Income-tax Act could be said to have taken place under the JDA.

POSITION UNDER MAHARASHTRA STAMP ACT

It may be noted that even though the legal position is as stated above, the Maharashtra Stamp Act, 1958 has amended the definition of conveyance in Article 25 of Schedule I to the Stamp Act. It provides that in the case of an agreement to sell immovable property, where the possession of any immovable property was transferred or agreed to be transferred to the purchaser before the execution, or at the time of execution, or after the execution of, such agreement, then such Agreement to Sell is deemed to be a conveyance, and stamp duty thereon shall be leviable accordingly. Hence, the net effect of this is that in the State of Maharashtra, an Agreement to Sell is stamped as if it were a conveyance.

Based on this feature in the Stamp Act, a question arose whether such an agreement changed the legal position in Maharashtra. The Bombay High Court in Naginbhai P. Desai vs. Taraben A. Sheth, 2003 AIR(Bom.) 192 answered the question in the negative. The Court held that Section 54 of the Transfer of Property Act specifically provided that an Agreement for Sale by itself did not create any interest in or charge on the property agreed to be sold. There was no transfer of any interest in the property. The fiction created by Explanation I to Article 25 of the Bombay Stamp Act by which the agreement for sale was to be treated conveyance was limited only for the purposes of the Stamp Act and for no other purpose.

USE FOR COLLATERAL PURPOSES

The Supreme Court in K.B. Saha and Sons P Ltd vs. Development Consultant Ltd, (2008) 8 SCC 564 has laid down how an unregistered document can be considered for collateral purposes. It could be used as evidence of collateral purpose as provided in s. 49 of the Registration Act. A collateral transaction must be independent of, or divisible from, the transaction to effect which the law required registration. A collateral transaction must be a transaction, not itself required to be effected by a registered document, that is, a transaction creating, etc. any right, title or interest in immovable property.

In M/s Paul Rubber Industries P Ltd vs. Amit Chand Mitra, CA No. 1598/2023,the Supreme Court held that the determination of the nature and character of a lease could not be treated as collateral under an unregistered lease deed since that constituted the primary dispute and hence the Court was excluded by law from examining the unregistered deed for that purpose.

It has been held in Ameer Minhaj vs. Dierdre Elizabeth (Wright) Issar,(2018) 7 SCC 639, that a contract to transfer the right, title or interest in an immovable property for consideration is required to be registered if the party wants to rely on the same for the purposes of Section 53A of the Transfer of Property Act to protect its possession over the stated property. However, when an unregistered sale deed is tendered in evidence, not as evidence of a completed sale, but as proof of an oral agreement of sale, then such a deed can be received as evidence. However, an endorsement needs to be made that it is received only as evidence of an oral agreement of sale. The Court held that the document is received as evidence of a contract in a suit for specific performance and nothing more.

In Balram Singh vs. Kelo Devi, CA 6733/2022, the Supreme Court was considering a question of the use of an unregistered Agreement to Sale for collateral purposes. It had to decide whether a decree for a permanent injunction could be passed on the basis of such an agreement which restrained the defendant from interfering with her possession. The Court held that such an unregistered document / agreement to sell was not admissible as evidence. The Supreme Court disallowed the permanent injunction. It held that being conscious of the fact that the plaintiff might not succeed in getting the relief of specific performance for such an unregistered Agreement to Sale, the plaintiff filed a simple suit for permanent injunction. While it was true that in a given case, an unregistered document could be used and/or considered for collateral purposes, but the plaintiff could not get the relief indirectly which otherwise he cannot get in a suit for substantive relief, namely, the relief for specific performance. Therefore, the Court held that the plaintiff could not get the relief even for a permanent injunction on the basis of such an unregistered document / agreement to sell.

It appears that this decision of Balram Singh is somewhat of a variance to the above-mentioned decision in the case of Ameer Minhaj. In Ameer Minhaj’s case, the Court allowed an unregistered contract as evidence in a suit for specific performance whereas in this case, the Court made an observation that the plaintiff would not succeed in getting the relief of specific performance for such an unregistered contract.

EPILOGUE

As would be evident from the above discussion, an unregistered document offers very little protection. Registering a document offers a “notice to the entire world” regarding the execution of the document. Registration also leads to revenue in the form of stamp duty and helps curb undervalued transactions in immovable properties.

BCAJ Admin

IBC: Tax or Creditors – Who Wins?

INTRODUCTION

One of the issues which has gained prominence under the Under the Insolvency & Bankruptcy Code, 2016 (“the Code”) is that in case of a company undergoing a Corporate Insolvency Resolution Process (“CIRP”), do the tax dues have priority over the secured lenders / creditors? In other words, would the direct and indirect tax claims get paid off before the secured creditors?

The general legal principle (prior to the enactment of the Code) in this respect has been laid down by various Supreme Court decisions, such as, Union of India vs. SICOM Ltd, [2009] 233 ELT 433 (SC) which was in the context of priority of Central Excise dues over those of a financial creditor. It held that the rights of the Crown to recover its debt would prevail over the right of a subject. Crown debt meant the debts due to the State which entitled the Crown to claim priority before all other creditors. Such creditors, however, were held to mean only unsecured creditors.

This issue has gained more prominence because of a Supreme Court decision delivered in 2022. The Supreme Court recently had an occasion to revisit its earlier decision and it upheld the earlier decision.The answer to the above question would depend upon the manner in which the tax Statute in question is worded. Let us understand the position in this respect.

WATERFALL MECHANISM AND THE CODE

At the outset, it must be understood that section 53 of the Code provides for a waterfall mechanism for the mode and manner of distribution of the proceeds of the sale of the assets of a Corporate Debtor. It starts with a non-obstante clause which overrides anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force. The mechanism is as follows:

(a) the insolvency resolution process costs and the liquidation costs paid in full;

(b) the following debts which shall rank equally between and among the following-

(i) workmen’s dues for the period of 24 months preceding the liquidation commencement date; and

(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security;

(c) wages and any unpaid dues owed to employees other than workmen for the period of 12 months preceding the liquidation commencement date;

(d) financial debts owed to unsecured creditors;

(e) the following dues which shall rank equally between:

(i) any amount due to the Central Government and the State Government in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

(f) any remaining debts and dues;

(g) preference shareholders, if any; and

(h) equity shareholders or partners, as the case may be.

Thus, as is evident from the above section, secured creditors have a priority in being repaid as compared to unsecured creditors.

Secured creditor is defined to mean a creditor in favour of whom security interest is created. Security interest is defined in an exhaustive manner to mean right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person.

In this respect it should be noted that section 238 of the Code contains a non-obstante clause which states that the provisions of the Code shall have an effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. The Supreme Court in PCIT vs. Monnet Ispat & Energy Ltd., [2019] 107 taxmann.com 481 (SC) has categorically held that:

“Given Section 238 of the Insolvency and Bankruptcy Code, 2016, it is obvious that the Code will override anything inconsistent contained in any other enactment, including the Income-Tax Act.”

SC’S DECISION IN RAINBOW PAPERS

InState Tax Officer vs. Rainbow Papers Ltd, [2022] 142 taxmann.com 157 (SC),a two-Judge Bench of the Supreme Court was faced with the question whether VAT / CST dues under the Gujarat Value Added Tax Act, 2003 could be treated as dues of a secured creditor? Section 48 of this Act reads as follows:

“48. Tax to be first charge on property— Notwithstanding anything to the contrary contained in any law for the time being in force, any amount payable by a dealer or any other person on account of tax, interest or penalty for which he is liable to pay to the Government shall be a first charge on the property of such dealer, or as the case maybe, such person.”

Based on the above statutory charge in terms of section 48 of the Gujarat VAT Act, the Apex Court concluded that the claim of the Tax Department of the State, squarely fell within the definition of “Security Interest” under the Code and the State became a secured creditor under the Code. Such security interest could be created by the operation of law. The definition of a secured creditor in the IBC did not exclude any Government or Governmental Authority. It held that it was not the case that section 48 of the Act prevailed over section 53 of the Code. Rather, it was the case that the State fell within the purview of “Secured Creditor”. Section 48 of the Act was not contrary to or inconsistent with any provisions of the Code. Under s.53(1)(b)(ii), the debts owed to a secured creditor, which would include the State under the GVAT Act, were to rank equally with other specified debts including debts on account of the workman’s dues for a period of 24 months preceding the liquidation commencement date.

SUBSEQUENT CONTRARY SC VERDICT IN PASCHIMANCHAL

A two-Judge Bench of the Supreme Court in Paschimanchal Vidyut Vitran Nigam Limited vs. Raman Ispat Private Limited, n C.A. No. 7976 of 2019, Order dated 17th July, 2023 observed that the decision in Rainbow Papers (supra) did not notice the ‘waterfall mechanism’ under section 53 of the Code and the provision had not been adverted to or extracted in the judgment. Furthermore, Rainbow Papers (supra) was in the context of a resolution process and not during liquidation. It observed that the dues payable to the government are placed much below those of secured creditors and even unsecured and operational creditors. This design was either not brought to the notice of the court in Rainbow Papers (supra) or was missed altogether. In any event, the judgment had not taken note of the provisions of the IBC which treat the dues payable to secured creditors at a higher footing than dues payable to the Central or State Government.

SC’S REVIEW PETITION DECISION

The above decision of Rainbow Papers (supra)has created several hurdles for secured creditors of companies undergoing resolution. Many secured lenders are afraid that there would not be anything left for them if the Government also ranks as a secured creditor along with them. Accordingly, many petitioners, strengthened by the above-mentioned verdict inPaschmianchal (supra), filed a Review Petition before the Supreme Court. The judgment in the same was delivered by a two-Judge Bench of the Apex Court in the case of Sanjay Kumar Agarwal vs. State Tax Officer, RP(Civil) No. 1620 /2023 Order dated 31st October, 2023. The Court refused to review the Petitions since it was a co-ordinate bench and even otherwise a well-considered judgment could not fall within the ambit of a Review Petition.

PRINCIPLES OF REVIEW

To refresh, a review petition could be filed before the Supreme Court since the power to review its own judgment has been enshrined on the Court under Article 137 of the Constitution. The Supreme Court in Sanjay Kumar (supra) laid down the following important principles which would govern a review of an earlier decision:

(i) A judgment is open to review inter alia if there is a mistake or an error apparent on the face of the record – Parsion Devi and Others vs. Sumitri Devi and Others, (1997) 8 SCC 715.

(ii) A judgment pronounced by the Court is final, and departure from that principle is justified only when circumstances of a substantial and compelling character make it necessary to do so – Sajjan Singh and Ors. vs. State of Rajasthan and Ors., AIR 1965 SC 845.

(iii) An error which is not self-evident and has to be detected by a process of reasoning, can hardly be said to be an error apparent on the face of record justifying the court to exercise its power of review – Shanti Conductors Private Limited vs. Assam State Electricity Board and Others, (2020) 2 SCC 677.

(iv) In exercise of the jurisdiction under Order 47 Rule 1 CPC, it is not permissible for an erroneous decision to be “reheard and corrected” – Shri Ram Sahu (Dead) Through Legal Representatives and Others vs. Vinod Kumar Rawat and Others, (2021) 13 SCC 1.

(v) A review petition has a limited purpose and cannot be allowed to be “an appeal in disguise” – Parison Devi (supra).

(vi) Under the guise of review, the petitioner cannot be permitted to reagitate and reargue the questions which have already been addressed and decided – Shanti Conductors (supra).

(vii) An error on the face of record must be such an error which, mere looking at the record should strike and it should not require any long-drawn process of reasoning on the points where there may conceivably be two opinions – Arun Dev Upadhyaya vs. Integrated Sales Service Limited & Another, 2023 (8) SCC 11.

(viii) Even the change in law or subsequent decision/ judgment of a co-ordinate or larger Bench by itself cannot be regarded as a ground for review – Beghar Foundation vs. Justice K.S. Puttaswamy (Retired) and Others, (2021) 3 SCC 1.

The above principles governing a review petition have been explained very succinctly and precisely by the Supreme Court. They would be useful in all cases for deciding whether or not a review could be filed.

PRINCIPLES OF JUDICIAL PROPRIETY

The Supreme Court inSanjay Kumar (supra)refused to entertain the review petition on grounds of judicial propriety which demands respect for the order passed by a Bench of coordinate strength. It referred to important cases on this point, such as, Jai Sri Sahu vs. Rajdewan Dubey and Others, AIR 1962 SC 83; Mamleshwar Prasad and Another vs. Kanhaiya Lal (Dead) Through L. Rs, (1975) 2 SCC 232; Sant Lal Gupta and Others vs. Modern Cooperative Group Housing Society Limited and Others, (2010) 13 SCC 336and held as follows:

a) One co-ordinate Bench could not comment upon the discretion exercised or judgment rendered by another co-ordinate Bench of the same strength.

b) If a Bench did not accept as correct the decision on a question of law of another Bench of equal strength, the only proper course to adopt would be to refer the matter to the larger Bench, for authoritative decision, otherwise the law would be thrown into the state of uncertainty by reason of conflicting decisions.

c) Certainty of the law, consistency of rulings and comity of courts all flowered from this principle.

d) The rule of precedent was binding for the reason that there was a desire to secure uniformity and certainty in law. Thus, in judicial administration precedents which enunciated the rules of law formed the foundation of the administration of justice under our system. Therefore, it was always insisted that the decision of a coordinate Bench must be followed.

RAINBOW PAPERS CORRECT ON MERITS

The Supreme Court further held that even on merits, the decision inRainbow Papers (supra)was correct. The plea that the court in the impugned decision had failed to consider the waterfall mechanism as contained in section 53 and failed to consider other provisions of the Code, were factually incorrect. The Court in the impugned judgment had categorically reproduced and referred to section 53 and other provisions of the Code. After considering the Waterfall mechanism as contemplated in section 53 and other provisions of the Code for the purpose of deciding as to whether section 53 IBC would override section 48 of the GVAT Act, it decided in favour of the State Government. Thus, the Court in Sanjay Kumar (supra) dismissed the review petitions.

POSITION BASED ON THE ABOVE VERDICTS

To apply the ratio laid down in Rainbow Papers, one would have to ascertain the exact nature of the wordings in the impugned tax statute. If they are of the type found in section 48 of the GVAT Act, then the Government would be treated as a secured creditor, and would rank pari passu with other secured lenders / creditors. Wordings similar to wordings of section 48 of the GVAT Act are found in the Maharashtra Value Added Tax Act, 2002.

However, what happens when the wordings of the tax statute are not so explicit? In that event, it is submitted that the Government would not be considered as a secured creditor. The decision in Rainbow Papers was based upon specific wordings found in section 48 of the GVAT Act which provided that the tax dues “shall be a first charge on the property” of such dealer. It is not a blanket verdict which holds that for all tax dues, the government is a secured creditor. Prior to the introduction of the Code, this was also the position as laid down by the Supreme Court in Dena Bank vs. Bhikhabhai Prabhudas Parekh & Co., (2000) 5 SCC 694, wherein it held that the Crown’s preferential right to recovery of debts over other creditors was confined to ordinary or unsecured creditors. The common law of England or the principles of equity and good conscience (as applicable to India) did not accord the Crown a preferential right for recovery of its debts over a mortgagee or pledgee of goods or a secured creditor.

A very old decision in M/s. Builders Supply Corporation vs. Union of India, AIR 1965 SC 1061, rendered under the Income-tax Act, 1922 is also relevant. Section 46(2) of that Act enabled the Income Tax Officer to forward to the Collector a certificate specifying the amount of arrears due from an assessee and requiring the Collector, on receipt of such certificate, to proceed to recover from the assessee in question the amount specified as if it were an arrear of land revenue. The Supreme Court held that merely on the basis of this provision it could not be construed that section 46 dealt with or provided for the principal of priority of tax dues. The provision could not be said to convert arrears of tax into arrears of land revenue either; all that it purported to do was to indicate that after receiving the certificate from the Income-tax Officer, the Collector had to proceed to recover the arrears in question as if the said arrears were arrears of land revenue.

Let us examine the position under some important tax statutes:

(a) Income-tax dues– The Income-tax Act, does not contain any such wordings of the nature found under section 48 of the GVAT Act. Hence, it is submitted that the income-tax officer would not be a secured creditor of the corporate debtor. He would rank much lower as per the waterfall mechanism. The decisions in the case of TRO vs. Punjab and Sing Bank, 161 ITR 220 (Del) / Suraj Prasad Gupta vs. Chartered Bank, 83 ITR 494 (All)support the principle that in the absence of any specific statutory provision, income-tax dues cannot defeat the rights of any secured creditor. In fact, section 178(6) of the Income-tax Act, was specifically amended to provide that the provisions pertaining to the liability of a company in liquidation would override all laws other than the provisions of the Code.

The decision of the Delhi ITAT in ACIT vs. ABW Infrastructure Ltd, I.T.A. No. 2861/DEL/2018 (A.Y 2008-09)also states that it is well settled now that the Code has an overriding effect on all Acts including Income Tax Act which has been specifically provided under section 178(6). The Delhi High Court in Tata Steel Ltd vs. DCIT, WP(C) 13188/2018 Order dated 31st October, 2023, has also held that the Code overrides the provisions of the Income-tax Act to the extent that the latter is inconsistent with the provisions of the former. Section 238 of the Code, contains a non-obstante clause which makes this abundantly clear. It concluded that the Code was a special enactment, dealing with aspects concerning insolvency and, therefore, it would prevail over the provisions of the Income-tax Act 1961.

The NCLAT in Om Prakash Agrawal vs. CCIT, [2021] 124 taxmann.com 305 (NCL-AT) held that the priority was different for Government dues under s.53(1)(e) of the Code and under section 178 of the Income-tax Act. Both section 178(6) of the Act and section 53 of the Code start with non-obstante clause, and therefore, the legislature in its wisdom to give effect to the scheme of the Code, amended section 178(6). By virtue of the amendment the whole of section 178 had no application to the liquidation proceedings initiated under the Code. The matter pertained to the recovery of TDS (under section 194-IA) dues from a company in liquidation. The NCLAT held that as per section 194-IA of the Income-tax Act, 1% TDS was recovered on priority to other creditors of the transferor, whereas s.53(1)(e) in its waterfall mechanism provided that the Government dues came 5th in order of priority. Thus, with regard to recovery of the Government dues (including income tax) from a company-in-liquidation under IBC, there was an inconsistency between section 194-IA and section 53(1)(e). Therefore, by virtue of section 238, section 53(1)(e) had an overriding effect on the provisions of section 194-IA. Even otherwise section 53 started with a non-obstante clause, whereas section 194-IA, did not start with a non-obstante clause, and it would necessarily be subject to the overriding effect of the Code.

(b) GST dues – The Central Goods and Services Tax Act contains an express provision to the contrary of the type found in the VAT Acts referred to above. It contains a non-obstante clause which states that any amount payable by a taxable person on account of GST would be a first charge on the property of such person. This provision would apply notwithstanding anything to the contrary in any other law except as otherwise provided in the Insolvency & Bankruptcy Code, 2016. Thus, the GST dues would not override the IBC Code.

CONCLUSION

One feels that the provisions of the Code are explicitly clear in as much as it overrides all other Statutes. In the absence of specific wordings of the type found in the State VAT Acts, it would be very difficult to consider the Revenue Department as a secured creditor along with other secured lenders. In spite of that, there have been several cases where the Revenue Department, relying on the decision in Rainbow Papers, is petitioning to be treated as a secured creditor. This is only increasing the cases of litigation and causing more problemsin the corporate resolution process. Some recent press reports indicate that the Government is considering a Notification which would clarify that the Revenuedoes not ipso facto become a secured creditor in all insolvency cases before the NCLT under the Code. It would depend upon the wordings of the statute in each and every case!

BCAJ Admin

Genuineness of A Will: Supreme Court Lays Down Guidelines

INTRODUCTION

A probate means a copy of the Will certified by the seal of a Court. A probate of a Will establishes the genuineness and finality of a Will and validates all the acts of the executors. It conclusively proves the validity of the Will, and after a probate has been granted no claim can be raised about the genuineness or otherwise of the Will.

The most important question in relation to any Will, irrespective of whether a probate is required, is whether the Will is genuine. If a Will is forged / fraudulent, then it does not transmit the estate of the deceased to the beneficiaries named in the Will. The issue of determining the authenticity of a Will has been one which has been a perennial source of litigation. Several judgments of the Supreme Court have shed light on this issue. The Supreme Court’s decision in the case of Meena Pradhan vs. Kamla Pradhan, CA No. 3351/2014 Order dated 21st September, 2023, has laid down the principles which the Courts should consider in this respect.

TESTS LAID DOWN BY THE SC

In the above-mentioned decision on Meena Pradhan vs. Kamla Pradhan, the Supreme Court laid down 9 important tests to determine the validity of a Will. It held that broadly it has to be proved that (a) the testator signed the Will out of his own free will, (b) at the time of execution he had a sound state of mind, (c) he was aware of the contents thereof and (d) the Will was not executed under any suspicious circumstances. The Navratna Tests of the Apex Court are explained below:

TEST-1: EXECUTED BY TESTATOR

The court has to consider two aspects: firstly, that the Will is executed by the testator, and secondly, that it was the last Will executed by him. The Court held that it is not required to be proved with mathematical accuracy, but the test of satisfaction of the prudent mind has to be applied. A Testator is the person who makes the Will. He is the person whose property is to be disposed of after his death in accordance with the directions specified under the Will. The Indian Succession Act, 1925, governs the making of Wills and lays down who can be an Executor of a Will. The following persons can make a Will:

(a) Any major person who is of sound mind;

(b) An ordinarily insane person can make a Will when he is sane / of sound mind;

(c) A person who is intoxicated or who does not understand what he is doing cannot make a Will in that state, e.g., a Will made by a person who is heavily drunk and not in his senses is not a valid Will;

(d) Deaf / dumb / blind people can make a Will provided they know what they are doing, e.g., a Will made by a blind person in Braille script. An illiterate person can also make a Will but he should be aware of the contents and should affix his / her thumb impression as a mark of acceptance;

(e) A married woman can bequeath any property which she could dispose of during her lifetime.

TEST-2: SIGNING OF THE WILL

The testator must sign / affix his mark to the Will or it shall be signed by some other person in his presence and by his direction and the said signature or affixation shall show that it was intended to give effect to the writing as a Will. The Indian Succession Act, 1925, requires that a testator shall so sign a Will that it appears that he intended to execute it. Thus, it need not necessarily be at the end of the Will, it can also be at the beginning of the Will. The key is that it should appear that he intended to give effect to the Will. There is no requirement that each and every page must be signed or initiated – Ammu Balachandran vs. Mrs O.T. Joseph (Died) AIR 1996 Mad 442 which was followed again in Janaki Devi vs. R Vasanthi (2005) 1 MLJ 357. Nevertheless, it goes without saying that for personal safety, the testator must sign each and every page so that there is no risk of pages being replaced.

TEST-3: ATTESTATION

One of the tests laid down was that it was mandatory to get the Will attested by two or more witnesses, though no particular form of attestation was necessary. Each of the attesting witnesses was required to have seen the testator sign or affix his mark to the Will or has seen some other person sign the Will, in the presence of and by the direction of the testator or has received from the testator a personal acknowledgement of such signatures. Each of the attesting witnesses shall sign the Will in the presence of the testator.

It is trite that the witnesses need not know the contents of the Will. All that they need to see is the testator and each other signing the Will — nothing more and nothing less!

The Indian Succession Act states that any bequest (gift) to a witness of the Will is void. However, the Will is not deemed to be insufficiently attested for this reason alone. Thus, he who certifies the signing of the Will should not be getting a bequest from the testator. However, there is a twist to this section. This section does not apply to a Will made by a Hindu, Sikh, Jain or Buddhist and hence, bequests made under such Wills to attesting witnesses would be valid! Wills by Muslims are governed by Sharia Law. Thus, the prohibition on gifts to witnesses applies only to Wills made by Christians, Parsis, Jews, etc. However, there is no bar for a person to be both an executor of a Will and a witness of the very same Will. In fact, the Indian Succession Act, 1925, expressly provides for the same.

TEST-4: EVIDENCE OF WITNESSES

The Court held that for the purpose of proving the execution of the Will, at least one of the attesting witnesses, who was alive and capable of giving evidence, should be examined. The attesting witness should speak not only about the testator’s signatures but also that each of the witnesses had signed the Will in the presence of the testator.

Section 68 of the Indian Evidence Act, 1872 (‘the Evidence Act’) explains how a document that is required to be attested must be proved to be executed. In the case of a Will, if the attesting witness is alive and capable of giving evidence, then, the Will can be proved only if one of the attesting witnesses is called for proving its execution. Thus, in case of a Will, the witness must be examined in the Court and he must confirm that he indeed attested the execution of that Will.

TEST-5: EVIDENCE OF ONE WITNESS IS SUFFICIENT

The Court declared that if one of the attesting witnesses can prove the execution of the Will, the examination of other attesting witnesses can be dispensed with. Where one attesting witness examined to prove the Will fails to prove its due execution, then the other available attesting witness has to be called to supplement his evidence.

Section 69 of the Evidence Act provides that if no attesting witness can be found, it must be proved that the attestation by at least one of the witnesses is in his own handwriting and that the signature of the person executing the document is in the handwriting of that person. Thus, evidence needs to be produced which can confirm the signature of at least one of the attesting witnesses to the Will as well as that of the Testator of the Will.

The Supreme Court in V. Kalyanaswamy(D) by LRs. vs. L Bakthavatsalam(D) by LRs., Civil Appeal Nos. 1021-1026 / 2013, Order dated 17th July, 2020, has explained that attesting witness not being found refers to a variety of situations – it would cover a case of incapacity on account of any physical illness; a case where the attesting witnesses are dead; the attesting witness could be mentally incapable / insane. Thus, the word “found” is capable of comprehending a situation as one where the attesting witness, though physically available, is incapable of performing the task of proving the attestation and therefore, it becomes a situation where he is not found.

TEST-6: SUSPICION SURROUNDING THE WILL

The Apex Court laid down that whenever there existed any suspicion as to the execution of the Will, it was the responsibility of the propounder to remove all legitimate suspicions before it could be accepted as the testator’s last Will. In such cases, the initial onus on the propounder became heavier.

On being satisfied that a Will is indeed genuine, the Court would grant a probate under its seal. The Supreme Court has held in the cases of Lalitaben Jayantilal Popat vs. Pragnaben J Kataria (2008) 15 SCC 365 and Syed Askari Hadi Ali vs. State (2009) 5 SCC 528, that while granting probate, the Court must not only consider the genuineness of the Will but also the explanation given by the parties to all suspicious circumstances surrounding thereto along with proof in support of the same. The onus of proving the Will is on the propounder (person claiming that the Will is genuine). The propounder has to prove the legality of the execution and genuineness of the said Will by proving the absence of suspicious circumstances and surrounding the said Will and also by proving the testamentary capacity and the signature of the testator. When there are suspicious circumstances, the onus is also on the propounder to explain them to the court’s satisfaction and only when such onus is discharged would the court accept the Will – K. Laxmanan vs. T Padmini (2009) 1 SCC 354. In that case, the testator and one of the attesting witnesses to the Will died before the date of examination of the witnesses. The second attesting witness was also not in good physical condition, in as much as neither was he able to speak nor was he able to move. Consequently, as the execution of the Will could not be proved by leading primary evidence, the Court held that the propounder was required to lead secondary evidence in order to discharge his onus of proving the Will. This view has also been held in Daulat Ram vs. Sodha, (2005) 1 SCC 40.

TEST-7: OVERALL FACTORS TO BE CONSIDERED

The Court held that the test of judicial conscience has evolved for dealing with those cases where the execution of the Will is surrounded by suspicious circumstances. It requires to consider factors such as awareness of the testator as to the content as well as the consequences, nature and effect of the dispositions in the Will; sound, certain and disposing state of mind and memory of the testator at the time of execution; testator executed the Will while acting on his own free will.

The mental capacity of the Testator is possibly the most relevant factor in determining the validity of a Will. For instance, in the case of a person suffering from Alzheimer’s disease / or if he is a schizophrenic, the mental capacity of such a person would be highly debatable.

In this respect, the verdict of the Court in Shivakumar vs. Sharanabasappa, (2021) 11 SCC 277 is very relevant. Here it held that unlike other documents, a Will speaks from the grave of the Testator, and so, when it was propounded, the Testator had already died and could not say whether or not it was his Will. It was this aspect which introduced an element of solemnity in the decision of the question as to whether the document propounded was indeed his last Will. Ordinarily when the evidence adduced in support of the Will was satisfactory and sufficient to prove the sound and disposing state of the Testator’s mind and his signature as required by law, Courts would be justified in making a finding in favor of the propounder. However, it also held that a Will is not approached with doubts but is examined cautiously and with circumspection.

TEST-8: ONUS ON THE PERSON WHO ALLEGES

One who alleges fraud, fabrication, undue influence et cetera has to prove the same. However, even in the absence of such allegations, if there are circumstances giving rise to doubt, then it becomes the duty of the propounder to dispel such suspicious circumstances by giving a cogent and convincing explanation. In the case of Shivakumar (supra), the Court observed that there were three unnatural and unusual features of the Will — different sheets of paper were used; placement of the signatures of the Testator was beyond normal distance from the last typed matter; and in making of three signatures, at least two different pens were used. These, the Court held, made it clear that a deeper probe into the genuineness of the Will was called for to find out whether the document could at all be accepted as the last Will of the Testator.

TEST-9: SUSPICIONS SHOULD BE REAL

The Court explained an important principle — “suspicious circumstances surrounding the Will must be ‘real, germane and valid’ and not merely the fantasy of the doubting mind”. Whether a particular feature qualified as ‘suspicious’ would depend on the facts and circumstances of each case. Any circumstance raising legitimate suspicions would qualify as a suspicious circumstance for example, a shaky signature, a feeble mind, an unfair and unjust disposition of property, the propounder himself taking a leading part in the making of the Will under which he receives a substantial benefit, etc.

For instance, in Pratap Singh vs. State, 157 (2009) DLT 731, the Delhi High Court held that the fact that a person was suffering from a very painful form of terminal cancer of the mouth which prevented him from speaking, and that he succumbed to it within 2 weeks of executing a Will, showed that he may not have prepared the Will. Hence, in cases of terminal illness, it becomes very important to prove how the testator could have prepared the Will. The role of the witnesses in such cases also becomes very important. In Maki Sorabji Commissariat vs. HomiSorabji Commissariat, TS No. 60/2011 Order dated 30th April, 2014, the Bombay High Court was faced withthe issue as to whether the Testator who was suffering from Parkinson’s disease could make a Will. It concluded that merely because he suffered from Parkinson’s disease, it would not indicate or prove that it had affected his sound and disposing mind or capacity to execute a Will. Unless the disease was of such a nature that it would affect the sound and disposing mind of the testator, such disease cannot be a ground to refuse a Probate.

Again, the Court’s verdict in Shivakumar (supra) is quite interesting in this respect. It concluded that while a fishing enquiry of digging out faults and lacuna was not to be resorted to while examining a Will but at the same time, the real and valid suspicions which arose (any abnormal happening or conduct) could not be ignored either. Ignoring or brushing aside all the features noticed in relation to the Will would require taking up an individual feature and ignoring it as being trivial or minor and then proceeding with the belief that it had only been a matter of chance that all the abnormalities somehow chose to conglomerate into the Will. The Apex Court held that such an approach could not be adopted. It emphasized that the examination of a Will had to be on the norms of reality as also normalcy, and the overall effect of all the features and circumstances was required to be examined.

CONCLUSION

Covering all situations and scenarios for examining the genuineness of a Will would require an exhaustive treatise. However, this decision of the Apex Court has done a very good job of collating all the important principles at one place and giving guidance to Courts as to what they should consider when a Will comes up before them! Persons executing Wills should be aware of these nitty-gritties so that their Wills have fail-safe features.

BCAJ Admin

Limited Liability Partnerships

We continue our examination of various laws and the issues arising therein in respect to an LLP.

1. Infrastructure projects :

1.1 Can an LLP be an SEZ Developer under the Special Economic Zone Act, 2005 ? S. 2(g) of this Act defines the term developer to mean a person who has been granted a letter of approval. S. 2(v) of the Act defines a person to include a company, a firm, an association of persons or body of individuals, whether incorporated or not. An LLP is none of the above but it is a ‘body corporate’. Again an amendment to the SEZ Act would be highly desirable to accommodate LLPs.

1.2 Can an LLP be the entity for developing, operating, maintaining an infrastructure facility such as a road, port, rail, airport, industrial park, etc. ? S. 80-IA(4) of the Income-tax Act which provides for the income-tax deduction specifies that the infrastructure facility must be owned by a company or a corporation or a body established under a Central or State Act. An LLP is none of these. However, if one looks at the Industrial Park Scheme, 2008 and Form IPS-1, then there is no restriction in the Scheme that the entity must be only a company.

2. Consolidation of accounts :

2.1 The LLP Act allows a company to become a partner in an LLP. What if the company owns more than 50% of the voting power of the LLP or controls the composition of the governing body of the LLP ? The issue is : Whether Consolidation of Accounts will be required ?

2.2 Accounting Standard 21 on Consolidated Financial Statements prescribed under the Companies (Accounting Standard) Rules, 2006, speaks about control by a company over an enterprise which may or may not be a company. Hence, the accounts of any entity over which the company exercises control should be consolidated with that of the parent.

2.3 The Expert Advisory Committee of the Institute of Chartered Accountants of India has given an opinion as regards investment by a company in a partnership firm. It opined that if a company is required to prepare consolidated financial statements (CFS) under any statute or it does so voluntarily, then the consolidation should be done in accordance with AS-21 by consolidating the financial statements of the firm with that of the company. The same EAC Opinion should hold good for an LLP.

3. Takeover regulations :

3.1 Reg. 3(1)(k) of the SEBI Takeover Regulations, 1997, exempts an Acquirer from making a Public Announcement in the case of acquisitions of voting power in an unlisted company. However, if the unlisted company is in control of a listed company and by virtue of the acquisition of the unlisted company, the acquirer acquires shares/voting power/control over a listed company, then the acquirer is required to make an offer for the listed company’s shares.

3.2 Now, if a person acquires ‘control’ over an LLP (by virtue of change of partnership in an LLP or otherwise) and the LLP owns shares/voting power/control over a listed company, whether any change in the Partners of the LLP would trigger the provisions of the Takeover Code ? As LLP is not expressly covered by the R.3(1)(k), as it talks about only a company, hence, it is a moot point whether any change in the control of an LLP leading to change in control of a listed company would require a Public Announcement.

4. SARFAESI Act :

4.1 One of the aspects of SARFAESI Act is Enforcement of security interest by banks/financial institution for recovery of a secured debt from a borrower in case of default in repayment.

4.2 An LLP can also be a borrower and if it fails to discharge its liability, the secured creditor may recover his debt in the manner prescribed by the Act, without intervention of the Court or Tribunal.

5. CCI for Mergers of LLP :

5.1 The Competition Act also provides for the regulation of Mergers and Acquisitions to prevent an adverse effect on competition. The Competition Commission of India (CCI) is authorised to approve and regulate the M&A exceeding the prescribed networth and turnover limits. The Act applies to all enterprises including firm, AOP, etc. engaged in any activity relating to production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of services and so on. Therefore, amalgamation of LLPs will also be covered under Competition Law and thereby would be regulated by CCI.

6. Related party transactions :

6.1 S. 295 and S. 297 of the Companies Act, 1956 require the previous approval of the Central Government in case a company makes any loan/guarantee/security to, or enters into certain contracts with certain prescribed persons, being related to the directors of the lending company. The provisions of S. 370 of the said Act will also have to be complied with.

6.2 The list of prescribed persons u/s.295 includes a body corporate in which not less than 25% of the voting power is exercised by one or more directors of the lending company as well as a body corporate which is accustomed to act on the instructions of the Board of Directors or one or more directors of the lending company. An LLP is a body corporate. Therefore, any loan/guarantee/security given by a public company to an LLP which acts as aforesaid would require previous approval of the Central Government.

6.3 However, the approval u/s. 297 will not be required in case a company enters into the prescribed transactions with an LLP.

6.4 Further, S. 299 on Disclosure of Interest by directors would require a director to give a general notice to the Board of Directors if he is a partner in an LLP. Also, if a director is directly or indirectly interested in any contract or arrangement entered into by the company with an LLP, the director should disclose the nature of his interest in the relevant Board Meeting.

7. Clause 49 requirements :

7.1 Clause 49 of the Listing Agreement lays down certain compliances to be made in case of a material unlisted subsidiary of a listed company. These include appointing an independent director of the listed company on the board of such a subsidiary.

7.2 The term ‘material non-listed Indian subsidiary’ has been defined to mean an unlisted subsidiary, incorporated in India, whose turnover or net worth (i.e. paid up capital and free reserves) exceeds 20% of the consolidated turnover or net worth respectively, of the listed holding company and its subsidiaries in the immediately preceding accounting year. Since the term subsidiary has not been defined under the Listing Agreement, one should refer to s.4 of the Companies Act. According to this section, only a company is covered within the definition of a subsidiary. Hence, an LLP cannot be a subsidiary of another company and accordingly it would not be covered within the ambit of Clause 49 of the Listing Agreement.

8. Security Interest on Conversion of a Company into LLP :

8.1 According to Para 2 of the Third Schedule to the LLP Act, a company can be converted into an LLP only if it does not have any security interest subsisting in its assets at the time of application.

8.2 It may be noted that this restriction is not laid down in case of conversion of a firm into an LLP.

8.3 The practical problem that arises in this regard is firstly that “Security Interest” has not been defined in the LLP Act. Secondly, if we take “Security Interest” to mean as understood in common parlance, hardly any company would be able to convert itself into an LLP. This cannot and should not be the intention of the legislature.

8.4 Let us analyse the meaning of the term ‘Security Interest’.

8.4.1 Definition under SARFAESI Act :

According to S. 2(zd) of the Securitisation and Re-construction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) —

“security interest means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in S. 31.”

S. 31 of this Act lays down the following cases wherein the provisions of SARFAESI Act shall not apply :

a) a lien on any goods, money or security given by or under the Indian Contract Act, 1872;

b) a pledge of movables within the meaning of S. 172 of the Indian Contract Act, 1872;

c) creation of any security in any aircraft as defined in clause (1) of S. 2 of the Aircraft Act, 1934;

d) creation of security interest in any vessel as defined in clause (55) of S. 3 of the Merchant Shipping Act, 1958;

e) any conditional sale, hire-purchase or lease or any other contract in which no security interest has been created;

f) any rights of unpaid seller under S. 47 of the Sale of Goods Act, 1930

g) any properties not liable to attachment (excluding the properties specifically charged with the debt recoverable under this Act) or sale under the first proviso to Ss.(1) of S. 60 of the Code of Civil Procedure, 1908;

h) any security interest for securing repayment of any financial asset not exceeding Rs. one lakh;

i) any security interest created in agricultural land;

j) any case in which the amount due is less than 20% of the principal amount and interest thereon.

8.4.2 Definition under Black’s Law Dictionary

Security Interest is a form of interest in property which provides that the property may be sold on default in order to satisfy the obligation for which security interest is given.

In other words, the term ‘security interest’ means any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability.

8.5 Thus, from the above definitions, it is seen that the definition of ‘Security Interest’ is very wide. At the same time, one cannot conclude that the charge which is created on the assets of a company in order to avail loans especially loans from banks and financial institutions can be treated as security interest subsisting in the assets of the company for the purposes of LLP Act.

In this regard, it is important to note that under the LLP Act, all the liabilities of the private limited company become the liabilities of the LLP. Further, both the entities have limited liability. So there is no difference in the nature of liability of the private limited company and its shareholders on one hand and the LLP and its partners on the other hand. Moreover, Schedule II which provides for conversion from a firm (where its partners have unlimited liability) into an LLP, does not put any such restriction. Therefore, it is difficult to understand the real intention of legislature in putting this restrictive clause in case of conversion of company into an LLP. It would be advisable if the MCA issues a clarification in this respect since this is holding up the conversion by several companies into LLPs.

(Concluded)

BCAJ Admin

Limited Liability Partnerships

We continue our examination of various laws and the issues arising therein in respect to an LLP.

1. Conversion of firm or company into LLP :

1.1 The LLP Act provides for conversion of a partnership firm and company into an LLP. This conversion is similar to the conversion of a firm into a company under Part IX of the Companies Act. Three issues which arise in respect of this conversion of a firm are the stamp duty, the income-tax liability thereon and the impact on tenancies of the firm/company. All of these contentious issues are very important for healthy growth of LLPs as a form of business in India. The Government must take steps to come out with clear-cut laws in this respect to avoid wasteful litigation.

1.2 Stamp duty :

(a) Para 6(b) of the Third Schedule to the LLP Act on Effect of Registration states that all tangible (movable and immovable) property as well as intangible property vested in the company and the whole of the undertaking of the firm shall be transferred to and shall vest in the LLP without further assurance act or deed.

(b) As explained earlier, stamp duty is on an instrument. If there is no ‘instrument’ of transfer, then no stamp duty can be levied.

(c) If there is a statutory vesting of the assets of the erstwhile firm/company in the newly incorporated LLP, there is no transfer under the Transfer of Property Act. Therefore, no conveyance is required and hence, there should not be any incidence of Stamp Duty.

(d) This view is also supported by the old decision in the case of Rama Sundari Ray v. Syamendra Lal Ray, ILR (1947) 2 Cal. 1 rendered in the context of a Part IX conversion. Applying the same principle, it is submitted that a conversion under Part X of the LLP Act, 2008 would not attract any stamp duty as it amounts to a statutory vesting of the assets of the firm/company in the LLP.

1.3 Income-tax :

(a) There is no transfer between the firm/private and the LLP and the word ‘transfer’ used is not in the sense of a ‘transfer’ as between a transferor and transferee, but is only meant to emphasise the vesting of the assets and liabilities in the LLP. Thus, there is no transfer as understood u/s.2(47) and u/s.45(1) of the Income-tax Act. Since there is no transfer u/s.45(1), the computation of capital gains should not arise.

(c) There is no transfer at the time of conversion of a firm/private company into an LLP as it is a case of a statutory vesting of assets and liabilities under the LLP Act like in case of Part IX of the Companies Act. In fact, it is possible to take a view that at no point of time do both the LLP and the firm/company exist. The firm/company is dissolved and the LLP is created simultaneously and it is the transfer which creates the LLP. Thus, since the two entities are not present at the same time, there is no transfer.

(d) This view has been upheld by the Bombay High Court in its decision of Texspin Engg. & Mfg. Works, 180 CTR 497 (Bom.). The Court held that a partnership firm can convert itself into a company under Part IX of the Companies Act, 1956 and further there would be no incidence of capital gains u/s.45(4) of the Income-tax Act. The ratio decidendi laid down by the Bombay High Court can also be applied in the case of conversion of a firm/company into an LLP. Hence, it is submitted that even though there is no express provision to this effect, the conversion should not attract capital gains tax. Incidentally, the Memorandum Explaining the provisions of the Finance (No. 2) Bill, 2009 provided as under :

“As an LLP and a general partnership is being treated as equivalent (except for recovery purposes) in the Act, the conversion from a general partnership firm to an LLP will have no tax implications if the rights and obligations of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions, the provisions of S. 45 shall apply.”

It may be noted that neither the exemption provision nor restrictive conditions mentioned above are found in the Bill or in the Finance Act 2009.

1.4 Tenancies of the firm :

One of the more contentious issues under the Rent Act is in regard to the position of a partnership firm which is a tenant when there is a change of partners. Can the landlord contend that there is an illegal sub-letting or assignment and hence, he can terminate the tenancy. There are several decisions on this subject and there is no clear-cut touchstone to determine under which situations can it be said that there is an illegal sub-letting and when there is not.

These decisions deal with the case where the partners of the firm change hands. In the case of conversion of a firm into an LLP, the entity remains the same. Only its status undergoes a change. It is not a case where there is a transfer of assets. Hence, in my view, the provisions of illegal sub-letting/ assignment of the Rent Act are not attracted and the tenant would not lose the tenancy. However, the issue is not free from doubt.

1.5 Other issues in relation to conversion :

1.5.1 Some other unanswered issues remain in relation to conversion of a firm/company into an LLP. One is relating to carry forward and set-off of unabsorbed losses. Would S. 79 of the Income-tax Act which denies such a set-off in the case of a change in shareholding apply ?

1.5.2 Another issue is in relation to the continuity of service clause of the employees in the case of a conversion. It is submitted that there would be a continuity of service.

1.5.3 Certain institutions such as the MIDC levy a very huge transfer charge for change of user. However, there is a concession in the case of involuntary transfers done by way of a Court order, e.g., mergers, demergers, etc. Such transfers attract a minimum processing fee of the MIDC. What would be the position in the case of conversion into an LLP is an interesting aspect which needs to be considered.

1.5.4 One issue which may gather steam in the coming years is that of reconversion of an LLP into a company. Can an LLP convert itself into a private/ public company is an aspect on which there is no clarity. The LLP Act is silent on this aspect. Part IX of the Companies Act also does not provide any clear-cut answer. The Companies Bill 2008 has done away with Part IX altogether. Hence, what would happen to a business which selects an LLP structure and after becoming profitable it desires to make an IPO is still a question. Obviously, an LLP cannot make an IPO. Would it ever be possible for the business to access the capital markets? This is one aspect which needs immediate attention or else LLPs would lose some of their sheen.

2. Merger of companies and LLPs:

2.1 One more issue which is worth consideration is whether an LLP can merge into a company or vice-versa. The LLP Act only deals with the amalgamation and restructuring of two or more LLPs.

2.2 However, the Companies Act is much broader in its coverage. It permits the merger of a transferor who is any body corporate with a transferee company which is an Indian company. The Companies Act defines a body corporate to include a company. The LLP Act provides that an LLP is a body corporate. Thus, it stands to reason that an LLP being a body corporate, it can be merged into a company. Since the ultimate authority for both companies and LLPs is the MCA, it would be desirable if they frame rules in this respect.

2.3 As stated above, the Companies Act provides that ‘transferor company’ includes any body corporate, whether a company within the meaning of this Act or not, but a ‘transferee company’ only means a company within the meaning of this Act. Hence, the Transferee Company cannot be an LLP and it must always be a company within the meaning of the Companies Act, 1956. Thus, the merger of a company into an LLP is not possible.

3. VCF regulations:

3.1 One of the main uses of LLPs globally is as Venture Capital Funds. In India, VCFs are regulated by the SEBIunder the SEBI (Venture Capital Funds) Regulations, 1996.

3.2 R.2 of these Regulations defines a Venture Capital Fund to mean a fund established in the form of a trust or a company including a body corporate.

Since an LLP is a body corporate, it can also be one of the forms for a VCF under the SEBI Regulations. However, R.15 provides that the VCF would raise money only through the private placement of its units. S. 32 and S. 33 of the LLP Act state only a partner of an LLP will make contributions to the LLP. There is no provision in the LLP Act for the issue of units. Hence, it is a moot point as to whether an LLP can issue units.

3.3 Further, the Regulations provide that the investee company must be a domestic company only. Hence, an LLP cannot attract funds from a SEBI Registered VCF.

4. Foreign tax credits:

4.1 Assuming that a foreign resident can invest in an LLP under the FEMA Regulations, another question which would arise is what would be the tax treatment of the income received by the foreign partner? An LLP is taxed as a firm and hence, the LLP would pay tax @ 30.9% in India. The draft Direct Taxes Code also continues this system of taxation. When the LLP distributes the after-tax income to its foreign partner, would he be able to claim a credit for the tax paid by the LLP ? Unfortunately, the answer is No. The tax treaty benefits will be lost in such a case and the foreign partner may once again pay tax on the income received by him. This is a great disadvantage for foreigners to invest in LLPs.

4.2 To address the above anomaly, the pass-through system wherein the LLP is ignored as a taxable entity and the partner is directly taxed in proportion to his share was desirable. In fact, press reports indicate that the MCA is keen on such an amendment to the Income-tax Act to bring taxation of LLPs in India at par with several western nations.
(To be continued)

BCAJ Admin

Limited Liability Partnerships

1. Introduction :

1.1 31st March, 2009, the last day of the financial year 2008-09, saw the Notification of the Limited Liability Partnership Act, 2008 (‘the Act’). The desirability of LLP as a business entity has been expressed by various committees, such as the Bhat Committee (1972); Naik Committee (1992); Expert Committee on Development of Small Sector Enterprises headed by Sh. Abid Hussain in 1997; Study Group on Development of Small Sector Enterprises (SSEs) headed by Dr. S. P. Gupta (2001), Naresh Chandra Committee on Regulation of Private Companies and Partnerships (2003); Dr. J. J. Irani Committee on New Company Law (2005).

In spite of these recommendations, India has been a bit late in recognising this extremely popular form of a business entity, considering that countries such as the USA have enacted a law dealing with Limited Liability Partnerships (‘LLPs’) as far back as in the early 1800s. Internationally, most venture capital funds/private equity funds/hedge funds are structured in the form of LLPs.

Nevertheless as the old adage goes, ‘better late than never’, India has come out with a law on LLPs at a time when the Small and Medium Sector is growing rapidly and entity such as an LLP is the right answer for this sector. The Finance (No. 2) Bill, 2009 has provided for taxation of LLPs.

1.2 LLPs lie somewhere in between the corporate sector which have limited liability but are highly regulated and the unregulated partnership sector which has unlimited liability. LLPs provide a great deal of flexibility and also limited liability. It is important to note that even though the term LLP signifies a partnership, the Act falls within the purview of the Ministry of Corporate Affairs (MCA) and the Registration and all other procedures are carried out by the RoC and not the Registrar of Firms.

1.3 By a series of Articles, let us examine some of the key features of the Act and some possible issues which may arise.

2. Features of an LLP :

2.1 Body corporate :

The most important aspect of an LLP is that it is treated as a body corporate, i.e., it is an independent legal entity with a distinct identity which is separate from its partners. As compared to this a partnership firm does not have an identity separate from its partners. An LLP has the following features of a body corporate :

(a) It has a perpetual succession.

(b) Its existence is not dependent upon its partners and hence, even if there were to be a change in its partners, the LLP’s status would remain unchanged. Death, insolvency, retirement of any partner has no bearing on the LLP.

(c) The property of an LLP is its own property and not the property of its partners. It can own property, whether immovable, movable or tangible, in its own name since it is a separate legal person.

(d) It is capable of suing and being sued in its own name.

(e) It can have a common seal.

2.2 Liability :

The liability of an LLP is to be met out of its property only and the liability does not extend to the partners. Thus, unlike in the case of a partnership firm, the partners are not personally liable for the dues of the LLP. This feature of an LLP is similar to a company where the shareholders and the company are separate legal entities. If the partner, knowingly, does any act which is outside the scope of his authority, then the LLP will not be bound by any such act. If the LLP does or the partners do any act with an intent to defraud, then the LLP and the partners shall have unlimited liability for all the debts of the LLP.

3. Incorporation Document :

3.1 To incorporate an LLP, the following steps must be taken :

(a) Two or more persons must come together to carry on any lawful business with a view to earn profits.

(b) They must subscribe to an ‘Incorporation Document and Statement’ in eForm-2. The Statement is to be digitally signed by a person named in the incorporation document as a designated partner and he must have a DPIN. The Statement must also be digitally countersigned by an advocate/company secretary/chartered accountant/cost accountant in practice who is engaged in the formation of LLP. In case of foreign nationals residing outside India and seeking to register an LLP in India, their signatures and address on the incorporation documents and proof of identity, where required, shall be notarised before the notary of the country of their origin.

(c) The RoC after satisfying himself about compliance with relevant provisions of the LLP Act will register the LLP, within a maximum period of 14 days of the filing of eForm-2 and will issue a certificate of incorporation in Form-16.

3.2 An LLP should have a registered office. Its name should be as per the guidelines laid down in this respect. The last words of the name should be limited liability partnership or LLP, e.g., the name of an LLP could be ‘Apex Venture Fund LLP’.

3.3 The partners of the LLP have to enter into an LLP Agreement.

4. Partners :

4.1 Just as a company has members, an LLP has partners. As per S. 5 of the Act, any individual or any body corporate can be a partner of an LLP. However, in any of the following cases, an individual cannot be a partner in an LLP :

(a) If he is adjudged to be of unsound mind by a Court.

(b) If he is an undischarged insolvent.

Any body corporate can also be a partner of an LLP. The term body corporate has been defined u/s.2 of the Act to mean a company as defined in S. 3 of the Companies Act, 1956, and also includes an LLP registered under the Act, an LLP incorporated abroad, a company incorporated abroad. However, it does not include a corporate sole, a co-operative society and any other body corporate so notified by the Government. Since an LLP is also a body corporate, one LLP can become a partner in another LLP. Two or more companies can also come together to form an LLP. LLPs could be the future for consortium type of arrangements.

4.2 Each LLP must have a minimum number of 2 partners. This feature is at par with a partnership. There is no limit on the maximum number of partners which an LLP can have. A partnership or an AOP cannot have more than 20 partners/members or else it becomes an illegal association. A private limited company cannot have more than 50 members. However, an LLP has no limit on the number of partners. Thus, in this respect it is at par with a public limited company. It is this feature of an LLP which makes it a very attractive structure from a VC/PE perspective since the fund can have as many investors as it likes.

4.3 Designated Partner:

a) The concept of a ‘Designated Partner’ has been introduced by the Act. S. 7 requires an LLP to have at least 2 designated partners, both of whom should be individuals and one of whom should be a resident in India. If there are only 2 partners in an LLP, then both should be treated as designated partners.

b) In case, both the partners are LLPs/companies, then partners of such LLPs or nominees of such companies should become designated partners.

c) The Act incorporates a part of the definition of the term ‘resident in India’ from S. 2 of the Foreign Exchange Management Act, 1999. A resident has been defined to mean a person who resided in India for not less than 182 days during the immediately preceding financial year.

d) The individual must give his prior consent to become a designated partner.

e) To become a designated partner, an individual must obtain a Designated Partner Identification Number (DPIN).

f) A designated partner is one who is responsible for carrying out all the compliance obligations of the LLP imposed by the Act. He is also liable to all the penalties imposed on the LLP for contravention of any of these provisions of the Act. One may loosely equate him with the Managing Director of a company.

g) Any person can be appointed as a designated partner and he may retire also. Any vacancy must be filled within 30 days.

4.4 Relationship of Partners:

a) The mutual rights and duties of the partners of an LLP are governed by the LLP agreement. If there is no such agreement, then S. 23(4) of the Act provides that the mutual rights and duties of the partners shall be as set out in the First Schedule to the Act. Such an agreement and any changes, therein, must be filed with the RoC.

b) For the purposes of the business of the LLP, every partner of an LLP is an agent of the LLP but not of the other partners. This is a fundamental difference between an LLP and a partnership firm, wherein mutual agency is a key condition of the partnership. Each partner is an agent of the firm and of the other partners. S. 4 of the Partnership Act defines a partnership as “the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”.

4.5 A person can resign from the LLP by giving a notice to other partners. A person would cease to be a partner on his death or on dissolution of the LLP or if he is declared to be of an unsound mind or if he has been adjudged as an insolvent. When a person ceases to be a partner, the LLP shall file a notice in the prescribed form with the RoC.

5. Contributions:

5.1 A partner of an LLP contributes towards the capital of the LLP. The obligation of a partner to contribute shall be as per the LLP Agreement.

5.2 The contribution can be in the following forms:

a) Tangible, movable, immovable, intangible property or a;ny other benefit to the LLP, e.g., land, goods, IPRs, etc.

b) Money, promissory notes, agreement to contribute cash or property and contract for services to be performed.

The monetary value of the contribution of each partner should be accounted for and disclosed in the accounts.

5.3 If the contribution is in kind, then the same must be valued by a practising CA or an approved valuer. No methodology has been prescribed for the valuation.

6. Tax Treatment:

6.1 The Finance (No. 2) Bill has prescribed the tax treatment for LLPs. The provisions are effective from A.Y. 2010-11. LLPs would now be taxed at par with partnership firms. Thus, the LLP will pay tax on its profits and the partners will receive their share in the LLP tax-free [5. 10(2A)]. The LLP will pay tax @ 30%. The Finance Bill has abolished the surcharge of 10% payable by firms and hence, even LLPs will not have to pay any surcharge. The 3% cess continues and hence, the net rate will be 30.9%.

6.2 LLP will get a deduction for remuneration paid to its working partners. The limits of S. 40(b) have been streamlined and simplified both for firms and LLPs:

a) On the first Rs.3 lakhs of book-profit – A deduction which is the higher of Rs.1.5 lakhs or 90% of the book-profits

b) On the balance book-profits – A deduction @ 60% of book-profits.

Any interest payment by the LLP to a partner in excess of 12% p.a. would be disallowed and any salary, remuneration, commission to non-working partners would be disallowed.

6.3 There will be no incidence of MAT or Divi-dend Distribution Tax or liability to Deemed Dividend on the LLP.

6.4 S. 45(3) would apply to the admission of a partner and S. 45(4) would apply to the dissolution of an LLP or retirement of a partner.

6.5 There is no express provision for the tax treatment of merger or demerger of two LLPs. The provisions contained for amalgamation or demerger in the Income-tax Act, only apply to companies and not to LLPs. It would be beneficial if the Finance Act, 2009 provides for this situation.

BCAJ Admin

Limited Liability Partnerships

1. Accounting requirements :

1.1 An LLP is required to maintain prescribed books of account relating to its affairs. The accounts can be maintained on cash or accrual basis and must be according to the double entry system of accounting. The books must be sufficient to show and explain the LLP’s transaction and must be able to disclose with reasonable accuracy its financial position at any time. They must also enable the partners to ensure that the Statement of Account and Solvency prepared by them complies with all the requirements of the Act.

1.2 The books must specifically deal with the following :

(a) Details of all receipts and payments.

(b) Record of all assets and liabilities of the LLP.

(d) Such other particulars as may be decided by the partners. Thus, the partners can incorporate additional requirements.

As required under the Companies Act, the books are to be preserved for a period of 8 years.

1.3 Within a period of 6 months from the end of the financial year, the LLP shall prepare a Statement of Account and Solvency in Form 8 for the financial year ended. This Statement must be filed with the Registrar of Companies within 7 months from the end of the year to which it relates. The filing fees in relation to the same range from Rs.50 to Rs.200 depending upon the amount of contribution of the LLP. This Statement must be signed by the designated partners. This Statement contains a Statement of Assets & Liabilities (Balance Sheet) and a Statement of Income and Expenditure (P&L Account) of the LLP. The Appendix to this Statement contains various other details, such as :

(a) Details of charges created

(b) Particulars of property on which the charge is created

2. Auditing requirements :

2.1 The accounts of the LLP are required to be audited in case :

(a) its turnover exceeds Rs.40 lakhs, or

(b) its contribution exceeds Rs.25 lakhs.

The turnover limit of Rs.40 lakhs is the same as that laid down for tax audit for a business. However, there is no distinction between an LLP which carries on a business and one which carries on a profession. The auditor must be appointed every financial year by the LLP.

2.2 The designated partners may appoint an auditor at any time for the first FY or at least 30 days prior to the end of any other FY or to fill a casual vacancy.

2.3 If the LLP Agreement so provides, the partners may remove an auditor at any point of time by following the procedure laid down therein. If the Agreement is silent on this point, then the consent of all the partners is required.

2.4 An auditor may resign or specify his unwillingness to be reappointed by giving a notice to the LLP.

3. Annual Return :

3.1 Every LLP must file an Annual Return with the RoC within 60 days of the end of its FY. The Return must be filed in Form 11 and must be signed by a designated partner.

3.2 If the LLP’s turnover is up to Rs.5 crores or it has a contribution of up to Rs.50 lakhs, then the Return must be accompanied by a certificate from a designated partner other than the one signing the Return. The certificate must state that the Return contains true and correct information.

3.3 If the LLP’s turnover exceeds Rs.5 crores or it has a contribution of more than Rs.50 lakhs, then the Return must be accompanied by a certificate from a practising Company Secretary. The certificate must state that the CS has verified the particulars from the books and records and found them to be true and correct. The filing fees in relation to the same range from Rs.50 to Rs.200 depending upon the amount of contribution of the LLP.

3.4 The Return contains the following information :

(a) Contact details of the LLP

(b) Details about the designated and other partners

4.1 One of the best features of the Act is that it provides for the automatic conversion of certain entities into an LLP. Chapter X of the Act provides for the following :

(a) Conversion of a firm into an LLP

(b) Conversion of a private limited company into an LLP

This Chapter is similar to the Chapter IX of the Companies Act, 1956, under which a firm can be converted into a company.

4.2 For the purposes of effecting a conversion of any of the above entities into an LLP, certain Statements must be filed with the RoC. On receiving the documents, the RoC will register the documents and issue a certificate of registration. It may be noted that other than registering the prescribed documents with the RoC, nothing further needs to be done. One of the essential conditions for conversion into an LLP is that all the partners in the case of a firm / all the shareholders in the case of a company must become partners of the LLP.

There is no transfer and no conveyance of the assets from the firm/company to the LLP. There is no liquidation of the company by way of a court-appointed liquidation or a voluntary liquidation. Once the LLP is registered, the company is deemed to have been dissolved and removed from the records of the RoC. There is an automatic change of status of the entity from a firm/company to an LLP.

4.3 If the RoC is not satisfied about certain information, then he may refuse to register the entity as an LLP. An appeal lies against this refusal to the National Company Law Tribunal. Till such time as the Tribunal is notified, the Company Law Board would prevail in the interim.

4.4 All pending proceedings by or against the entity would continue by or against the LLP. In any agreements, deeds, contracts, bonds, instruments, etc., executed by such entity, the LLP would be sub-stituted for such entity /The LLP steps into the shoes of the firm/company. All employees of the firm/ company would continue with continuation of employment under the LLP. Thus, the employees are not worse off by reason of change in status.

4.5 Once the LLP is registered on conversion, the firm/company shall be deemed to be dissolved/ removed from the records of the RoF or RoC, as the case may be.

4.6 The LLP may have to make consequential changes in respect of documents/records standing in the name of the erstwhile firm/company. For instance, for any property registered in the name of the erstwhile company, the Record of Rights/Property Card/Index Il, etc., standing with the Sub-Registrar of Assurances would have to be amended and the LLP’s name would have to be added instead of the company’s name. It should be noted that this change is not taking place by virtue of any transfer. Hence, there should not be any liability to registration fees and/or stamp duty. It would be desirable if the Government enacts amendments to clarify this matter beyond any doubt, since often there is a gap between what is legally correct and what is practically happening.

5. Amalgamations and arrangements:

5.1 The Act contains provisions for the amalgamation, arrangement and reconstruction of LLPs. S. 60 to S. 62 deal with the same. These provisions are similar to S. 391-S. 394 of the Companies Act, but not as wide in its ambit as S. 391-S. 394. S. 60 to S. 62.

5.2 The following schemes are possible:

a) A compromise or an arrangement between an LLP and its creditors.

b) A compromise or an arrangement between an LLP and its partners.

c) A reconstruction of an LLP.

d) An amalgamation of two or more LLPs.

5.3 In order that any such scheme can be approved, a majority of 3/4th in value of the creditors/partners must at a meeting called for this purpose sanction the compromise/ arrangement/ amal-gamation. An application for the same must be made to the Company Law Tribunal. However, till such time as the CLT is notified, the High Courts would have such powers.

5.4 Every order sanctioning the scheme will be made only if the Court is satisfied that the LLP has disclosed all material facts, its latest financial position and details of any pending investigations. While passing the order, the Court would have power to supervise the carrying out of any compromise or arrangement and can also make such modifications in the scheme as it considers necessary. The order must be filed with the RoC in Form 22 within 30 days of making of the order.

5.5 The Act also provides for the merger of two or more LLPs. While passing such an order, the Court may make a provision for the following matters:

a) Transfer of the undertaking of the transferor LLP.

b) Continuation by or against the transferee LLP of any pending legal proceedings by or against the transferor LLP.

c) Dissolution without winding up of the transferor LLP. However, no order for the dissolution will be made until the Official Liquidator first submits his report that the LLP’s affairs have not been conducted in a manner prejudicial to the partners or public’s interest.

d) Provision for any person who dissents to the amalgamation.

e) Such incidental, consequential and supplemental matters as are necessary to fully carry out the amalgamation.

The above provisions also apply to any reconstruction or compromise or arrangement of an LLP.

5.6 Rule 35 of the LLP Rules, 2009 lays down the procedure to be followed in respect of any compromise, arrangement or reconstruction of LLPs. Some of the key provisions are as follows:

(a) An application calling a meeting of the creditors/members must be supported by an affidavit.

(b) The Court may call a meeting or dispense with it. At the meeting voting by proxy is permitted.

(d) A chairman will be appointed for the meeting. He must prepare a report of the proceedings of the meeting.

(e) The report of the meeting’s Chairman and the petition must be presented to the Court.

5.7 The Rules also lay down the procedure for an arrangement for the revival and rehabilitation of an LLP. Some of the key provisions in this respect are as follows:

(a) An arrangement for revival and rehabilitation of any LLP may be proposed in the following circumstances:

(i) If the LLP has outstanding debt which it has failed to pay withn 30 days of the service of the notice of demand or has failed to secure or compound it to the reasonable satisfaction of the creditors and if its creditors representing 50% or more of such debt make a demand; or

(ii) If a petition for winding up of an LLP is pending before the Court and such directions are given by the Court.

(iii) Where the Official Liquidator has filed his report before the Court, in terms of directions given by the Court on the report of the Liquidator.

(iv) Alternatively, the LLP or any creditor or partner, or the Official Liquidator, may make an application for the sanction of the arrangement for revival and rehabilitation before the Tribunal.

(b) An application under sub-rule (12) shall be accompanied by :

(i) A statement of account and solvency of LLP for the immediately preceding financial year, in case the application is made by the LLP;

(ii) Particulars and documents relevant to the scheme including commitments expected from various parties or, proposed restructuring or rescheduling of the debts, undertaking or in case from bank or financial institution through a letter or in any other case through an affidavit of concerned party or parties;

iii) proposed scheme of revival and rehabilitation of the LLP induding a proposal for appointment of an LLP Administrator. The LLP administrator shall be appointed from a panel maintained by the Central Government for winding up and dissolution of LLPs.

c) The Court may hear all the parties concerned and admit or dismiss the application.

d) The LLP Administrator proposed in the scheme shall submit his preliminary report.

(e) On consideration of the report of the LLP Administrator, if the Court is satisfied that the creditors representing 3/4th in value have resolved that it is not possible to revive and rehabilitate the LLP, it may, within 60 days of the receipt of such report, order that winding-up be initiated or sanction the arrangement for revival and rehabilitation of LLP, induding making orders for continuation of the LLP Administrator.

f) The order of sanction of the arrangement by the Tribunal may make provisions, for all or any of the following matters:-

i) powers and functions of the LLP Administrator;

ii) the time period within which various actions proposed in the arrangement to be completed;

iii) any such direction to the LLP or its officers or to the creditors, or to the LLP Administrator or to any other person, as may be considered necessary, for the purpose of implementation of the arrangement of revival and rehabilitation; and

(iv) any other order or orders as may be considered necessary.

(g) The LLP Administrator shall complete all his actions and submit his final report before the Court within 180 days of the Court’s order.

BCAJ Admin

Limited Liability Partnerships

1. Issues under other laws :

In the last three issues, we have analysed various facets of the LLP Act and looked at different provisions contained therein. However, the LLP Act is not an island by itself. One also needs to consider the impact on an LLP by or under various other laws, such as, the Stamp Act, the FDI Policy/FEMA Regulations, tenancy laws, restructuring of companies with LLPs, etc. In this last part, let us look at some such laws and the issues arising therein in respect to an LLP.

2. Stamp Act :

2.1 To incorporate an LLP, the Partners need to execute an LLP Agreement. This Agreement would lay down the respective capital contributions, whether they would be in the form of cash or property, etc. One of the main unresolved issues in relation to an LLP is what would be the stamp duty on such an Agreement ? Stamp Duty is a State subject and hence, the law in this respect would depend upon the State in which the registered office is situated. For the purposes of our discussion, let us consider the Bombay Stamp Act, 1958, which is applicable in the State of Maharashtra.

2.2 The Bombay Stamp Act, 1958 (‘the Act’), which is applicable to the State of Maharashtra, levies stamp duty u/s.3 of the Act. The relevant portion of S. 3 reads as follows :

“3. Instrument chargeable with duty :

Subject to the provisions of this Act and the exemptions contained in Schedule I, the following instruments shall be chargeable with duty of the amount indicated in Schedule I as the proper duty therefor respectively, that is to say :

(a) every instrument mentioned in Schedule I, which is executed in the State . . . . . .;

(b) every instrument mentioned in Schedule I, which . . . . . . , is executed out of the State, relates to any property situate, or to any matter or thing done or to be done in this State and is received in this State :

Provided that a copy or extract, whether certified to be a true copy or not and whether a facsimile image or otherwise of the original instrument on which stamp duty is chargeable under the provisions of this section, shall be chargeable with full stamp duty indicated in the Schedule I if the proper duty payable on such original instrument is not paid”

From the analysis of s. 3, the following points emerge :

(a) Stamp duty is leviable on an instrument and not on a transaction.

(b) Stamp duty is leviable only on those instruments which are mentioned in Schedule I to the Act.

(c) Stamp duty is leviable on the instrument if it is executed in the State of Maharashtra or on the instrument which, though executed outside the State of Maharashtra, relates to any property situate, or to any matter or thing done or to be done in the State and is received in the State. Hence, for example, even if an LLP Agreement is executed outside the State of Maharashtra but if registered office of the LLP is located in Maharashtra, and the instrument of partnership is received in Maharashtra, then it would be subject to stamp duty under the Act.

(d) The charge of stamp duty is subject to the provisions of this Act and the exemptions contained in Schedule I.

Currently, there is no express provision in the Act for levying stamp duty on an LLP Agreement. Under the Act, the term ‘instrument’ is defined to include, amongst other things, every document by which any right or liability is, or purports to be created, transferred, limited, extended, extinguished or recorded. Stamp duty is always on an instrument and not on a transaction. The LLP Agreement would determine the contribution of capital, distribution of profits, ownership and transfer of property, rights and duties of partner, etc. Therefore, an LLP Agreement would come under the definition of an ‘instrument’ and attract Stamp Duty.

2.3 Let us consider some of the possible Articles of Schedule I to the Bombay Stamp Act under which the LLP Agreement could be stamped.

(a) Conveyance :

Article 25 deals with duty as on a Conveyance. The term Conveyance is defined (as is relevant to this discussion) u/s.2(g) of the Act to include, a conveyance on sale, every instrument by which property or any estate/interest in property is transferred to or vested in any other person inter vivos. Thus, a conveyance includes every transfer of property between two or more persons except those transfers which are covered by other Articles, e.g., lease, leave and licence, gift, etc. It would not be correct to say that an LLP Agreement is a conveyance of property from the partner to the LLP. Hence, in my view, an LLP Agreement should not be stamped with duty as on a conveyance. However, the Legislature can, by an amendment to the Stamp Act, extend the same rate as a conveyance to the introduction of property other than cash as capital contribution of the LLP.

(b) Instrument of Partnership :

Another Article is Article 47 which deals with the duty as on an Instrument of Partnership. Article 47 of Schedule I specifically provides for levy of stamp duty on partnership and the relevant article is reproduced below :

“47. Partnership :

The term ‘instrument of partnership’ and the term ‘partnership’ have not been defined in the Act. Hence, the term ‘partnership’ would have to be understood as defined in the Indian Partnership Act, 1932. At present, an LLP Agreement cannot be covered under Article 47 of the Bombay Stamp Act, 1958 since it expressly deals with a partnership firm and an LLP is not a partnership firm.

(c) Agreement :

Till the time an express amendment is made, the LLP Agreement may be covered under Article 5(h)(A)(iv) of the Bombay Stamp Act which provides as under :

“Agreement or its records or memorandum of an agreement

Thus, in my view, till such time as an express amendment is made to the Act, an LLP Agreement should attract duty @ 0.1% if the value of the capital contribution is less than Rs.I0 lakhs and @ 0.2% in all other cases.

In case the LLP Agreement does not have any monetary value then the duty would be under Article S(h)(B) at Rs.200.

3. Foreign Investment in an LLP

3.1 The next important issue which arises is that can a foreigner /NRI invest in an LLP ? S. 7 of the LLP Act provides that at least one of the Designated Partners of an LLP should be a resident in India. This term is defined to mean a person who stayed in India in the preceding one year for more than 182 days. Thus, the LLP Act itself recognises that a partner of an LLP can be a non-resident.

3.2 However, the Foreign Exchange Management Act, 1999 and the Regulations issued thereunder do not deal with the investment by a person resident outside India (PROI) in the capital of an LLP. FEMA 20/2000 or the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 provide for the Foreign Direct Investment Scheme. Para 1(1) of Schedule I to these Regulations enables a PROI to invest, on a repatriable basis, in the shares or convertible debentures issued by an Indian company. However, these Regulations do not enable a PROI to invest in the capital of an Indian LLP.

3.3 The Foreign Exchange Management (Investment in Firm or Proprietary Concern in India) Regulations, 2000 enable an NRI/PIO to invest in the capital of a partnership firm or a proprietary concern in India. R.3 of these Regulations empowers the RBI to permit, on application, any PROI to invest in the capital. of a firm, proprietary concern, AOP in India. However, these Regulations also do not enable a PROI to invest in the capital of an Indian LLP.

3.4 Till such time as the RBI amends the FEMA Regulations, it would be difficult for foreign investors to invest in LLPs. LLPs are a very tax-efficient way of structuring investments, especially in the infrastructure sector, such as in roads, highways, ports, etc. In sectors where the concept of multiple layers of SPVs, Holding Companies, JV Companies, etc., is prevalent, the use of LLPs can minimise the tax leakages. Hence, it is high time for the Government to amend the FEMA to facilitate the investment by PROIs in LLPs.

4. Foreign Investment by an LLP

4.1 FEMA 120/2004 or the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 provide for the Direct Investment Outside India by an Indian party. Under s.2(v) of the FEMA, an LLP would be a person resident in India since it is a body corporate registered or incorporated in India.

4.2 These Regulations permit an Indian party to make an overseas investment in a JV or a subsidiary abroad. R.2(k) defines an Indian party to mean a company or a body created under an Act of the Parliament or a partnership firm registered under the Indian Partnership Act, 1932. An LLP is neither of these three entities. Further, the Regulations also permit Registered Trusts, Societies, unregistered partnership firms, sole proprietary concerns and individuals rendering professional services, etc., to acquire shares in a foreign entity or to set up JV/ WOS under certain situations. However, there is no provision to facilitate the overseas direct investment by an LLP. Hence, till such time as these Regulations are amended an LLP cannot make an overseas investment.

4.3 One wonders why, when the Ministry of Company Affairs is so upbeat about LLPs, it has not aggressively pursued these amendments with the RBI?

(To be continued)

BCAJ Admin

Laws and Business

Fraudulent Transfers

Introduction

When a person has a debt and is not paying, then the creditor can approach the Court for an attachment of debtor’s property. If the debtor were to transfer his property with an intent to defraud the creditor, then the creditor would be left without any source to recover his debts. This act of transferring the property on the part of the debtor is known as ‘fraudulent transfer’. Various laws have dealt with this subject of fraudulent transfer by giving it different terminologies, such as voluntary transfer, private alienation, etc. Let us look at some of the important laws dealing with the subject of fraudulent transfer. In this age where several agencies, such as the Enforcement Directorate, are contemplating attaching properties of businessmen/companies the subject of fraudulent transfers assumes importance.

Meaning of fraud
Since we are examining the concept of a fraudulent transfer, let us first understand the meaning of the term fraud. U/s.25 of the Indian Penal Code, 1860, a person is said to do a thing fraudulently if he does so with an intent to defraud and not otherwise. Hence, to prove a charge of fraud, mens rea or a culpable state of mind is a must. The term defraud has not been defined in the Code. However, its general meaning presupposes two elements, deceit or intention to deceive and an injury to someone. The Supreme Court in the case of Dr. Vimla v. Delhi Administration, 1963 SCR Supl. (2) 585, has held as follows:

“. . . . . . the two adverbs, ‘dishonestly’ and ‘fraudulently’ are used alternatively, indicating thereby that one excludes the other. That means they are not tautological and must be given different meanings . . . . . . . . The word ‘defraud’ includes an element of deceit. Deceit is not an ingredient of the definition of the word ‘dishonestly’, while it is an important ingredient of the definition of the word ‘fraudulently’. The former involves a pecuniary or economic gain or loss, while the latter by construction excludes that element. Further the juxtaposition of the two expressions ‘dishonestly’ and ‘fraudulently’ used in the various sections of the Code indicates their close affinity and therefore the definition of one may give colour to the other. To illustrate, in the definition of ‘dishonestly’, wrongful gain or wrongful loss is necessary enough. So too, if the expression ‘fraudulently’ were to be held to involve the element of injury to the person or persons deceived, it would be reasonable to assume that the injury should be something other than pecuniary or economic loss. Though almost always an advantage to one causes loss to another and vice versa, it need not necessarily be so. Should we hold that the concept of ‘fraud’ would include not only deceit but also some injury to the person deceived, it would be appropriate to hold by analogy drawn from the definition of ‘dishonestly’ that to satisfy the definition of ‘fraudulently’ it would be enough if there was a non-economic advantage to the deceiver or a non-economic loss to the deceived. Both need not co-exist. . . . . . ”

In S. P. Changalvaraya Naidu v. Jagannath, 1994 (1) SCC 1, it was held that a fraud is an act of deliberate deception with the design of securing something by taking unfair advantage of another. It is a deception in order to gain by another’s loss. It is a cheating intended to get an advantage. Fraud as is well known vitiates every solemn act. Fraud and justice never dwell together. Fraud is a conduct either by letter or words, which includes the other person or authority to take a definite determinative stand as a response to the conduct of the former either by word or letter. It is also well settled that misrepresentation itself amounts to fraud. Indeed, innocent misrepresentation may also give reason to claim relief against fraud. A fraudulent misrepresentation is called deceit and consists in leading a man into damage by willfully or recklessly causing him to believe and act on falsehood. It is a fraud in law if a party makes representations, which he knows to be false, and injury inures therefrom, although the motive from which the representations proceeded may not have been bad. An act of fraud on court is always viewed seriously. A collusion or conspiracy with a view to deprive the rights of the others in relation to a property would render the transaction void ab initio. Fraud and deception are synonymous.

Fraud is a conduct either by letter or word, which induces the other person or authority to take a definite determinative stand as a response to the conduct of the former either by word or letter — State of Andhra Pradesh v. T. Suryachandra Rao, Appeal (Civil) 4461 of 2005 (SC).

The Supreme Court in Ram Chandra Singh v. Savitri Devi, 2003 (8) SCC 319, held that it is well settled that misrepresentation itself amounts to fraud. Indeed, innocent misrepresentation may also give reason to claim relief against fraud. A fraudulent misrepresentation is called deceit and consists in leading a man into damage by willfully or recklessly causing him to believe and act on falsehood. It is a fraud in law if a party makes representations which he knows to be false, and injury ensues from the same, although the motive from which the representations proceeded may not have been bad. In an ‘action of deceit’ the plaintiff must prove actual fraud. Fraud is proved when it is shown that a false representation has been made knowingly, or without belief in its truth, or recklessly, without caring whether it be true or false.

In Ram Preeti Yadav v. U.P. Board of High School, JT 2003 (Supp. 1) SC 25 it was held that fraud is a conduct either by letter or word, which induces the other person, or authority to take a definite determinative stand as a response to the conduct of former either by word or letter. Although negligence is not fraud, but it can be evidence on fraud.

Civil Procedure Code The Civil Procedure Code, 1908 (‘the Code’) deals with the provisions relating to a Court decree and its execution. In case of a decree from a Court, the Court may require any person to pay any sum to the decree holder (or the plaintiff). In case the defendant fails to do so, the Court can, in execution of its decree, attach the movable and immovable properties of the defendant and recover the amount due by disposal of these assets. According to the CPC, an attachment prevents a private-transfer and no person can benefit from a subsequent transfer of the attached property.

Section 64 of the Code provides for such private alienation. Once a property has been attached, any private alienation of such property by private transfer or delivery and any payment to the judgment debtor of any debt, dividend, etc., contrary to such attachment shall be void as against all claims enforceable under the attachment. Section 64 applies whether the property stands in the name of the judgment debtor or any other person who is a name lender, i.e., benami property — Pradyut Shah, AIR 1979 Bom. 166. However, if the transfer is by an operation of law or pursuant to a Court order, then section 64 does not apply. For instance, a sale consequent to a later attachment would prevail even if there was an earlier attachment on the sale date — Rukmani v. Ram AIR, 1942 Nag. 36. It only covers private transfers, such as, voluntary sales, gifts, mortgages. It may be noted that the private transfers are not void ab initio, but only void as against all claims enforceable under the attachment. There is a difference of opinion amongst various Courts as to whether or not any private transfer after attachment but in pursuance of a contract of sale executed prior to attachment is covered by section 64. Various decisions have held that in order that an attachment renders a subsequent alienation as void u/s.64, the attachment must follow the due process laid down under the Code, e.g., Rules 41 to 57 of Order 21.

Indian Penal Code, 1860

Under the Indian Penal Code (IPC) if the following four conditions are satisfied:

(a) the accused removes, conceals, delivers the property or transfers it or causes to transfer it to someone;

(b) the above is done without adequate consideration;

(c) the intention of the accused was to prevent the distribution of that property among his creditors or some other person’s creditors; and

(d) he must act in a dishonest or fraudulent manner then the accused shall be punished with imprisonment of a term up to 2 years and/or fine.

Similarly, if a person fraudulently or dishonestly prevents any debt which is due to him from being made available to him for the payment of his debts, then the person shall be punished with imprisonment of a term up to 2 years and/ or fine. Thus, this provision seeks to prevent debtors from dodging their dues by preventing receipts from accruing to themselves.

A dishonest or fraudulent execution of an instrument which purports to transfer/charge any property and which contains any false statement with respect to the consideration for such transfer/ charge or to the beneficiaries of such transfer/charge is punishable with imprisonment of a term up to 2 years and/or fine. Benami conveyances would be covered within the scope of this provision.

A person who dishonestly or fraudulently conceals or removes property belonging to himself/ some other person or dishonestly releases any demand or claim to which he is entitled shall be punished with imprisonment of a term up to 2 years and/or fine.

We have already examined the meaning of the term fraud. Let us now see the meaning of the term ‘dishonestly’. Section 24 of the IPC defines ‘dishonesty’ as doing anything with the intention of causing wrongful gain to one person or wrongful loss to another person. Wrongful gain is defined as the gain by unlawful means of property to which the person gaining is not legally entitled. Conversely, wrongful loss means the loss by unlawful means of property to which the person losing it is legally entitled. A person wrongfully gains when he retains/acquires wrongfully. A person loses wrongfully when he is wrongfully kept out or deprived of property. Thus, in order to attract a charge of dishonesty, wrongful gain or loss is a must.

Presidency-Towns Insolvency Act

The Presidency-Towns Insolvency Act, 1909 deals with the law relating to insolvency as applicable in the cities of Mumbai, Chennai and Kolkata. Section 56 of this Act enunciates the doctrine of Fraudulent Preference. Every transfer by a debtor of his property, every payment made, every obligation incurred and every judicial proceeding taken or suffered by him is fraudulent and void against the Official Assignee, if all the following conditions are satisfied:

(i) at the time of the transaction, the debtor was unable to pay his debts

(ii) the transfer must be in favour of a creditor

(iii) the transfer must be with a view to give a preference to that creditor over other creditors

(iv) the creditor has in fact been preferred over other creditors

(v) the debtor must have entered into the transaction without any compulsion

(vi) the debtor must be adjudged insolvent on a petition presented within 3 months after the date of the transaction.

However, the rights of a bona fide person acquiring a title in good faith and for valuable consideration are not affected by the above doctrine.

Section 57 of the Act provides for the protection of bona fide transactions. Subject to the provisions relating to fraudulent preferences, in case of an insolvency, the following would not be affected:

(i) any payment by the insolvent to any of his creditors

(ii) any payment or delivery to the insolvent

(iii) any transfer for valuable consideration; or

(iv) any contract or dealing by or with the insolvent for valuable consideration.

However, the transaction should take place before the date of the order of adjudication and that person with whom such transaction takes place does not have notice of any insolvency petition.

Transfer of Property Act

The Transfer of Property Act, 1882 also deals with the concept of a fraudulent transfer. According to section 53, every transfer of immovable property made with the intent of defeating or defrauding the creditors of the transferor shall be voidable at the option of any creditor who is defeated or delayed. Thus, the following important conditions must be satisfied:

(i) The transfer must be of an immovable property. Unlike the previous two Acts, this section only applies to immovable property. What is an immovable property would be a matter of fact and unless it is a clear-cut case of classic land and building, it would have to be ascertained on a case-by-case basis.

(ii) Section 5 of this Act defines a transfer of property to mean any act by which a living person conveys present or future property to one or more other living persons. The expression living person has been defined to include a company, AOP and BOI.

(iii) The transfer must be made with an intention to delay or defraud one’s creditors. Hence, mens rea or a culpable state of mind on the part of the transferor must be demonstrated. Unless the same is proved, section 53 would not apply. Further, if the intention is to give preference to one creditor over another, then this section would not apply — Sharp v. Jackson, (1899) AC 19. The transfer must be to delay the creditors.

(iv) The transfer is not void ab initio. It only becomes voidable at the creditor’s option. If the creditor sues to avoid the transfer, then he must do so on behalf of all the creditors. The onus of proving that the transfer was made with an intent to delay or defeat creditors lies on the creditors — Daulat Ram v. Ghulam Fatima, (1926) 89 IC 953. However, once the fraud is established, then the onus of proving good faith shifts to the debtor — Amarchand v. Gokul, (1903) 5 Bom LR 142.

However, section 53 does not impair the rights of a buyer in good faith and for consideration. Hence, if a buyer has purchased immovable property without notice of the intention on the part of the debtor to delay his creditors and he has paid good consideration for the same, then his title is not impacted by section 53. This section is subject to the law of insolvency.

Companies Act

U/s.531 of the Companies Act, 1956, any transfer of property, whether movable or immovable, delivery of goods, payment, execution, etc., taken or done by or against a company within 6 months before the commencement of winding-up of a company, is invalid and is treated as a fraudulent preference of the creditors if the same would, in the case of an individual’s insolvency petition, be deemed to be a fraudulent preference. The preference is fraudulent when the substantial and dominant motive was to prefer one creditor or particular creditors — Mohandas v. Tikamdas, (1917) 37 IC 250. It is important to prove that both the transferor and transferee had a common intent to defraud creditors and if the transaction was made in good faith for valuable consideration then the same is not void — Official Liquidator v. MD, AP State Financial Corp., 115 Comp. Cases 284 (AP).

Similarly u/s.531A, such transfer made by a company is void against the liquidator if it is made within one year before the presentation of a winding- up petition. This however, excludes a transfer in its ordinary course of business or in favour of a purchaser in good faith and for valuable consideration. The person who has been fraudulently preferred would be subject to the same rights and liabilities as if he had personally agreed to become a surety for the company’s debt. The extent of his liability is equal to lesser of the mortgage or charge on the property or the value of his interest. The value of his interest is to be determined as on the date of the transaction which constitutes the fraudulent preference as if the interest was free of all encumbrances other than those to which the mortgage or charge for the company’s debt was then subject. This section even applies to transfers made by book entries — Jayanti Bai v. Popular Bank Ltd., 36 Comp. Cases (Ker.).

Income-tax Act

Section 281 of the Act provides that where during the pendency of any tax proceedings or after the completion of the same but before the service of a tax recovery notice, any assessee creates a charge or transfers any of his assets in favour of any other person, then such a charge/transfer would be void as against any tax claim. However, this section does not apply where the transfer is made for adequate consideration and without notice of any previous proceedings/tax demand or with the prior approval of the Assessing Officer. This section applies to any asset being land, building, machinery, plant, securities, bank deposits, provided the same are not stock-in-trade of the assessee. The Bombay High Court has, in the case of Twinstar Holdings Ltd. 260 ITR 6 (Bom.) held that where shares held as investment were converted into stock-in-trade and the only purpose of such conversion was to avoid attachment of the shares by the Department to recover tax, the transfer was void.

Conclusion

Although the legal position appears quiet straight-forward on this issue, its practical implementation is a different ballgame altogether. Whether or not a particular transfer is a fraudulent transfer is a matter of fact, circumstances and evidence. One would have to make a deep study of the evidence before arriving at any conclusion. For instance, whether a settlement by a person on a trust amounts to a fraudulent transfer or is an act of valid asset protection, needs to be carefully scrutinised.

BCAJ Admin

Laws and Business

Introduction

In the commercial and legal world, one often comes across a transaction being executed through a power-ofattorney. It is a means by which a person who is unable to be physically present to carry out a task or a transaction, does so through another person. While most of us may be conversant with the concept of a power-of-attorney, it would be interesting to note that there is a separate Act, i.e., the Powersof- Attorney Act, 1882 (Act), which governs the law relating to powers-of-attorney. In addition, certain other statutes also regulate the law in relation to powers-of-attorney. Let us have a brief overview of the law in this respect.

Meaning

The Act defines a power-of-attorney to include any instrument empowering a specified person to act for and in the name of the person executing it. Thus, there is an inclusive definition of the term. The following are the key features emanating from the definition:

(a) It is an instrument;
(b) The instrument must be executed by some person, known as the donor of the power;
(c) It must empower a person specified in the instrument, known as the donee of the power; and
(d) The donee must be empowered to act for and in the name of the donor.

The Bombay Stamp Act, 1958, defines a power-of-attorney includes any instrument empowering a specified person to act for and in the name of the person executing it and includes an instrument by which a person, not being a lawyer, is authorised to appear on behalf of any party in any proceeding before any Court, Tribunal or authority. However, it does not include a vakalatnama given to an advocate which is stamped with the court-fees.

Effect

Under section 2 of the Act, if the donee (holder of power-of-attorney), based on his discretion:

(a) executes any instrument or does any act;
(b) under his own name, signature and seal, if seal is required;
(c) but under the ambit of the authority conferred on him by the donor of the power-of-attorney; then such instrument or act would be treated in law as if it had been execution or done in the name, signature and seal of the donor. The legal effect of the power is that the acts of the donee, when done under proper authority, are treated as if they were done by the donor. This is an important provision of the Act, which gives legal sanctity to all acts done by a donee on behalf of the donor.

Thus, the position of the donee-donor is similar to that of an agent and his principal. A power-of-attorney’s origins may be traced to the legal maxim qui facit alium facit per se, i.e., what one can do directly he can also do through an agent. But one crucial difference as compared with an agent-principal relationship is that an agent must sign in the principal’s name while the power-of-attorney holder signs his own name.

The object of the aforesaid section and of the Act is to effectuate instruments executed by an agent, but not in accordance with the rule of the Contract Act. It does not confer on a person a right to act through an agent. It presupposes that the agent has the authority to act on behalf of the principal and protects acts done by him in exercise of that authority but in the agent’s own name — Rao Bahadur Ravulu Subba Rao v. CIT, 30 ITR 163 (SC).

In the case of Suraj Lamp & Industries P. Ltd. v. State of Haryana, (2012) 1 SCC 656, the Supreme Court has held that a power-of-attorney is not an instrument of transfer in regard to any right, title or interest in an immovable property. The power-of-attorney is creation of an agency whereby the grantor authorises the grantee to do the acts specified therein, on behalf of the grantor, which when executed will be binding on the grantor as if done by him. It is revocable or terminable at any time unless it is made irrevocable in a manner known to law. Even an irrevocable attorney does not have the effect of transferring title to the grantee.

In State of Rajasthan v. Basant Nehata, (2005) 12 SCC 77, the Apex Court held that a grant of power-of-attorney is essentially governed by the Contract Act. By reason of a deed of power-of-attorney, an agent is formally appointed to act for the principal in one transaction or a series of transactions or to manage the affairs of the principal generally conferring necessary authority upon another person. A deed of power-of-attorney is executed by the principal in favour of the agent. The agent derives a right to use his name and all acts, deeds and things done by him and subject to the limitations contained in the said deed, the same shall be read as if done by the donor. A power-of-attorney is, as is well known, a document of convenience.

Execution of a power-of-attorney in terms of the provisions of the Contract Act as also the Powers of- Attorney Act is valid. The donee in exercise of his power under such power-of-attorney only acts in place of the donor subject of course to the powers granted to him by reason thereof. He cannot use the power-of-attorney for his own benefit. He acts in a fiduciary capacity. Any act of infidelity or breach of trust is a matter between the donor and the donee and does not affect an outsider.

Revocation of a power

A power-of-attorney can be terminated or cancelled by the principal by revoking his authority or by the power-of-attorney holder renouncing his authority. A power-of-attorney is revoked by implication in the following circumstances:

(a) The donor expressly revokes all powers given by him;
(b) The donor dies;
(c) The donor becomes of unsound mind; or
(d) The donor becomes insolvent.

In any of the above situations, the power comes to an end. In Prahlad v. Laddevi, AIR 2007 Raj 166 it was held that a power comes to an end on the demise of the donor. Any acts done by the donee thereafter in pursuance of such a power are invalid.

However, if the donee not being aware of the above situations, does any act or makes any payment in good faith pursuant to the power-of-attorney, then he shall not be liable in respect of such payment or act. But any person interested in the money so paid shall continue to have a right against the recipient and he will have the remedy against the recipient as he would have had against the payer, if the payment had not been made by him.

According to the Indian Contract Act where the agent has himself an interest in the property which forms the subject matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest. Thus, in cases where the power-of-attorney is coupled with interest it is irrevocable. For instance, A gives authority to B to sell A’s land, and to pay himself out of the proceeds, the debts due to him from A. This power cannot be revoked by A. In State of Rajasthan v. Basant Nehata, (2005) 12 SCC 77, the Apex Court held that except in cases where power-of-attorney is coupled with interest, it is revocable.

Evidence of power-of-attorney

Any power-of-attorney which has been verified by an affidavit, statutory declaration, notarisation, etc., and which has been deposited with a High Court or District Court shall be treated as sufficient evidence of the contents of the instrument.

The Indian Evidence Act, 1872 provides that any Court shall presume that every power-of-attorney executed before and authenticated by a Notary Public, Court, Judge, Magistrate, Indian Consul or Vice-Consul was so executed and authenticated. This is the reason why powers-of-attorney are notarised. The presumption about the authenticity is a mandatory provision. The Delhi High Court in the case of Kamala Rani v. Texamco Ltd., AIR 2007 Del. 147 has held that the onus lies on the other side to prove that the power-of-attorney is not genuine.

A donee of a power-of-attorney cannot give evidence in Court on behalf of the donor — Rajiv Gadkari v. Smt. Nilangi Gadkari, AIR 2010 (NOC) 538 (Bom.) 2010. The Patna High Court in the case of Rajmuni Devi v. Shyama Devi, (2007) 9 RC 309 (SC) has held that a power-of-attorney holder cannot depose on behalf of the donor, but can appear as a witness on behalf of the principal.

A power-of-attorney holder cannot depose and be cross-examined in Court on matters which only the principal is expected to have knowledge of — Janki V. Bhojwani v. IndusInd Bank Ltd., 2005 Vol. 107 Bom. LR 28 (SC).

Power-of-attorney of married woman

A married woman who is not a minor has powers, as if she were unmarried to appoint an attorney on her behalf.

Can a donee sign under Income-tax Act for donor?

If the Income-tax Act or the rules made thereunder specifically require the personal signature of the assessee, then the same cannot be delegated by way of a power-of-attorney. This is would be a circumcision of the field of operation of the Power-of-Attorney Act and such a curtailment of powers is not ultra vires — Rao Bahadur Ravulu Subba Rao v. CIT, 30 ITR 163 (SC). All that section 2 of the Act provides is that there can be a delegation of powers and the manner of doing so. However, if any other enactment requires a personal presence or signature, then the two Acts operate in separate fields. The Court laid down this principle under the 1922 Income-Tax Act in relation to signing an ap-plication for registration of a firm. The rules required the partner to personally sign the application. It may be noted that Rule 22(5) now expressly permits such an application to be signed by a power-of-attorney holder in the case of a person absent from India.

Stamp Duty

Under the Bombay Stamp Act, 1958, a power-of-attorney is liable to be stamped as follows:

(a) When executed for the sole purpose of registering documents — Rs.100. Most of the builders give a power-of-attorney in favour of their employees for registering the agreements for sale/flat ownership agreements with buyers.

(b) When authorising a person to act in a transaction — Rs.100.

(d) When any person other than cases covered by (c) above authorising to sell or transfer immovable property — the same duty as on a conveyance on the market value of the immovable property, e.g., 5% on the stamp duty ready-reckoner value. One of the ways to avoid payment of stamp duty was to give a power-of-attorney to a person authorising him to sell the property and receive consideration equal to the market value of the property for such a power. This method is very prevalent in Northern India. In 2008, the Bombay Stamp Act was amended to increase the duty on such a power from 1% to 5%. Thus, now such powers are at par with a conveyance of immovable property.

A power-of-attorney given to manage and sell an immovable property and hand over the consideration to the owner cannot be treated as a conveyance for consideration and hence, charged with stamp duty as on a conveyance — Suman Kumar Sinha v. State of Jharkhand, AIR 2009 Jharkand 53.

It is not necessary that every power-of-attorney ex-ecuted abroad must be presented before the Collector for adjudication of stamp duty. Only those powers which have been executed abroad and on which no stamp duty has been paid need to be adjudicated. If proper duty has already been paid, then nothing further needs to be done — Anitha Rajan v. Revenue Divisional Officer, AIR 2010 Kerala 153.

A power-of-attorney is to be compulsorily registered only if it creates an interest in immovable property and not otherwise — B. Maragathamani v. Member Secretary, Chennai Metropolitan Development, AIR 2010 Madras 61.

Transfer of property by power of attorney

A very popular mode of transferring immovable property in Northern India was by adopting a combination of a sale agreement, general power-of-attorney and a will. This facilitated the avoidance of a conveyance and thereby saving on stamp duty for the buyer. The modus operandi in such transactions was for the owner to receive the agreed consideration, deliver possession of the property to the purchaser and execute the following documents or variations thereof:

(a)    A sale agreement by the vendor in favour of the purchaser.
(b)    An irrevocable general power-of-attorney by the seller in favour of the purchaser authorising him to manage, deal with and dispose of the property without recourse to the seller.
(c)    A will bequeathing the property to the purchaser (as a safeguard against the consequences of death of the seller before the transfer is effected).

The Supreme Court had in the case of Suraj Lamp & Industries Pvt. Ltd. v. State of Haryana, (2009) 7 SCC 363 referred to the “ill effects of what is known as general power-of-attorney sales”.

In its latest decision in the case of Suraj Lamp & Industries P. Ltd. v. State of Haryana, (2012) 1 SCC 656, the Court has held that there cannot be a sale of immovable property by execution of a power-of-attorney, nor can there be a transfer by execution of an agreement of sale and a power-of-attorney and will. It held that these kinds of transactions were evolved to avoid prohibitions/conditions regarding certain transfers, to avoid payment of stamp duty and registration charges on deeds of conveyance, to avoid payment of capital gains on transfers, to invest black money’ and to avoid payment of ‘unearned increases’ due to Development Authorities on transfer.

It also held that the observations of the Delhi High Court, in Asha M. Jain v. Canara Bank, 94 (2001) DLT 841, that the “concept of power-of-attorney sales have been recognised as a mode of transaction” when dealing with transactions by way of sale agreement/ general power of attorney/will are unwarranted, unjustified and unintendedly misleading the general public into thinking that such transactions are some kind of a recognised or accepted mode of transfer and that it can be a valid substitute for a sale deed. Such decisions to the extent they recognise or accept transactions by way of by way of sale agreement/ general power-of-attorney/will as concluded transfers are not good law.

The Apex Court however, carved out a niche for genuine transactions where the owner of a property grants a power-of-attorney in favour of a family member or friend to manage or sell his property, as he is not able to manage the property or execute the sale, personally. It also held that a power-of-attorney holder may however execute a deed of conveyance in exercise of the power granted under the power-of-attorney and convey title on behalf of the grantor.

It only clamped down upon transactions, where a purchaser pays the full price, but instead of getting a deed of conveyance gets a sale agreement/general power-of-attorney/will as a mode of transfer, either at the instance of the vendor or at his own instance.

Registering a property under a power

The Sub-Registrar of Assurances permits a power-of-attorney holder to register an instrument on behalf of the donor. However, the power must first itself be registered before the Sub-Registrar. For this purpose the donor and the donee must both go to the Sub-Registrar. Further, the Sub-Registrar insists that both the donor and the donee sign the power before him.

Conclusion

To sum up, a simple power-of-attorney has been the subject matter of great controversy and litigations. Chartered Accountants would be well advised to consider whether the power-of-attorney relied upon by their clients is valid or not. When in doubt, they should consider obtaining an opinion. One is reminded of the quote by W. H. Auden which ended as follows:

“……There is always another story, there is more than meets the eye.”

BCAJ Admin

Hindu Law: Rights of an Illegitimate Child in Joint Property

INTRODUCTION

The codified and uncodified aspects of Hindu Law deal with several personal issues pertaining to a Hindu. One such issue relates to the rights of an illegitimate child, in relation to inheritance to ancestral property, self-acquired property of his parents, right to claim maintenance, etc. This feature has earlier (March 2021) examined the position of the rights of an illegitimate child. However, recently a larger bench of the Supreme Court in Revanasiddappa vs. Mallikarjun, C.A. No. 2844/2011, Order dated:1st September, 2023, has examined the position of such a child’s rights in respect of joint family / HUF property.

VOID / VOIDABLE MARRIAGE

The Hindu Marriage Act, 1955, applies to and codifies the law relating to marriages between Hindus. It states that an illegitimate child is one who is born out of a marriage which is not valid. S.16(1) of this Act provides that even if a marriage is null and void, any child born out of such marriage who would have been legitimate if the marriage had been valid, shall be considered to be a legitimate child. Hence, all children of void/voidable marriages under the Act are treated as legitimate. The Act also provides that such children would be entitled to rights in the property of their parents.

SUCCESSION TO PROPERTIES OF OTHER RELATIVES

However, while such a child born out of a void or voidable wedlock would be deemed to be legitimate, the Act does not confer any rights on the property of any person other than his parents. This is expressly provided in s.16(3) of the Hindu Marriage Act.

In JiniaKeotin&Ors. vs. Kumar SitaramManjhi&Ors. (2003) 1 SCC 730, the Supreme Court held that s.16 of the Act, while engrafting a rule of fiction in ordaining the children, though illegitimate, to be treated as legitimate, notwithstanding that the marriage was void or voidable chose also to confine its application, so far as succession or inheritance by such children is concerned to the properties of the parents only. It held that conferring any further rights upon such children would be going against the express mandate of the legislature.

This view was once again endorsed by the Supreme Court in Bharatha Matha & Anr vs. R. Vijaya Renganathan, AIR 2010 SC 2685 where it held that a child born of void or voidable marriage is not entitled to claim inheritance in ancestral coparcenary property but is entitled only to claim share in self-acquired properties, if any.

CONTROVERSY IN THE ISSUE

The above issue of whether illegitimate children can succeed in ancestral properties or claim a share in the HUF was given a new twist by the Supreme Court in 2011 in the case of Revanasiddappa vs. Mallikarjun (2011) 11 SCC 1. The question which was dealt with in that case was whether illegitimate children were entitled to a share in the coparcenary property or whether their share was limited only to the self-acquired property of their parents under s.16(3) of the Hindu Marriage Act? It disagreed with the earlier views taken by the Supreme Court in JiniaKeotin (supra), BharathaMatha (supra) and in Neelamma&Ors. vs. Sarojamma&Ors (2006) 9 SCC 612, wherein the Court held that illegitimate children would only be entitled to a share of the self-acquired property of the parents and not to the joint Hindu family property.

The Court observed that the Act uses the word “property” and had not qualified it with either self-acquired property or ancestral property. It has been kept broad and general. It explained that if they have been declared legitimate, then they cannot be discriminated against and they will be at par with other legitimate children, and be entitled to all the rights in the property of their parents, both self-acquired and ancestral. The prohibition contained in s. 16(3) will apply to such children only with respect to the property of any person other than their parents. Qua their parents, they can succeed in all properties! The Court held that there was a need for a progressive and dynamic interpretation of Hindu Law since Society was changing. It stressed the need to recognise the status of such children which had been legislatively declared legitimate and simultaneously recognisethe rights of such children in the property of their parents. This was a law to advance the socially beneficial purpose of removing the stigma of illegitimacy on such children who were as innocent as any other children.

The Supreme Court also explained the modus operandi of succession to ancestral property. Such children will be entitled only to a share in their parents’ property but they cannot claim it in their own right. Logically, on the partition of an ancestral property, the property falling in the share of the parents of such children would be regarded as their self-acquired and absolute property. In view of the Amendment, such illegitimate children will have a share in such property since such children were equated under the amended law with legitimate offspring of a valid marriage. The only limitation even after the Amendment was that during the lifetime of their parents such children could not ask for partition but they could exercise this right only after the death of their parents.

Hence, the Court in Revanasiddappa (supra) concluded that it was constrained to take a view different from the one taken earlier by it in JiniaKeotin (supra), Neelamma (supra) and Bharatha Matha (supra) on s. 16(3) of the Act. Nevertheless, since all these decisions were of Two-Member Benches, it requested the Chief Justice of India that the matter should be reconsidered by a Larger Bench.

CURRENT STATUS

After a long wait of more than 12 years, the Supreme Court Larger Bench has finally resolved the matter in the case of Revanasiddappa vs. Mallikarjun, C.A. No. 2844/2011, Order dated: 1st September, 2023.The issue for determination, as framed by the Supreme Court, was “Whether such an illegitimate child, who has been deemed to be legitimate by virtue of s.16 of the Act, can succeed only to the self-acquired properties of his parents or even to their ancestral properties?” The Court was also examining whether such a child could become a coparcener in the HUF.

LEGITIMACY UNDER SECTION 16

The first issue settled by the Apex Court was that legitimacy bestowed by s.16 of the Hindu Marriage Act was irrespective of whether (i) such a child was born before or after the commencement of the Amendment Act of 1976 which introduced s.16; (ii) a decree of nullity was granted in respect of that marriage under the Act and the marriage was held to be void. Further, where a voidable marriage has been annulled by a decree of nullity, a child ‘begotten or conceived’ before the decree has been made, is deemed to be their legitimate child, notwithstanding the decree.

HUF AND HINDU SUCCESSION ACT

The Court examined the meaning of an HUF and its genesis under the Hindu Law. It also examined the rights of coparceners to succeed to the share of their father in the HUF in light of the Hindu Succession Act, 1956. This could be by way of a Will or by intestate succession. In the case of intestate succession, the provisions of the Hindu Succession Act provide for Class I heirs to succeed to the property of a Hindu male. In this situation, the Court noted that the Hindu Succession Act did not distinguish between legitimate Class I heirs and illegitimate heirs. The fact that legitimacy has been bestowed upon the children of a void marriage by virtue of s.16 of the Hindu Marriage Act would mean that no distinction can be drawn between those children who were legitimate and those who are deemed to be legitimate.

INTESTATE PROPERTY INCLUDES SHARE IN HUF

All property of an intestate Hindu male was to be divided amongst his Class I heirs. The Apex Court observed that the phrase “all property” means all property belonging to the intestate and included the share in his HUF. The Hindu Succession Act also provided for a notional partition of the HUF to determine the share of the deceased in the HUF. The legislature had provided for the ascertainment of the share of the deceased on a notional basis. The expression ‘share in the property that would have been allotted to him if a partition of the property had taken place’ indicated that this share represented the property of the deceased. Where a person died intestate, the property would devolve in terms of the Hindu Succession Act. The Court held that in the distribution of the property of the deceased who had died intestate, a child who was recognised as legitimate under the Hindu Marriage Act would be entitled to a share. Since this was the property that would fall to the share of the intestate after the national partition, it belonged to the intestate. Hence, where the deceased had died intestate, the devolution of this property must be among the children – legitimate as well as those conferred with legitimacy by the Legislature. The Court gave an illustration of a HUF with 4 coparceners. Of these, C2, one coparcener dies and is survived by his wife and two children. One of the two children is illegitimate but deemed to be legitimate as above. A notional partition of the HUF would take place, and C2’s share would be determined as 1/4th and this 1/4th would be split equally amongst his widow, his legitimate child and his illegitimate child. Each of them would get a 1/3rd share in C2’s 1/4th share, i.e., a 1/12th share in the HUF.

ENTITLED TO SHARE BUT NOT A COPARCENER

However, the Court held that the illegitimate child would not ipso facto become a coparcener in the HUF. He would get a share in his deceased father’s HUF share but not directly become a coparcener in the HUF. This is because the HUF property is not the exclusive property of his father. S.16(3) of the Hindu Marriage Act has an express carve out that a deemed legitimate child cannot succeed to properties of other relatives. To make him a coparcener would violate s.16(3). It noted several amendments during the year to the Hindu Succession Act to remove gender biases. But the legislature has not stipulated that a child whose legitimacy is protected by s.16 of the Hindu Marriage Act, would become a coparcener by birth.

The very concept of a coparcener postulated the acquisition of an interest by birth. If a person born from a void or voidable marriage to whom legitimacy was conferred by s.16 were to have an interest by birth in a HUF, this would affect the rights of others apart from the parents of the child. Holding that the consequence of legitimacy under s.16 was to place such an individual on an equal footing as a coparcener in the coparcenary would be contrary to the provisions of s.16(3) of the Hindu Marriage Act.

CONCLUSION

The issue relating to HUF rights of illegitimate children has been quite contentious and litigation-prone. After a long wait, the issue has reached finality. The Court has aimed for a balancing approach by protecting the rights of the deemed legitimate child on the one hand and also preserving the rights of other HUF coparceners on the other hand!

BCAJ Admin

What’s In a Name? Immovable or Movable Could Be the Same

INTRODUCTION

Immovable property is the most ancient form of an asset which mankind has ever known. Its law and practice are multi-faceted, both from a legal and tax perspective.Different laws have defined the term ‘immovable property’ differently. These definitions are very relevant in determining whether or not a particular asset can be classified as an immovable property. For example, there is a difference in the rates of stamp duty on conveyance of a movable property and an immovable property. Similarly, GST is payable only in respect of sale of goods which are movable property and not on a completed immovable property. Recently, the Supreme Court in the case of the Sub Registrar, Amudalavalasa versus M/s Dankuni Steels Ltd., CA No. 3134-3135 of 2023, order dated 26th April, 2023 had an occasion to consider this issue in great detail. The Court analysed various definitions and propounded the settled principle that anything which is permanently affixed to land would also be immovable property. Let us examine this important proposition.

FACTS OF THE CASE

In the case of Dankuni (supra), under an auction, the assets of a company which consisted of land, building, civil works, plant and machinery and current assets, were declared to be sold to the highest bidder for a consideration of Rs. 8.35 cr. A sale deed was executed for this amount. Subsequent to the sale deed, a conveyance was executed for conveying the land, building and civil works. In the conveyance, the fact of the sale deed was mentioned and it was also stated that the market value of the land and building was Rs. 1.01 cr.Accordingly, the buyer tried to pay stamp duty on this amount of Rs.1.01 cr. and register the conveyance deed. The Sub-Registrar of Assurances did not agree with this value and held that the market value of the plant and machinery should also be included since it was immovable in nature. The matter reached the Division Bench of the Andhra Pradesh High Court, which held that the when the conveyance was only for the land and building, the Sub-Registrar could not force the buyer to pay stamp duty on the value of the plant when he does not seek its registration. The Court directed the registration of the conveyance deed as it stood and for the value recorded therein. Aggrieved by this decision, the Revenue appealed to the Supreme Court.

DEFINITIONS

The Registration Act, 1908 defines the term in an inclusive manner to include land, buildings, hereditary allowances, rights of ways, lights, ferries, fisheries or any other benefits to arise out of land, and things attached to earth or permanently fastened to anything which is attached to the earth, but not standing timber, growing crops and grass.The General Clauses Act, 1897 defines the term to include land, benefits to arise out of land and things attached to the earth, or permanently fastened to anything attached to the earth.

The Transfer of Property Act, 1882, is the primary law dealing with immovable property. The Act merely defines immovable property as not including standing timber, growing crops and grass. However, it defines the phrase attached to the earth to mean-

“(i) rooted in the earth, as in the case of trees and shrubs;

(ii) imbedded in the earth, as in the case of walls or buildings; or

(iii) attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached”.

Section2(ja) of the Maharashtra Stamp Act, 1958, defines the term immovable property as follows:

“Immovable property includes land, benefits to arise out of land, and things attached to the earth or permanently fastened to anything attached to the earth.”

The Goods and Services Tax Act, 2017 does not contain any definition of the term immovable property or land. However, the definition of the crucial term “goods” states that it not only includes every kind of movable property other than money and securities but also actionable claims, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply. Thus, in this case the definition under the Transfer of Property Act would come in useful.

From the above definitions, it would be evident that the main issue whether an asset is an immovable property or not would arise in respect of plant and machinery, power transmission towers, cellular towers, and similar assets.

JUDICIAL HISTORY

Various landmark decisions of the Supreme Court and High Courts have dealt with what is an immovable property. Key decisions are discussed below.The Supreme Court in Sirpur Paper Mills (1998) 1 SCC 400 while examining whether or not a paper plant was an immovable property, held that the whole purpose behind attaching the machine to a concrete base was to prevent wobbling of the machine and to secure maximum operational efficiency and also for safety. It further held that paper-making machine was saleable as such by simply removing the machinery from its base. Hence, the machinery assembled and erected at its factory site was not an immovable property because it was not something attached to the earth like a building or a tree. The test laid down was, whether the machine can be sold in the market. Just because the plant and machinery is fixed in the earth for better functioning, it would not automatically become an immovable property.

Further, the decision of the Supreme Court in the case of Duncan’s Industries Ltd vs. State Of U. P. (2000) 1 SCC 633, dealing with a fertiliser plant, is also relevant in determining what is movable and what is immovable. In this case, the Supreme Court distinguished Sirpur’s case and held that whether machinery which is embedded in the earth is a movable property or an immovable property, depends upon the facts and circumstances of each case. Primarily, the court will have to take into consideration the intention of the party when it decided to embed the machinery: the key question is, whether such embedment was intended to be temporary or permanent? If the machineries which have been embedded in the earth permanently with a view to utilising the same as a plant, e.g., to operate a fertiliser plant, and the same was not embedded to be dismantled and removed for the purpose of sale as a machinery at any point of time, then it should be treated as an immovable property. In this case, a transfer took place on “as is where is” basis and “as a going concern” of a fertiliser business. This was preceded by an agreement which involved also expressly the transfer of plant and machinery. The Collector levied a stamp duty and penalty on the basis that since the transfer contemplated the sale of the unit as a going concern, the intention of the vendor was to transfer all properties in the fertiliser business in question.

Applying the above principles, the Apex Court agreed with the demand of the Collector. It was held that when the buyer contended that the possession of the plant and machinery were handed over separately to by the vendor, the machineries were not dismantled and given to the buyer, nor was it possible to visualise from the nature of the plant that such a possession de hors the land could be given by the buyer. Thus, it was an attempt to reduce the market value of the property the document by drafting it as a conveyance deed regarding the land only. The buyer had purported to transfer the possession of the plant and machinery separately and was contending now that this handing over possession of the machinery was de hors the conveyance deed. The Court relied on the conveyance deed itself to hold that what was conveyed was not only the land but the entire fertiliser business including plant and machinery.

In the case of Triveni Engineering & Indus. Ltd., 2000 (120) ELT 273 (SC), the Supreme Court held that generating sets consisting of the generator and its prime base mover are mounted together as one unit on a common base. Floors, concrete bases, walls, partitions, ceilings etc., even if specially fitted out to accommodate machines or appliances, cannot be regarded as a common base joining such machines or appliances to form a whole. The installation or erection of the turbo alternator on the concrete base specially constructed on the land could not be treated as a common base and, therefore, it followed that the installation or erection of turbo alternator on the platform constructed on the land would be immovable property.

The decision in the case of Mittal Engineering Works Pvt. Ltd. vs. CCE Meerut, 1996(88) ELT622 (SC) was on similar lines where it held that a mono vertical crystalliser, which had to be assembled, erected and attached to the earth by a foundation at the site of the sugar factory was not capable of being sold as it is, without anything more. Hence, the plant was not a movable property.

In Quality Steel Tubes (P) Ltd vs Collector of Central Excise, 1995 SCC (2) 372 it was held that goods which were attached to the earth became immovable, and did not satisfy the test of being goods within the meaning of the Excise Act nor could be said to be capable of being brought to the market for being bought or sold, fall within the definition of immovable. Therefore, a plant of tube mill and welding head was regarded as immovable.

The Delhi High Court in Inox Air Products Ltd vs. Rathi Ispat Ltd (2007) 136 DLT 101 (DB) dealt with machineries which have been embedded in the earth, to constitute Cryogenic Air Separation Plants for the production of oxygen and nitrogen to be used in the production of steel. The machinery was erected with civil and structural works, viz., foundation, piling, structural support and pipe support, etc. for the installation of the plant, and the same could not be shifted without first dismantling it and then re-erecting it at another site. These were held to be immovable in nature. On erection, the machinery, ceased to be movable property. The Court held the machinery did not answer the description of “goods” or “movable property”, which by its very nature envisaged mobility and marketability on an “as it is, where it is basis”. Even though, the plant and machinery after dismantling could have been sold as scrap, but that was also the case with steel recovered from the rubble of an edifice.

The Karnataka High Court in Shree Arcee Steel P Ltd vs. Bharat Overseas Bank Ltd, AIR 2005 Kant 287, held that the meaning of the word “immovable” means permanent, fixed, not liable to be removed. In other words, for a chattel to become immovable property, it must be attached to the immovable property permanently as a building or as a tree attached to earth. Though a moveable property was attached to earth permanently for beneficial use and enjoyment, it remained a movable property. The Court gave an illustration that though a sugar cane machine/or an oil engine was attached to earth, it was moveable property. The degree, manner, extent and strength of attachment of the chattel to the earth or building were the main features to be recorded. Thus, the Court concluded that a centerless bar turning machine measuring 80’ in length and 10’ in width and 5’ height embedded to the earth by mounting the same on a cement base and fastened to it with bolts and nuts could not be called as immovable property.

The Central Board of Excise and Customs had, under the erstwhile, Central Excise Act 1944, after considering several Court decisions (including some of those mentioned above), clarified vide Order No. 58/1/2002 – CX that:

(A) If items assembled or erected at site and attached by foundation to the earth cannot be dismantled without substantial damages to components and thus cannot be reassembled, then the items would not be considered as movables.

(B) If any goods installed at site (e.g., paper-making machine) are capable of being sold or shifted as such after removal from the base and without dismantling into its components/parts, the goods would be considered to be movable. If the goods, though capable of being sold or shifted without dismantling, are actually dismantled into their components/parts for ease of transportation etc., they will not cease to be movable merely because they are transported in dismantled condition.

(C) The intention of the party is also a factor to be taken into consideration to ascertain whether the embedment of machinery in the earth was to be temporary or permanent. This, in case of doubt, may help determine whether the goods are moveable or immovable.

The CBEC also issued clarifications for specific items:

(i) Turn key projects like Steel Plants, Cement plants, Power plants, etc. involving supply of large number of components, machinery, equipments, pipes and tubes, etc. for their assembly/installation/erection/integration/inter-connectivity on foundation/civil structure etc. at site, will not be considered as excisable goods.

(ii) Huge tanks made of metal for storage of petroleum products in oil refineries or installations: These tanks, though not embedded in the earth, are erected at site, stage by stage, and after completion they cannot be physically moved. On sale/disposal they have necessarily to be dismantled and sold as metal sheets/scrap. It is not possible to assemble the tank all over again. Such tanks are therefore not moveable.

(iii) Refrigeration/Air conditioning plants: These are basically systems comprising of compressors, ducting, pipings, insulators and sometimes cooling towers, etc. They are in the nature of systems and not machines as a whole. They come into existence only by assembly and connection of various components and parts. The refrigeration/air conditioning system as a whole cannot be considered to be goods.

(iv) Lifts and escalators: Lifts and escalators which are installed in buildings and permanently fitted into the civil structure cannot be considered to be goods.

DECISION IN DANKUNI’S CASE

The Supreme Court considered the various statutory definitions of the term immovable property as well as its own decision in Duncans (supra). It also considered the sale deed in the present case. Accordingly, it was clear from the sale deed itself, that the total sale consideration was Rs. 8.35 cr., for the land, building, civil works, plant and machinery and current assets, etc. However, what had been done was that an amount of Rs.1.01 cr. had been taken as the value of the land, building and civil works. The Court held that what was purported to be conveyed, was, the land as defined in the Sale Deed and land was immovable property. However, Immovable property was defined in the General Clauses Act, 1897 as ‘including land, benefits to arrive out of land and things attached to the earth or permanently fastened to anything attached to the earth’. When it came to the definition of ‘immovable property’ in the Transfer of Property Act, it is defined as ‘not including standing timber, growing crops or grass’. In the Registration Act, 1908, immovable property included, apart from land and buildings, things attached to the earth or permanently fastened to anything attached to the earth but not including standing timber, growing crops or grass. In this respect, the Supreme Court made a useful reference to section 8 of the Transfer of Property Act which declared that in the absence of an express or implied indication, a transfer of property passed to the transferee all the interests, which the transferor was capable of passing in the property and in the legal incidents thereof. Such incidents included, inter alia, where the property was land, all things attached to the earth. Accordingly, the Apex Court laid down a very important principle, that when the property was machinery attached to the earth, the movable parts thereof also were comprehended in the transfer.A proper reading of the Sale Deed, indicated that what was conveyed was rights over the scheduled property, which, no doubt, was the land but it also included all the rights, easements, interests, etc., i.e., the rights which ordinarily passed on such sale over the land. The Court held that it was from a reading of this deed in conjunction with section 8 of the Transfer of Property Act that the intention of the parties become self-evident that the vendor intended to convey, all things, which inter alia stood attached to the earth. The mere fact that there was no express reference to plant and machinery in the Sale Deed did not mean that the interest in the plant and machinery which stood attached to the land was not conveyed. It held that the buyer had only considered value of the land, building and civil works and this was done to tide over the liability to stamp duty for what was actually, in law, conveyed. Thus, the Court concluded that it was clear that the sale deed operated to convey the rights over the plant and machinery as well, which were comprised in the land mentioned in the sale deed. However, it added that as far as plant and machinery was concerned, it would be only that which was permanently embedded to the earth and answering the description of the immovable property as defined above. Accordingly, the stamp duty valuation should be recomputed on that basis.

EPILOGUE

Apparently, the quote “What’s in a Name?” would hold true in this case. Even if an asset is called movable property, if it answers the description of immovable property, then instruments dealing with it would be subject to stamp duty accordingly. In this case, a “Rose by any other name would smell as sweet!” Although one may hasten to add that here, the smell would be far from sweet due to the higher stamp duty incidence.

shailesh.kwebmaker

Cross-Border Succession : Foreign Assets Of An Indian Resident

INTRODUCTION

We continue with our theme of cross-border succession planning. Last month’s Feature, examined issues in the context of a foreign resident leaving behind Indian assets. This month we explore the reverse situation, i.e., succession issues of an Indian resident leaving behind foreign assets. In the age of the Liberalised Remittance Scheme (LRS) of the RBI, this has become a very important factor to be considered.

APPLICABLE LAW OF SUCCESSION

The first question to be addressed is which law of succession applies to such an Indian resident? Here the Indian Succession Act, 1925 would not be applicable. The relevant law of succession of the country where the assets are located would apply. It would have to be seen whether that country has a law similar to the Indian Succession Act which provides that succession to movables is governed by the law where the deceased was domiciled and succession to an immovable property is governed by the law of the land where the property is located. For instance, England has a law similar to India.

There are two basic legal systems in International Law ~ Civil Law and Common Law. Certain Civil Law jurisdiction countries, such as, France, Italy, Germany, Switzerland, Spain, Japan, etc., have forced heirship rules. Forced heirship means that a person does not have full freedom in selecting his beneficiaries under his Will. Certain close relatives must get a fixed share. This is a feature which is not found in Common Law countries, such as, the UK and India. Thus, an Indian has full freedom to prepare his Will as per his wishes and bequeath to whomsoever he wishes. This issue has been elaborated eloquently by the Supreme Court in its decision in Krishna Kumar Birla vs RS Lodha, (2008) 4 SCC 300 where it has held:

“Why an owner of the property executes a Will in favour of another is a matter of his/her choice. One may by a Will deprive his close family members including his sons and daughters. She had a right to do so. The court is concerned with the genuineness of the Will. If it is found to be valid, no further question as to why did she do so would be completely out of its domain. A Will may be executed even for the benefit of others including animals.”

Countries in the Middle East, such as, the UAE, follow the Sharia Law. According to the Sharia Law forced heirship rules apply, i.e., a person does not have complete freedom in bequeathing his assets under a Will. The Federal Law No. (28) of 2005 on Personal Status applies in the UAE for all inheritance issues. When a non-Muslim dies intestate, the Sharia Law as applicable in the UAE would apply to his assets located in the UAE. Sharia Law provides more rights to a son as opposed to a daughter. However, if the non-Muslim were to make a Will and follow the necessary procedure, such as, translation to Arabic, attestation by authorities, etc., then the Sharia Law would not apply. In addition, certain free trade zones e.g., the DIFC in Dubai, gives the option of getting the Will registered with Courts located within their zone. This registration also results in Sharia Law not applying to the UAE assets of the deceased.

Since January 2023, the forced heirship in Switzerland has reduced from 3/4th share in the estate to ½ share. Thus, a person can now make a Will according to his choice for ½ of his estate located in Switzerland and the rest must go according to the law to the spouse and parents of the deceased. Louisiana in the US is the only State which has forced heirship rules since it was at one time a French colony. Trusts could be a solution for avoiding forced heirship rules.

ONE INDIAN WILL OR SEPARATE WILLS?

Is it advisable to make one consolidated Indian Will for all assets, wherever they may be located or should a person make a separate Will for India and one for each country where the assets are situated? The International Institute for the Unification of Private Law or UNIDROIT has a Convention providing a Uniform Law on the Form of an International Will. Member signatories to this Convention would recognise an International Will if made as per this Format. Thus, a person can make one consolidated Will under this Convention which would be recognised in all its signatories. This would preclude the need for making separate Wills for different countries. However, only a handful of countries such as, Australia, Canada, Italy, France, Belgium, Cyrpus, Russia, etc., have accepted this Convention. Countries, which have a major Indian diaspora such as, UAE, Singapore, Hong Kong, Malaysia, etc., are not signatories. Further, in the US, only 20 states have ratified this Convention, with the major states being, California and Illinois. Conspicuous by their absence are key States such as, Texas, Florida, New York, New Jersey, etc. Considering the limited applicability of the UNIDROIT Convention, it is a better idea to have horses for courses approach, i.e., a distinct Will for each jurisdiction where assets are located. For example, an Indian with assets in Dubai, could get his Will prepared according to the format prescribed by the Dubai International Financial Centre and register it with the DIFC Courts to avoid the applicability of Sharia Law.

International Wills would require probates/succession certificates/inheritance certificates as per the laws of the country in which the assets are located. Some nations that require a Probate / Certificate of Inheritance ~ US, Singapore, UAE, France, Switzerland, Germany, Canada, Malaysia, South Africa, etc. Further, states in the US have their own Probate Laws and Probate Fees. For instance, Probate Costs are very high in the states of California and Connecticut. Thus, if a person dies leaving behind assets in these states, he would have to consider the costs as per the State Law.

Indian residents should examine whether their foreign Wills for foreign assets need to follow forced heirship rules if that country is governed by such rules.

FEMA AND FOREIGN ASSETS OF A RESIDENT

The Foreign Exchange Management Act, 1999 provides that a person residing in India may hold, own, transfer or invest in currency, security or any immovable property situated abroad, if such currency, security or property was acquired, held or owned by such person when he was a non-resident or inherited by him from a person who was a non-resident. Thus, a resident can own, hold and transfer such assets inherited by him.In addition, the Overseas Investment Rules, 2022 permit a person resident in India to acquire immovable property outside India by way of inheritance from a person resident in India who has acquired such property as per the foreign exchange provisions in force at the time of such acquisition. Hence, if a person has acquired a foreign property under LRS then his heirs can inherit the same from him. A person resident in India can also acquire foreign immovable property from a non-resident.

Further, a resident individual may, without any limit, acquire foreign securities by way of inheritance from a person resident in India who is holding such foreign securities in accordance with the provisions of the FEMA or from a person resident outside India. Again a person who has invested in shares under LRS can bequeath them to his legal heirs.

TAX PROVISIONS

Inheritance Tax / Estate Duty is applicable in several nations, such as, the US, UK, Germany, France, Japan, Netherlands, Switzerland, Thailand, South Africa, etc. These provisions apply to the global assets of a resident of these countries and should be carefully scrutinised to understand their implications. Belgium has the highest slab rate of estate duty with the peak duty touching 80 per cent! While there is no duty on movables located within Belgium, Belgian immovable property is subject to inheritance tax even for non-residents.Popular countries where Indians have assets and which do not levy estate duty include, UAE, Singapore, Hong Kong, Malaysia, Saudi Arabia, Mauritius, Australia, etc.

The US has the most complex and comprehensive Estate Duty Law. An Indian resident (who is neither a US citizen nor a Green Card holder) is subjected to estate duty on the US assets after a basic exemption limit of only US$60,000. On the other hand, a US citizen has a basic estate duty exemption limit of $12.92 million. However, the peak estate duty rate is the same for both at 40 per cent! Thus, consider an example of an Indian resident who has been regularly investing under the LRS in the shares of Apple Inc. His portfolio has now swelled up to a value of $3 million. On his demise, his estate would get an exemption of $60,000 and the balance sum of $2.94 million would be subject to US estate duty with the peak rate being 40 per cent. Add to this the US Probate costs and you could have a huge portion of the estate snipped off to taxes and duties.

Further, in the case of a US citizen who is living abroad, say, in India, while the basic exemption limit is $12.92 million, any inheritance to his estate by his non-US spouse is exempt only to the extent of $175,000. If it was a case of US citizen to US spouse estate transfer (even if both were residents of India), there would be no estate duty since marital transfers are exempt from duty.

The UK also levies Inheritance Tax @ 40 per cent after a basic exemption limit (known as the nil-rate band) of £325,000. In addition, one UK house up to £175,000 is also exempt. These limits apply also to foreigners owning assets in the UK. There are certain exemptions, such as, inter-spousal transfers. In addition, the UK and India have a Double Tax Avoidance Treaty in relation to Estate Duty. The UK also has look-back rules of up to 7 years and thus, in the case of certain gifts if the donor does not survive for 7 years after the gift, then the gift would also be subject to Inheritance Tax. Most countries, including the US, have a look back period of 3 years, the UK is quite unique in pegging this period at 7 years.

Switzerland has a unique system where the inheritance taxes are regulated by Cantons. Each Canton has the power to determine their own inheritance tax rate.

There is no Estate Duty/Inheritance tax in India on any inheritance/succession/transmission. Section 56(2)(x) of the Income-tax Act also exempts any receipt of an asset/money by Will/intestate succession. This exemption would also be available to receipt of foreign assets by Indian residents. There is no condition that the receipt under a Will/Succession/Inheritance must be from a relative. It could even be from a friend.

Residents who inherit any foreign assets must be careful and file Schedule FA in their income-tax Returns. They should also pay heed to whether the asset inherited by them consists of an undisclosed asset as per the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. The decision of the Calcutta High Court in the case of Shrivardhan Mohta vs UOI, [2019] 102 taxmann.com 273 (Calcutta) is relevant in this respect. Four undisclosed offshore bank accounts were found during a search on the assessee and action under the Black Money Act was initiated against him for non-disclosure of these accounts. The explanation given by the assesse was one of inheritance. The Court held that “Inheritance did not prevent him from disclosing. It is just an unacceptable excuse.” Thus, it would be the responsibility of the beneficiary to include foreign assets within his disclosure on receiving the same.

CONCLUSION

Estate planning, per se, is a complex exercise. Throw in a cross-border element and one is faced with a very dynamic, multi-faceted scenario which requires due consideration of both Indian and foreign tax and regulatory provisions.

shailesh.kwebmaker

Cross-Border Succession: Indian Assets Of A Foreign Resident

INTRODUCTION

We live in a global village and cross-border acquisition of assets has become an extremely common phenomenon. Cases of both, Indians acquiring assets abroad and foreign residents acquiring Indian assets, are increasing. With this come issues of cross-border succession and Wills. What happens when a person living abroad dies leaving behind Indian assets and when an Indian resident dies, leaving behind foreign assets? Which law should apply and which Wills would prevail? These are some of the myriad complex questions which one grapples with in such scenarios. Let us, in this month’s Feature, examine some such posers in the context of a foreign resident leaving behind Indian assets.

APPLICABLE LAW OF SUCCESSION

The first question to be addressed is which law of succession applies to such a foreign resident? The Indian Succession Act, 1925 (“the Act”) provides that succession to the immovable property in India, of a person deceased shall be regulated by the law of India, wherever such a person may have had his domicile at the time of his death. However, succession to his moveable property is regulated by the law of the country in which such person had his domicile at the time of his death. For example, A, having his domicile in England, dies in UK, leaving property, both moveable and immovable, in India. The succession to the immovable property would be regulated by the law of India but the succession to the moveable property is regulated by the English rules which govern the succession to the moveable property of an Englishman. The Act further provides that a person can have only one domicile for the purpose of the succession to his moveable property. If a person dies leaving the moveable property in India, then, in the absence of proof of any domicile elsewhere, succession to the property is regulated by the law of India.

The Act provides that the domicile of origin of every person of legitimate birth is in the country in which at the time of his birth his father was domiciled; or, if he was born after his father’s death, then in the country in which his father was domiciled at the time of the father’s death. However, the domicile of origin of an illegitimate child is in the country in which, at the time of his birth, his mother was domiciled. The domicile of a minor follows the domicile of the parent from whom he derived his domicile of origin. Except as provided by the Act, a person cannot, during minority, acquire a new domicile.

By marriage a woman acquires the domicile of her husband, if she had not the same domicile before. A wife’s domicile during her marriage follows the domicile of her husband.

The domicile of origin prevails until a new domicile has been acquired which can be done by taking up his fixed habitation in a country which is not that of his domicile of origin. The law further provides that a man is not to be deemed to have taken up his fixed habitation in India merely by reason of his residing in India or by carrying or the civil, military, naval or air force service of Government, or in the exercise of any profession or calling. Thus, a person who comes to India for business does not ipso facto acquire an Indian domicile. There must be intent to remain in India forever and for an uncertain period of time. The Act gives an example of A, whose domicile of origin is in England, comes to India, where he settles as a barrister or a merchant, intending to reside there during the remainder of his life. His domicile would now be in India.

However, if A, whose domicile is in England, goes to reside in India to wind up the affairs of a partnership which has been dissolved, and with the intention of returning to England as soon as that purpose is accomplished, then he does not by such residence acquire a domicile in India, however long the residence may last. But if in the same example, A, having gone to reside in India, afterwards alters his intention, and takes up his fixed habitation in India, then he has acquired a domicile in India.

The Act provides that any person may acquire a domicile in India by making and depositing before the State Government, a declaration of his desire to acquire such domicile; provided that he has been resident in India for one year immediately preceding the time of his making such declaration. A new domicile continues until the former has been resumed or another has been acquired.

The Act also provides that the above provisions pertaining to domicile would not apply to a Hindu / Buddhist / Sikh / Jain or to a Muslim since they are governed by their personal law of succession. Hence, the above provisions would apply mainly to Christians, Parsees, Jews, etc. However, even though the Act does not apply to these five communities, the Rules of Private International Law (on which the provisions of the Act are based) would apply to them.

ONE WILL OR SEPARATE INDIAN WILL?

Is it advisable to make one consolidated Will for all assets, wherever they may be located or should a person make a separate Will for each country where assets are situated? The International Institute for the Unification of Private Law or UNIDROIT has a Convention providing a Uniform Law on the Form of an International Will. Member signatories to this Convention would recognise an International Will if made as per this Format. Thus, a person can make one consolidated Will under this Convention which would be recognised in all its signatories. This would preclude the need for making separate Wills for different countries.

However, only a handful of countries such as, Australia, Canada, Italy, France, Belgium, Cyrpus, Russia, etc., have accepted this Convention. India is not a signatory to this Convention.

Considering the limited applicability of the UNIDROIT Convention, it is a better idea to have a ‘horses for courses’ approach, i.e., a distinct Will for each jurisdiction where assets are located. Thus, a foreign resident should make a separate Indian Will for his Indian assets.

PROBATE OF A FOREIGN WILL IN INDIA

International Wills

Consider a situation of a person who is domiciled in the UK but also has several immovable properties and assets in India. This individual dies in the UK and has prepared a Will for his UK estate. This also includes a bequest for his Indian properties. How would this Will be executed in India?

According to the Indian Succession Act, 1925, no right as an executor or a legatee of a Will can be established in any Court unless a Court has granted a probate of the Will under which the right is claimed.

A probate means the copy of the Will certified by the seal of a Court along with the list of assets. Probate of a Will establishes its authenticity and finality, and validates all the acts of the executors. It conclusively proves the validity of the Will and after a probate has been granted no claim can be raised about its genuineness.. This probate provision applies to all Christians and to those Hindus, Sikhs, Jains and Buddhists who are / whose immovable properties are situated within the territory of West Bengal or the Presidency Towns of Madras and Bombay (i.e., West Bengal or Tamil Nadu or Maharashtra). Thus, for Hindus, Sikhs, Jains and Buddhists who are / whose immovable properties are situated outside the territories of West Bengal or Tamil Nadu or Maharashtra, a probate is not required.

Section 228 of the Indian Succession Act deals with a case where the Will has been executed by a non-resident. It provides that where a Will has been proved in a foreign court and a properly authenticated copy of such Will is produced before a Court in India, then letters of administration may be granted by the Indian Court with a copy of such Will annexed to the same. A letters of administration is at par with a probate of a Will and it entitles the holder of the letters of administration to all rights belonging to the deceased as if the administration had been granted at the moment after his death. Basically, while a probate is granted for a testate succession (i.e., one where there is a will), a letters of administration is granted for an intestate succession (i.e., one where there is no will). However, in case of a foreign Will, instead of a probate, a letters of administration is granted.

FEMA AND INDIAN ASSETS OF A FOREIGN RESIDENT

Section6 (5) of the Foreign Exchange Management Act, 1999 provides that a person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India. Thus, a non-resident (whether of Indian origin or not) has been given express permission to inherit such Indian assets from a resident Indian.

Further, Rule 24 of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 provides that an NRI or an OCI may acquire any immovable property in India by way of inheritance from a person resident outside India who had acquired such property:

(i) in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him; or

(ii) from a person resident in India.

When contrasted with Section 6(5), it would be evident that the general permission under Rule 24 is only for NRIs and Overseas Citizens of India, whereas Section 6(5) is for all persons resident outside India. Thus, a foreign citizen of Indian origin, who does is not an OCI, i.e., he is only a Person of Indian Origin, would not be eligible for automatic permission to inherit the property mentioned under Rule 24.

RBI’s Master Direction on Remittance of Assets provides that a Citizen of a foreign state may have inherited assets in India from a person resident outside India who acquired the assets (being immovable property, securities, cash, etc.) when he was an Indian resident or is a spouse of a deceased Indian national and has inherited assets from such Indian spouse. Such a Foreign Citizen can remit an amount not exceeding US$ 1 million per year if he produces documentary proof in support of the legacy, e.g., a Will. “Assets” for this purpose include, funds representing a deposit with a bank or a firm or a company, provident fund balance or superannuation benefits, amount of claim or maturity proceeds of insurance policies, sale proceeds of shares, securities, immovable properties or any other asset held in accordance with the FEMA Regulations.

Further, a Non-Resident Indian or a Person of Indian Origin, who has received a legacy under a Will, can remit from his Non-Resident Ordinary (NRO) Account an amount not exceeding US$ 1 million per year if he produces documentary proof in support of the legacy, e.g., a Will. The meaning of the term “Assets” is the same as that above. In addition, a similar amount is also allowed to be repatriated in respect of assets acquired by the NRI / PIO under a deed of settlement made by either of his/ her parents or a relative as defined in Companies Act, 2013. The settlement should take effect on the death of the settler. Relative for this purpose means, spouse, siblings, children, daughter-in-law and son-in-law. Further, step-parents, step-children and step-siblings are also included within the definition. There is no express mention about adoptive parents. However, various Supreme Court decisions have held that once all formalities of adoption are validly completed, the adopted child becomes as good as the biological child of the adoptive parents. The term settlement is not defined under the FEMA Regulations and hence, one may refer to definitions under other laws. The Indian Stamp Act, 1899 defines a settlement to mean any non-testamentary disposition (i.e., not by Will), in writing, of moveable or immovable property made–

(a) in consideration of marriage,

(b) for the purpose of distributing property of the settler among his family or those for whom he desires to provide, or for the purpose of providing for some person dependent on him, or

and includes an agreement in writing to make such a disposition.

The Specific Relief Act, 1963 defines a settlement to mean an instrument (other than a Will or codicil as defined by the Indian Succession Act, 1925), whereby the destination or devolution of successive interests in movable or immovable property is disposed of or is agreed to be disposed of.

A declaration of Trust has also been held to be a settlement in the case of Sita Ram vs. Board of Revenue, AIR 1979 All 301. In the case of Chief Controlling Revenue Authority vs P.A. Muthukumar, AIR 1979 Mad 5, the Full Bench examined the question of whether a deed was a settlement or a trust? The Court held that the quintessence of the definition of the word ‘settlement’ in Section 2(24)(b) of the Indian Stamp Act was that the property should be distributed among the members of the family of the author of the trust or should be ordained to be given to those near and dear to him. In the absence of any such clause express or implied to be culled out by necessary implication from out of the instrument to conclude about distribution of property, either movable or immovable among the settlor’s heirs or relatives, it would be difficult to hold that an instrument should be treated as a settlement.

In case of a remittance exceeding the above limits, an application for prior permission can be made to the Reserve Bank of India.

TAX PROVISIONS

Inheritance Tax / Estate Duty is applicable in several nations, such as, the USA, UK, Germany, France, etc. These provisions apply to the global assets of a resident of these countries.

The USA has the most complex and comprehensive Estate Duty Law. A US Resident leaving behind Indian assets would be subject to US Estate Duty on the Indian Assets. Currently, the US has a Federal Estate Duty exemption of US$12.92 million which can be utilized by the estate of a person even for foreign assets. In addition, there is no estate duty on marital transfers, i.e., between US spouses. Hence, if a US person leaves his global assets to his Wife (who should also be a US person), then there is no estate duty. However, if the spouse is a non-US person, then the estate duty exemption is only US$175,000. US Federal Estate duty rates are as high as 40 per cent above the exemption limit.

Further, several US States, such as, NY, Illinois, Washington, etc., levy a State Estate Duty for its residents who die leaving behind estate. Key states which do not levy Estate Duty, include, Texas, Florida, etc.

In addition, six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania) levy a State Inheritance Tax, i.e., a tax paid by the recipient on the assets received from a deceased. Thus, for recipients staying in these six states, the estate of the deceased would be subject to a Federal Estate Tax, may have to pay a State Estate Duty and then the recipients would also pay State Inheritance Tax.

There is no Estate Duty / Inheritance tax in India on any inheritance/succession/transmission. Section 56 (2) (x) of the Income-tax Act, 1961 also exempts any receipt of an asset / money by Will / intestate succession. This exemption would also be available to receipt by non-residents in cases covered by Section 9 (1) of the Income-tax Act, 1961, i.e., receipt of sum of money by a non-resident from a resident.

CONCLUSION

Estate planning, per se, is a complex exercise. In a cross-border element, one is faced with a very dynamic, multi-faceted scenario which requires due consideration of both Indian and foreign tax and regulatory provisions.

shailesh.kwebmaker

IBC & SC in Vidarbha Industries: NCLT May or Should Admit a Financial Creditor’s Application?

INTRODUCTION

The Insolvency and Bankruptcy Code, 2016 (“the Code”) provides for the insolvency resolution process of corporate debtors. The Code gets triggered when a corporate debtor commits a default in payment of a debt, which could be financial or operational. The initiation (or starting) of the corporate insolvency resolution process under the Code, may be done by a financial creditor (in respect of default in respect of financial debt) or an operational creditor (in respect of default in respect of an operational debt) or by the corporate itself (in respect of any default).

An interesting question has arisen as to whether the National Company Law Tribunal (NCLT) is bound to admit a plea for a Corporate Insolvency Resolution Process (“CIRP”) filed by a financial creditor against a corporate debtor or does it have the discretion to refuse to admit it, if the debtor is otherwise financially healthy? The Supreme Court in the case of Vidarbha Industries Power Ltd vs. Axis Bank Ltd, [2022] 140 taxmann.com 252 (SC) has given a very interesting reply to this very crucial question. A subsequent review petition has upheld the earlier decision of the Apex Court. Now, once again in an appeal filed before the Supreme Court, this decision has been questioned. This shows the importance of this decision to matters under the Code. Let us examine the issue at hand.

FINANCIAL CREDITOR’S APPLICATION

To refresh, the following terms are important under the Code:

a) A corporate debtor is a corporate person (company, LLP, etc.,) who owes a debt to any person. Here it is interesting to note that defined financial service providers are not covered by the purview of the Code. Thus, insolvency and bankruptcy of NBFCs, banks, insurance companies, mutual funds, etc., are not covered by this Code. However, if these financial service providers are creditors of any corporate debtor, they can seek recourse under the Code.

b) A debt means a liability or an obligation in respect of a claim and could be a financial debt or an operational debt. Financial debt is defined as a debt along with an interest, if any, which is disbursed against the consideration for the time value of money. An operational debt is defined as a claim for the provision of goods or services or employment dues or Government dues.

c) It is also relevant to note the meaning of the term default which is defined as non-payment of debt when the whole or any part has become due and payable and is not repaid by the debtor.

The process for a CIRP filed by a financial creditor is as follows:

(a) Financial creditors can file an application before the NCLT once a default (for a financial debt) occurs for initiating a corporate insolvency resolution process against a corporate debtor.

(b) The NCLT would decide within 14 days whether or not a default has occurred.

(c) Section7 (5)(a) of the Code provides that -if the NCLT is satisfied that a default has occurred and the application filed by the financial creditor is complete, it may, by order, admit such an application.

SUPREME COURT’S VERDICT IN VIDARBHA

In the case of Vidarbha (supra), the corporate debtor was a power-generating company which due to a fund crunch defaulted in its dues to a bank. It had however, received an Order from the Appellate Tribunal for Electricity in its favour which when implemented would result in an inflow of Rs.1,730 crores and would take care of its liquidity position. The NCLT admitted the application of the bank and held that all that was required to check whether there was a default of debt and whether the application, was complete. This Order was upheld by the Appellate Tribunal (NCLAT). Both the forums held that they were not concerned with the abovementioned favourable order which the debtor had received.

A Two-Judge Bench of the Supreme Court observed that the objective of the Code was to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals, in a time-bound manner, inter alia, for maximization of the value of the assets of such persons, promoting entrepreneurship and availability of credit, balancing the interest of all the stakeholders and matters connected therewith or incidental thereto.

It held that both, the NCLT and the NCLAT proceeded on the premises that an application must necessarily be entertained under section7(5)(a) of the Code, if a debt existed and the corporate debtor was in default of payment of debt. In other words, the NCLT found section 7(5)(a) of the IBC to be mandatory.

Thus, the Supreme Court framed the question before it as whether section 7(5)(a) was a mandatory or a discretionary provision. In other words, could the expression ‘may’ be construed as ‘shall’?

It proceeded to answer the question by holding that there was no doubt that a corporate debtor who was in the red should be resolved expeditiously, following the timelines in the IBC. No extraneous matter should come in the way. However, the viability and overall financial health of the Corporate Debtor were not extraneous matters. When the corporate debtor had an Award of Rs. 1,730 crores in its favour, such a factor could not be ignored by the NCLT in considering its financial health. It laid down a principle that the existence of a financial debt and default in payment thereof only gave the financial creditor the right to apply for initiation of CIRP. The Adjudicating Authority (NCLT) was required to apply its mind to relevant factors and the overall financial health and viability of the Corporate Debtor under its existing management.

It strongly relied upon the fact that the Legislature had, in its wisdom, chosen to use the expression “may” in section 7(5)(a) of the IBC and had it been the legislative intent that section 7(5)(a) of the IBC should be a mandatory provision, the Legislature would have used the word ‘shall’ and not the word ‘may’.

It compared the position of a financial creditor with that of an operational creditor. Section 8 of the Code provided for the initiation of a resolution by an operational creditor. There were noticeable differences between the procedure by which a financial creditor could initiate resolution and the procedure by which an operational creditor could do so. The operational creditor, on occurrence of a default, was required to serve on the corporate debtor, a demand notice of the unpaid operational debt. If payment is not received within 10 days of this Notice, the operational creditor could file a petition before the NCLT. The Supreme Court observed the wordings of s.9(5)(i) of the Code in this respect

“9(5) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order

(i) admit the application……………..”

The Court concluded that the Legislature had used the word ‘may’ in section 7(5)(a) of the Code in respect of an application initiated by a financial creditor against a corporate debtor but had used the expression ‘shall’ in an otherwise almost identical provision of section 9(5) relating to the initiation of insolvency by an operational creditor. The Court gave an explanation on when the word “may” could be construed as “shall” and when it remained “may”.

The Legislature intended section 9(5)(a) to be mandatory but section 7(5)(a) to be discretionary. The rationale for this dichotomy was explained and it held that the law consciously differentiated between financial creditors and operational creditors, as there was an innate difference between financial creditors, in the business of investment and financing, and operational creditors in the business of supply of goods and services. Financial credit was usually secured and of much longer duration. Such credits, which were often long-term credits, on which the operation of the corporate debtor depends, could not be equated to operational debts which were usually unsecured, of shorter duration and of a lesser amount.

The financial strength and nature of business of a financial creditor were not comparable with that of an operational creditor, engaged in the supply of goods and services. The impact of the non-payment of admitted dues could be far more serious on an operational creditor than on a financial creditor.

In the case of financial debt, there was flexibility. The NCLT was conferred the discretion to admit the application of the financial creditor. If facts and circumstances so warranted, it could keep the admission in abeyance or even reject the application. A very telling statement was that it was certainly not the object of the Code to penalise solvent companies, temporarily defaulting in repayment of their financial debts, by the initiation of insolvency.

It however, concluded that the discretionary power of the NCLT could not be exercised arbitrarily or capriciously.

REVIEW PETITION

A review petition was filed before the Supreme Court in the case of Axis Bank Ltd vs. Vidarbha Industries Power Ltd, Review Petition (Civil) No. 1043 of 2022. It was contended that the above judgment was rendered per incuriam since it ignored an earlier Two-Judge Decision in E. S. Krishnamurthy vs. Bharath Hi-Tech Builders Pvt Ltd (2022) 3 SCC 161. In that case, the Court had held that NCLT must either admit or reject an application. These were the only two courses of action which were open to the NCLT in accordance with s. 7(5).

The NCLT could not compel a party to the proceedings before it to settle a dispute. Thus, it was contended that the NCLT had no discretionary power. The Supreme Court rejected the Review Application by holding that the question of whether section7(5)(a) was mandatory or discretionary was not an issue in the above judgment. The only issue was whether the NCLT could foist a settlement on unwilling parties. That issue was answered in the negative.

In the Review Application, the Solicitor General also contended that Vidarbha’s decision could be interpreted in a manner that might be contrary to the aims and objects of the Code and could render the law infructuous. The Apex Court held that such an apprehension appeared to be misconceived. Hence, the review petition was dismissed.

FOLLOWED BY NCLAT

Subsequently, Vidarbha’s decision was followed by the NCLAT in Jag Mohan Daga vs Bimal Kanti Chowdhary, CA (AT) (Insolvency) No. 848 of 2022. The NCLAT held that the dispute was a family dispute which was given the colour of a financial creditor’s dues.

The NCLAT set aside the admission of the plea by the NCLT on the grounds that the Supreme Court in Vidarbha has clearly laid down that it was not mandatory that s. 7 applications were to be admitted merely on proof of debt and default. Petitions should not be allowed to continue when the financial creditor proceeded under the Code not for the purposes of resolution of insolvency of the corporate debtor but for other purposes with some other agenda. The NCLAT held that the NCLT should not permit such an insolvency petition to go on which had been initiated to settle an internal family business dispute.

APPEAL AGAINST NCLAT / VIDARBHA AGAIN QUESTIONED

An appeal was filed before the Supreme Court (Maganlal Daga HUF vs. Jag Mohan Daga, CA 38798/2022) against the above-mentioned NCLAT decision. The matter was heard by a Three-Judge Bench and it noted that the NCLAT relied on Vidarbha’s decision against which the review petition was rejected. Once again the Petitioners contended that Vidarbha’s decision ran contrary to the settled position of law. The Solicitor General again pleaded that the principle which was enunciated in Vidarbha was liable to dilute the substratum of the Code. This appeal is still pending.

MCA’S DISCUSSION PAPER

Realising the gravity of the decision in Vidarbha’s case, the Ministry of Corporate Affairs (MCA) issued a Discussion Paper on 18th January, 2023 highlighting the proposed changes to the Code. One of the key changes is a proposed amendment to s. 7(5)(a) making it mandatory to admit the application if other conditions are met. Thus, the disparity between section 7(5) and section 9(5) is sought to be removed.

The MCA has stated that Vidarbha’s decision has created confusion and hence, to alleviate any doubts, it was proposed that section 7 may be amended to clarify that while considering an application for initiation of the insolvency process by the financial creditors, the NCLT was only required to be satisfied about the occurrence of a default and fulfilment of procedural requirements for this specific purpose (and nothing more). Where a default was established, it would be mandatory for the NCLT to admit the application and initiate the insolvency process.

CRITIQUE

It is submitted that the Supreme Court’s analysis in Vidarbha’s case is spot on and cannot be faulted. The objective of the Code must be to create and enhance value for all stakeholders and not merely send an otherwise sound company to the gallows. A discretionary power to the NCLT would empower it to provide for other remedial measures in case of a default on a debt. Rather than making the powers mandatory under section7(5)(a), the MCA could provide for alternative remedies which the NCLT can suggest in case of a default. It is true that several unscrupulous promoters have hoodwinked the financial system under the earlier laws, but it is also true that an overzealous law may in fact harm otherwise good companies.

If the MCA proposals are implemented then this discretionary power would be taken away from the NCLT. Also, the outcome of the Supreme Court appeal would be interesting. It could impact several NCLT cases, including the recent insolvency plea of IndusInd Bank against Zee Entertainment Ltd.

In conclusion, the words of the Supreme Court sum up the situation aptly ~ “It is certainly not the object of the IBC to penalize solvent companies, temporarily defaulting in repayment of its financial debts, by initiation of CIRP.”

shailesh.kwebmaker

Conditional Gifts Vs. Senior Citizens Act

INTRODUCTION

A gift is a transfer of property, movable or immovable, made voluntarily and without any consideration from a donor to a donee. This feature, in the past, has examined whether a gift which has been made, can be taken back by the donor? In other words, can a gift be revoked? There have been several instances where parents have gifted their house to their children and then the children have either not taken care of their parents or ill-treated them. In such cases, the parents wonder whether they can take back the gift on grounds of ill-treatment? The position in this respect is not so simple and the law is clear on when a gift can be revoked. Recently, the Supreme Court faced an interesting issue of whether a gift made by a senior citizen can be revoked by having resort to the Maintenance and Welfare of Parents and Senior Citizens Act, 2007 (“Senior Citizens Act”)?

LAW ON GIFTS

The Transfer of Property Act, 1882 (‘the Act’) deals with gifts of property, both immovable and movable. Section122 of the Act defines a gift as the transfer of certain existing movable or immovable property made voluntarily and without consideration, by a donor, to a donee. The gift must be accepted by or on behalf of the donee during the lifetime of the donor and while he is still capable of giving. If the donee dies before acceptance, then the gift is void. In Asokan vs. Lakshmikutty, CA 5942/2007 (SC), the Supreme Court held that in order to constitute a valid gift, acceptance thereof is essential. The Act does not prescribe any particular mode of acceptance. It is the circumstances of the transaction which would be relevant for determining the question. There may be various means to prove acceptance of a gift. The gift may be handed over to a donee, which in a given situation may also amount to a valid acceptance. The fact that possession had been given to the donee also raises a presumption of acceptance.

This section is also clear that it applies to gifts of movable properties also. A gift is also a transfer of property and hence, all the provisions pertaining to transfer of property under the Act are applicable to it. Further, the absence of consideration is the hall mark of a gift. What is consideration has not been defined under this Act, and hence, one would have to refer to the Indian Contract Act, 1872. Section 2(d) of that Act defines ‘consideration’ as follows: ~ “when, at the desire of one person, the other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.”

HOW ARE GIFTS TO BE MADE?

Section 123 of the Act answers this question 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, section 123 makes transfer by a registered instrument mandatory. This is evident from the use of word “transfer must be effected”. However, 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 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. This view has been upheld by the Supreme Court in Renikuntla Rajamma (D) By Lr vs. K.Sarwanamma (2014) 9 SCC 456.

CONDITIONAL GIFTS

In Narmadaben Maganlal Thakker vs. Pranjivandas Maganlal Thakker, (1997) 2 SCC 255 a conditional gift of an immovable property was made by the donor without delivering possession and there was no acceptance of the gift by the donee. There was no absolute transfer of ownership by the donor in favor of the donee. The gift deed conferred only limited right upon the donee and was to become operative after the death of the donor. The donor permanently reserved his rights to collect the mesne profit of the property throughout his lifetime. After the gift deed was executed, the donee violated certain conditions under the deed. Hence, the Supreme Court held that the donor had executed a conditional gift deed and retained the possession and enjoyment of the property during his lifetime. Since the donee did not satisfy the conditions of the gift deed, the gift was void.

In K. Balakrishnan vs. K Kamalam, (2004) 1 SCC 581 the donor gifted her share in land and a school building. However, the gift deed provided that the management of the school and income from the property remained with the donor during her lifetime and thereafter would be vested in the donee. The Supreme Court upheld the gift without possession and held that it was open to the donor to transfer by gift title and ownership in the property and at the same time reserve its possession and enjoyment to herself during her lifetime. There is no prohibition in law that ownership in a property cannot be gifted without its possession and right of enjoyment. It examined section 6(d) of the Transfer of Property Act, 1882 which states that an interest in property restricted in its enjoyment to the owner personally cannot be transferred by him. However, the Supreme Court held that Clause (d) of section 6 was not attracted to the terms of the gift deed being considered by the Court because it was not merely an interest in a property, the enjoyment of which was restricted to the owner personally. The donor, in this case, was the absolute owner of the property gifted and the subject matter of the gift was not an interest restricted in its enjoyment to herself. The Court held that the gift deed was valid even though the donor had reserved to herself the possession and enjoyment of the property gifted.

However, the Larger Bench of the Supreme Court settled the above issue by the decision in the case of Renikuntla Rajamma vs. K. Sarwanamma, (2014) 9 SCC 445. In this case, the donor made a gift of an immovable property by way of a registered gift deed, which was duly attested. However, the donor retained the possession of the gifted property for enjoyment during her life time, and also the right to receive the rents of the property. The question before the Court was that since the donor had retained the right to use the property and receive rents during her life time, whether such a reservation or retention or absence of possession rendered the gift invalid?

The Supreme Court upheld the validity of the gift. It held that a conjoint reading of sections 122 and 123 of the Transfer of Property, 1882 Act made 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, was not a sine qua non for the making of a valid gift under the provisions of the Transfer of Property Act, 1882. Section 123 has overruled the erstwhile requirement under the Hindu Law/Buddhist Law of delivery of possession as a condition for making of a valid gift. Transfer by the way of gift of immovable property 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. Absence of any such requirement led the Court to conclude that the delivery of possession was not essential for a valid gift in the case of immovable property. The Court also distinguished on facts, its earlier decision in the case of Narmadaben Maganlal Thakker. It held that in that case, the issue was of a conditional gift whereas the current case dealt with an absolute gift. It accepted the ratio laid down in the latter case of K. Balakrishnan. Thus, the Supreme Court established an important principle of law that a donor can retain possession and enjoyment of a gifted property during his lifetime and provide that the donee would be in a position to enjoy the same after the donor’s lifetime.

REVOCATION OF GIFTS

Section 126 of the Act provides that a gift may be revoked in certain circumstances. The donor and the donee may agree that on the happening of certain specified event that does not depend on the will of the donor, the gift shall be revoked. Further, it is necessary that the condition should be expressed and specified at the time of making the gift. A condition cannot be imposed subsequent to giving the gift. In Asokan vs. Lakshmikutty, supra, the Supreme Court held that once a gift is complete, the same cannot be rescinded. For any reason whatsoever, the subsequent conduct of a donee cannot be a ground for rescission of a valid gift.

However, it is necessary that the event for revocation is not dependent upon the wishes of the donor. Thus, revocation cannot be on the mere whims and fancies of the donor. For instance, after gifting, the donor cannot say that he made a mistake, and now he has a change of mind and wants to revoke the gift. A gift is a completed contract and hence, unless there are specific conditions precedent which have been expressly specified there cannot be a revocation. It is quite interesting to note that while a gift is a completed contract, there cannot be a contract for making a gift since it would be void for absence of consideration. For instance, a donor cannot enter into an agreement with a donee under which he agrees to make a gift but he can execute a gift deed stating that he has made a gift. The distinction is indeed fine! It needs to be noted that a gift which has been obtained by fraud, misrepresentation, coercion, duress, etc., would not be a gift since it is not a contract at all. It is void ab initio.

DECISIONS ON THIS ISSUE

In Jagmeet Kaur Pannu, Jammu vs. Ranjit Kaur Pannu AIR 2016 P&H 210, the Punjab & Haryana High Court considered whether a mother could revoke a gift of her house in favor of her daughter on the grounds of misbehaviour and abusive language. The mother had filed a petition with the Tribunal under the Maintenance and Welfare of Parents and Senior Citizens Act, 2007 which had set aside the gift deed executed by the mother. It held that the deed was voidable at the mother’s instance. The daughter appealed to the High Court which set aside the Tribunal’s Order. The High Court considered the gift deed which stated that the gift was made voluntarily, without any pressure and out of natural love and affection which the mother bore towards the daughter. There were no preconditions attached to the gift. The High Court held that the provisions of s.126 of the Act would apply since this was an important provision which laid down a rule of public policy that a person who transferred a right to the property could not set down his own volition as a basis for his revocation. If there was any condition allowing for a document to be revoked or cancelled at the donor’s own will, then that condition would be treated as void. The Court held that there have been decisions of several courts which have held that if a gift deed was clear and operated to transfer the right of property to another but it also contained an expression of desire by the donor that the donee will maintain the donor, then such an expression in the gift deed must be treated as a pious wish of the donor and the sheer fact that the donee did not fulfil the condition could not vitiate the gift.

Again, in the case of Syamala Raja Kumari vs. Alla Seetharavamma 2017 AIR (Hyd) 86 a similar issue before the High Court was whether a gift which was made without any preconditions could be subsequently revoked? The donor executed a gift deed in favor of his daughters out of love and affection. He retained a life interest benefit and after him, his wife retained a life interest under the said document. However, there were no conditions imposed by the donor for gifting the property in favor of the donees. All it mentioned was that he and his wife would have a life-interest benefit. Subsequently, the donor executed a revocation deed stating that he wanted to cancel the gift since his daughters were not taking care of him and his wife, and were not even visiting them. The Court set aside the revocation of the gift. It held that once a valid unconditional gift was given by the donor and accepted by donees, the same could not be revoked for any reason. The Court held that the donees would get absolute rights in respect of the property. By executing the gift deed, the donor had divested his right in the property and now he could not unilaterally execute any revocation deed for revoking the gift deed executed by him in favor of the plaintiffs.

Similarly, in the case of Sheel Arora vs. Madan Mohan Bajaj, 2007 (6) BomCR 633, the donor executed a registered gift deed of a flat in favor of a donee. Subsequently, the donor unilaterally executed a revocation deed cancelling the gift. The Bombay High Court held that after lodging the duly executed gift deed for registration, there was an unilateral attempt on the part of the donor to revoke the said gift deed. Section 126 of the Act, provides that revocation of gift can be only in cases specified under the section and the same requires participation of the donee. In the case in hand, there was no participation of the donee in an effort on the part of the donor to revoke the said gift deed. On the contrary, an unilateral effort on the part of the donor by execution of a deed of revocation itself disclosed that the donor had clearly accepted the legal consequences which were to follow on account of execution of a valid gift deed, and presentation of the same for registration.

However, in the case of S. Sarojini Amma vs. Velayudhan Pillai Sreekumar 2018 (14) SCALE 339, the Supreme Court considered a gift, where in expectation that the donee would look after the donor and her husband, she executed a gift deed. The gift deed clearly stated that, gift would take effect after the death of the donor and her husband. Subsequently, the donor filed a Deed of Cancellation of the Gift Deed. The Supreme Court observed that a conditional gift became complete on the compliance of the conditions mentioned in the deed. Hence, it allowed the revocation.

CANCELLATION VS. SENIOR CITIZENS ACT

Recently, the Supreme Court in the case of Sudesh Chhikara vs. Ramti Devi, Civil Appeal No. 174 of 2021; Order dated 6th December, 2022 was faced with a very interesting issue as to whether a senior citizen can cancel a gift of lands made to her children on grounds that their relationship was strained. Accordingly, she filed a petition under section 23 of the Senior Citizens Act for the cancellation of the gift. The Maintenance Tribunal constituted under the Act (which adjudicates all matters for maintenance, including provision for food, clothing, residence and medical attendance and treatment) upheld the cancellation on the grounds that her children were not taking care of her.

Section 23 of this Act contains an interesting provision. If any senior citizen has transferred by way of gift or otherwise, his property, on the condition that the transferee shall provide the basic amenities and basic physical needs to the transferor and such transferee refuses or fails to provide such amenities and physical needs, then the transfer of property shall be deemed to have been made by fraud or coercion or under undue influence and shall at the option of the transferor be declared void by the Tribunal. This negates every conditional transfer if the conditions subsequent are not fulfilled by the transferee. Property has been defined under the Act to include any right or interest in any property, whether movable/immovable, ancestral/self-acquired, tangible/intangible.

The Supreme Court in Sudesh Chhikara (supra) held that the Senior Citizens Act was enacted for making effective provisions for the maintenance and welfare of parents and senior citizens guaranteed and recognized under the Constitution of India. The Maintenance Tribunal was established to exercise various powers under this Act. This Act provided that the Maintenance Tribunal, had to adopt such summary procedure while holding inquiry, as it deemed fit. The Court held that the Tribunal exercised important jurisdiction under Section 23 of the Senior Citizens Act and for attracting Section 23, the following two conditions must be fulfilled:

a) The transfer must have been made subject to the condition that the donee / transferee shall provide the basic amenities and basic physical needs to the senior citizen transferor; and

b) the transferee refuses or fails to provide such amenities and physical needs to the transferor.

The Court held that when a senior citizen parted with his property by executing a gift deed / release deed in favor of his relatives, the senior citizen does not make it conditional to taking care of him. On the contrary, very often, such transfers were made out of natural love and affection without any expectations in return. Therefore, the Court laid down an important proposition that when it was alleged that the conditions mentioned in section 23 were attached to a transfer, existence of a conditional gift deed must be clearly brought out before the Maintenance Tribunal. If a gift was to be set aside under section 23, it was essential that a conditional gift deed / release deed was executed, and in the absence of any such conditions, section 23 could not be attracted. A transfer subject to a condition of providing the basic amenities and basic physical needs of the senior citizen transferor was a sine qua non (essential condition) for applicability of section 23. Since in this case, there was no such conditional deed, the Apex Court did not set aside the release deed executed by the senior citizen.

CONCLUSION

Donor beware of how you gift, for gift once given cannot be easily revoked! If there are any doubts or concerns in the mind of the donor then he should refrain from making an absolute unconditional gift or consider whether to avoid the gift at all! This is all the more true in the case of old parents who gift away their family homes and then try to claim the same back since they are being ill-treated by their children. They should be forewarned that it would not be easy to revoke such a gift. Remember a non-conditional gift / release is like a bullet which once fired cannot be recalled!!

shailesh.kwebmaker

Hindu Gains of Learning Act

INTRODUCTION

Hindu Undivided Families (HUFs) often have a scenario wherein the family sponsors the education of one of the members and he goes on to become a successful professional/businessman. In such a case, the question that one comes across is whether the joint family, which has funded his education, can stake a claim to his earnings? In other words, can the other family members state that whatever income / wealth the member has on account of the investment made by the family in his education and hence, they should also share in the same? Let us examine this quite interesting facet of family law.

HINDU LAW AND HUF

Hindu Law is a unique statute since part of it is codified by the Parliament whereas part of it is governed by customs, traditions, and usages. The answer to the above questions could be dissected into two scenarios ~ the position before 1930 and the position post-1930.

POSITION BEFORE 1930

Before 1930, the position in this respect was dictated by the ancient uncodified Hindu Law which was explained by a Division Bench ruling of the Supreme Court in the case of Chandrakant Manilal Shah vs. CIT (1992) 193 ITR 1 (SC). It held that before 1930, it was settled law that income earned by a member of a joint family by the practice of a profession or occupation requiring special training was joint family property if such training was imparted at the expense of the joint family property.

Accordingly, till 1930 if a joint family had spent on a coparcener’s education, then whatever he earned by virtue of this degree/skill became joint family property in which all coparceners also had a right.

POSITION AFTER 1930

On 25th July, 1930, the Parliament passed the Hindu Gains of Learning Act, 1930 (“the 1930 Act”). The 1930 Act was passed to remove doubts as to the rights of a member of a Hindu Undivided Family in the property acquired by him by means of his learning.

Section 3 of the 1930 Act provides that notwithstanding any custom, rule, or interpretation of the Hindu Law, gains of learning of a member shall be held to be the exclusive and separate property of the acquirer even if —

(a) his learning having been, in whole or in part, imparted to him by any member, of his family, or with the aid of the joint funds of his family/ any family member, or

(b) himself or his family having, while he was acquiring his learning, been maintained or supported, wholly or in part, by the joint funds of his family, any member.

The Act further describes “gains of learning” in an inclusive manner to mean `all acquisitions of property made substantially through learning, whether such acquisitions be made before or after the commencement of this Act and whether such acquisitions be the ordinary or the extraordinary result of such learning’.

The important term “learning” has been defined to mean education, whether elementary, technical, scientific, special or general, and training of every kind which is usually intended to enable a person to pursue any trade, industry, profession or a vocation in life.

Thus, the net impact of the 1930 Act is that on and from the date of its enactment:

(a) All gains of learning of a coparcener of an HUF shall be held to be his exclusive and separate property even if his learning was funded by the joint family funds /HUF. Thus, all income earned by him by virtue of his skill / knowledge / learning would solely belong to him.

(b) Even acquisitions of properties made by him out of such gains of learning are treated as his exclusive and separate property and not that of the HUF.

RATIONALE

The Supreme Court in Raj Kumar Singh Hukam Chandji vs. CIT, [1970] 78 ITR 33 (SC) has explained the rationale behind the enactment of the 1930 Act. It held that in Gokul Chand vs. Hukum Chand Nath Mal AIR 1921 PC 35, the Judicial Committee ruled “that there could be no valid distinction between the direct use of the joint family funds and the use which qualified the members to make the gains on his efforts”. In making this observation, the Judicial Committee appeared to have been guided by certain ancient Hindu law texts. According to the Supreme Court that view of the law became a serious impediment to the progress of the Hindu society. It was well-known that the decision in Gokul Chand’s case (supra), gave rise to a great deal of public dissatisfaction and the Central Legislature was constrained to step in and enact the Hindu Gains of Learning Act, 1930, which nullified the effect of that decision.

JURISPRUDENCE

The Gujarat High Court in CIT vs. Dineschandra Sumatilal, 1978 112 ITR 758 (Guj) has explained this Act. It held that the law now recognised the distinction between the earnings of a coparcener as a result of his learning, efforts, and advancement in life and the income which a coparcener received merely as a result of the investment of the family funds in the source which produced such income.

The Court held that with technological advancements in commerce and industry, a qualified coparcener might be employed in a business in which his family had contributed its funds, and by his skill, experience, and labor, all of which were his incorporeal property or intangible assets, might contribute to the growth of such a business. If any remuneration was received by him for the services so rendered, it could not, by any stretch of imagination, be related to the joint family investment in the business. The salary of such a coparcener was not an alias for the return of profits of the investment made by the family. It was a legitimate return for the human capital – sweat, skill, and toil, which were productive investments, which the coparcener made in such business. To treat his income as the income of the family was not only not in consonance with the true legal position, but would also lead to the denial to the family business of the human capital which the coparcener would contribute with greater sincerity than an outsider. Thus, the Gujarat High Court held that even in a case where the HUF funded the business, the remuneration earned by the coparcener would remain his personal property.

The decision of the Supreme Court in Chandrakant Manilal Shah vs. CIT (1992) 193 ITR 1 (SC) held that the definition of the term ‘learning’ was wide and encompassed every acquired capacity which enabled the acquirer of the capacity “to pursue any trade, industry, profession or avocation in life”. Skill and labor involved as well as generated mental and physical capacity. This capacity was in its very nature an individual achievement and normally varied from individual to individual. It was by utilisation of this capacity that an object or goal was achieved by the person possessing the capacity. Achievement of an object or goal was a benefit. This benefit accrued in favor of the individual possessing and utilising the capacity. Skill and labour were by themselves possessions. They were assets of that individual and there seemed to be no reason why they could not be contributed as a consideration for earning profit in the business of a partnership firm. They certainly were not the properties of the HUF but were the separate properties of the individual concerned.The Court held that where an undivided member of a family qualified in technical fields – may be at the expense of the family – he was free to employ his technical expertise elsewhere and the earnings were his absolute property; he will, therefore, not agree to utilise them in the family business, unless the latter is agreeable to remunerate him therefore immediately in the form of a salary or share of profits.

The Madras High Court in the case of Prof. G. S. Ramaswamy (2003) 259 ITR 442 (Mad) was dealing with the case of a Professor who was educated from funds belonging to his joint family. He published a book on a technical subject and threw the royalties from the book into the HUF hotchpot and claimed that the royalties would now belong to the HUF. The Tax department objected on the grounds that after the passage of the 1930 Act, all gains of learning of an individual cannot be treated as HUF property even if the education was funded by the HUF funds. The High Court said while the proposition of the Department was correct, the 1930 Act would not apply if the coparcener himself took steps to blend his self-acquired earnings / property with the joint family hotchpot.

In K Govindrajan vs. K Subramanian, 2013 AIR (Mad) 80, it was contended that if a member got educated from out of the joint family funds, and also acquired properties, the member should put all those properties into the common hotchpot, and also render accounts. The Madras High Court negated this claim and held, nothing had been demonstrated as on what basis the plaintiff should render accounts of his earnings and also put all the properties he earned out of such learning into the common hotchpot. Simply because, he admitted that he got his education, during the lifetime of his father that per se did not mean that it should be construed that what all he acquired out of his salary should be put into common hotchpot. The 1930 Act was relied upon by the Court to hold this conclusion.

CONCLUSION

Based on the above discussion, the following position emerges:

(a) If a coparcerner’s education was funded out of HUF property, even in that scenario, his earnings and investments would remain his separate property.

(b) The 1930 Act would clearly apply in this case and all gains of learning of such a coparcener would be his separate self-acquired property.

(d) As long as the coparcener has not taken any action of blending his gains of learning with the common family hotchpot and hence not converted his personal property into joint family property, the gains of learning would not be a part of the HUF property.

This very old piece of pre-independence legislation could help quell several family disputes. It is interesting to note that even though this Act has been around for over 80 years it has not got the recognition which it deserves!

shailesh.kwebmaker

Guarantors, Beware!

INTRODUCTION
It is quite common for banks and lenders to insist upon the personal guarantees of the managing directors/promoters/partners, in case of loans extended by them to business entities. In addition, one generally also comes across requests from family members and friends to stand as a guarantor for business loans taken by them. Most people would sign on the dotted line. However, pause for a moment and consider the legal consequences of such a personal guarantee. In light of the Insolvency & Bankruptcy Code, 2016 (“the Code”), the position has become quite different than what it was earlier. Also, some Supreme Court decisions in this respect have made the situation even more peculiar.

INDIAN CONTRACT ACT
The Indian Contract Act, 1872 deals with contracts of guarantee and lays the framework for all guarantees. A “contract of guarantee” is defined as a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written. The liability of the surety is co- extensive with that of the principal debtor, unless it is otherwise provided by the contract. The Contract Act gives an illustration in this respect ~

“A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. A is liable, not only for the amount of the bill, but also for any interest and charges which may have become due on it.”

Any variance, made without the surety’s consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance. The surety is also discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.

The Contract Act also provides that where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor. A surety is also entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.

The Supreme Court in a judgment under the Code has examined the Indian Contract Act. In the case of Maitreya Doshi vs. Anand Rathi Global Finance Ltd, [2022] 142 taxmann.com 484 (SC), it held that a contract of indemnity was a contract by which, one party promised to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person. In a contract of indemnity, a promisee acting within the scope of his authority was entitled to recover from the promisor all damages and all costs which he may incur. A contract of guarantee, on the other hand, was a promise whereby the promisor promised to discharge the liability of a third person in case of his default. Anything done or any promise made for the benefit of the principal debtor may be a sufficient consideration to the surety for giving the guarantee.

IBC
As readers would recall, the Code is a one-stop shop for all matters relating to an insolvency of a corporate debtor. The trigger point of any action for corporate insolvency is the default by a corporate debtor in paying its debt, whether operational or financial. The expression ‘default’ is expounded in section 3(12) of the Code to mean non-payment of debt which had become due and payable and is not paid by the debtor or the corporate debtor, as the case may be. This leads to an insolvency resolution process of the corporate debtor before the NCLT. A corporate debtor is a company or an LLP. A relevant definition under section 2 of the Code in the context of this discussion is the term ‘personal guarantor’. A personal guarantor is defined to mean an individual who is the surety in a contract of guarantee to a corporate debtor.

AMENDMENT IN 2018
The Code presently, only concerns itself with the insolvency resolution process of corporate persons. The provisions relating to the insolvency provisions of non-corporates have not yet been notified by the Central Government. Section 2 as originally enacted, did not contain a separate category of personal guarantors to corporate debtors. Instead, personal guarantors were a part of a category or group of individuals, to whom the Code applied (i.e. individuals, proprietorship and partnership firms). The Code envisioned that the insolvency process outlined in provisions of Part III was to apply to them. However, vide an Amendment in 2018, personal guarantors were added as a separate class to whom the Code applied. The rationale for the same was explained as follows:

“In the first phase, the provisions would be extended to personal guarantors of corporate debtors to further strengthen the corporate insolvency resolution process….”

Further, by the Amendment to the Code in 2018 and a Notification dated 15th November, 2019, the provisions pertaining to insolvency of personal guarantors to corporate debtors were notified and all such provisions were to be considered by the NCLT. Thus, all matters that were likely to impact, or have a bearing on a corporate debtor’s insolvency process, were sought to be clubbed together and brought before the same forum.

SUPREME COURT’S APPROVAL
The rationale behind this Amendment was explained by the Supreme Court in its landmark decision of Lalit Kumar Jain vs. UOI, (2021) 127 taxmann.com, 368 (SC). It held that it was clear that the Parliamentary intent was to treat personal guarantors differently from other categories of individuals. The intimate connection between such individuals and corporate entities to whom they stood guarantee, as well as the possibility of separate processes being carried on in different forums, with its attendant uncertain outcomes, led to carving out personal guarantors as a separate species of individuals, for whom the NCLT was common with the corporate debtor to whom they had stood guarantee. The NCLT would be able to consider the whole picture, as it were, about the nature of the assets available, either during the corporate debtor’s insolvency process, or even later; this would facilitate framing of realistic insolvency resolution plans, keeping in mind the prospect of realising some part of the creditors’ dues from personal guarantors.

The Court concluded that when the Code alluded to insolvency resolution or bankruptcy, or liquidation of three categories, i.e. corporate debtors, corporate guarantors (to corporate debtors) and personal guarantors (to corporate debtors), it also covered the insolvency resolution, or liquidation processes applicable to corporate debtors and their corporate guarantors, whereas insolvency resolution and bankruptcy processes applied to personal guarantors (to corporate debtors).

CORPORATE DEBTOR OR NOT, CORPORATE GUARANTORS COVERED
An interesting reverse situation arose in the case of Laxmi Pat Surana vs. Union Bank of India, [2021] 125 taxmann.com 394 (SC), wherein the principal debtor was a sole proprietary firm. However, the debt was guaranteed by a company. The issue before the Supreme Court was whether since the guarantor was a corporate, could insolvency proceedings be brought against it even though the debtor was not a corporate debtor.

The Court held that a right or cause of action would be available to the lender (financial creditor) to proceed against the principal borrower, as well as the guarantor in equal measure in case they commit default in repayment of the amount of debt acting jointly and severally. It would still be a case of default committed by the guarantor itself, if and when the principal borrower failed to discharge his obligation in respect of amount of debt. For, the obligation of the guarantor was coextensive and coterminous with that of the principal borrower to defray the debt, as predicated in section 128 of the Contract Act. As a consequence of such default, the status of the guarantor metamorphoses into a debtor or a corporate debtor if it happened to be a corporate person. Thus, action under the Code could be legitimately invoked even against a (corporate) guarantor being a corporate debtor. The definition of ‘corporate guarantor’ in the Code needed to be understood accordingly.

The expression “default” had also been defined in section 3(12) of the Code to mean non-payment of debt when the whole or any part or instalment of the amount of debt had become due or payable, and was not paid by the debtor or the corporate debtor, as the case may be. The principal borrower may or may not be a corporate person, but if a corporate person extended guarantee for the loan transaction concerning a principal borrower not being a corporate person, it would still be covered within the meaning of expression ‘corporate debtor. The Apex Court negated the argument that as the principal borrower was not a corporate person, the financial creditor could not have invoked remedy against the corporate person who had merely offered guarantee for such loan account. That action can still proceed against the guarantor being a corporate debtor, consequent to the default committed by the principal borrower. There was no reason to limit the width of the Code, if and when default was committed by the principal borrower. For, the liability and obligation of the guarantor to pay the outstanding dues would get triggered coextensively.

The Court laid down the principle, if the guarantor was a corporate person (i.e., a company or an LLP), it would come within the purview of the expression ‘corporate debtor’, within the meaning of the Code.

GUARANTORS COVERED EVEN IF NO ACTION AGAINST DEBTORS
The Supreme Court in the case of Mahendra Kumar Jajodia vs. SBI, [2022] 172 SCL 665 (SC) has held that corporate insolvency resolution proceedings can be carried out against the personal guarantor even in a case where no insolvency/liquidation proceedings have been commenced against the corporate debtor itself. This is a very important principle since the creditor could pick and choose whom he would like to approach first.

In Axis Trustee Services Limited vs. Brij Bhushan Singal, [2022] 144 taxmann.com 139 (Delhi), the High Court held that in terms of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors), Rules, 2019, it has specifically been provided that the adjudicating authority for the purposes of personal guarantors to corporate debtors would be the NCLT. Accordingly, it held that the Debt Recovery Tribunal or the DRT would have no jurisdiction in such cases over the personal guarantors and all proceedings would stand transferred to the NCLT who has jurisdiction over the corporate debtor.

The rationale for this was explained by the Supreme Court in Embassy Property Developments (P) Ltd vs. State of Karnataka, [2019] 112 taxmann.com 56 (SC). It explained that the objective behind making the NCLT the nodal authority was to group together, the insolvency/liquidation proceedings of a corporate debtor and the insolvency resolution or liquidation or bankruptcy of a corporate guarantor/personal guarantor of the very same corporate debtor, so that a single Forum may deal with both. This was to ensure that the insolvency resolution of a corporate debtor and the insolvency resolution of the individual guarantors of the very same corporate debtor did not proceed on different tracks, before different fora, leading to conflict of interests, situations or decisions. The Court further held that the DRT continued to remain the Adjudicating Authority in relation to insolvency matters of individuals and firms. This was in contrast to the NCLT being the Adjudicating Authority in relation to insolvency resolution and liquidation of corporate persons including corporate debtors and personal guarantors. The expression “personal guarantor” meant an individual who was the surety in a contract of guarantee to a corporate debtor. Therefore, the object of the Code was to avoid any confusion that may arise and to ensure that whenever an insolvency resolution process was initiated against a corporate debtor, the NCLT would be the Adjudicating Authority not only in respect of such corporate debtor but also in respect of the individual who stood as surety to such corporate debtor, notwithstanding the naming of the DRT as the Adjudicating Authority for the insolvency resolution of individuals (who were not personal guarantors).

PERIOD OF LIMITATION
In Laxmi Pat’s case (supra), the Supreme Court held that the liability of the corporate debtor (corporate guarantor) also triggered when, the principal borrower acknowledged its liability in writing within the expiration of prescribed period of limitation, to pay such outstanding dues and fails to pay the acknowledged debt. Correspondingly, the right to initiate action within three years from such acknowledgment of debt accrued to the financial creditor. That, however, needed to be exercised within three years when the right to sue/apply accrued, as per Article 137 of the Limitation Act. A fresh period of limitation was required to be computed from the time when the acknowledgement was so signed by the principal borrower or the corporate guarantor (corporate debtor), as the case may be, provided the acknowledgement was before expiration of the prescribed period of limitation. It concluded that the financial creditor had not only the right to recover the outstanding dues by filing a suit, but also had a right to initiate resolution process against the corporate person (being a corporate debtor) whose liability was coextensive with that of the principal borrower and more so when it activated from the written acknowledgment of liability and failure of both to discharge that liability.

DOES A RESOLUTION PLAN DISCHARGE THE GUARANTOR?
The Apex Court in Lalit Kumar’s case (Supra) also laid down an important proposition that the sanction of a resolution plan and finality imparted to it by the NCLT did not per se operate as a discharge of the guarantor’s liability. As to the nature and extent of the liability, much would depend on the terms of the guarantee itself. It reiterated its earlier verdict in the case of Maharashtra State Electricity Board Bombay vs. Official Liquidator, High Court, Ernakulum [1982] 3 SCC 358 which held that a surety was discharged under the Indian Contract Act by any contract between the creditor and the principal debtor by which the principal debtor was released or by any act or omission of the creditor, the legal consequence of which was the discharge of the principal debtor. However, this did not mean that a discharge which the principal debtor secured by operation of law in bankruptcy (or in liquidation proceedings in the case of a company) absolved the surety of his liability. The Court concluded that its approval of a resolution plan did not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. The release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, did not absolve the surety/guarantor of his or her liability, which arose out of an independent contract.

CAN ARCS PROCEED AGAINST GUARANTORS?
A related issue has been that if the bank securitized its bad loan in favour of an Asset Reconstruction Company (ARC), can the ARC proceed against the guarantors to the corporate debtor. This was the issue before the NCLAT in Naresh Kumar Aggarwal vs. CFM Asset Reconstruction (P) Ltd [2023] 152 taxmann.com 264 (NCLAT- New Delhi). The NCLAT referred to the Supreme Court decision in Anuj Jain vs. Axis Bank Ltd [2020] 115 taxmann.com 1 (SC) wherein it was held that when acquisition of assets by an ARC is made, it shall be deemed to be the Lender for all purposes. As a Lender, the ARC was fully entitled to exercise its right to initiate proceedings under the Code. Hence, the NCLAT held that the ARC could also proceed against the guarantor.

CAN THE RESOLUTION PLAN INCLUDE THE GUARANTOR’S ASSETS?
One of the important decisions in this respect is that of the NCLAT in the case of Nitin Chandrakant Naik vs. Sanidhya Industries LLP [LSI-696-NCLAT-2021(NDEL)]. The NCLAT has held that in the Resolution Plan itself, there can be no provision to move against the personal guarantor. The NCLAT held that making a provision to this effect in the Resolution Plan, would be akin to a blank cheque given to proceed even with regard to any other property of the Personal Guarantors. It concluded that without resorting to appropriate proceedings against the Personal Guarantors of Corporate Debtor, this was an irregular exercise of powers.

In January 2023, the Ministry of Corporate Affairs released a Consultation Paper inviting public comments on changes being considered to the Code. One of the important changes being considered is the Intermingling of the assets of the corporate debtor and its guarantor. Under the Code, the resolution process is restricted to the assets of a corporate debtor. However, according to the Paper, in several cases, assets of the corporate debtor and its guarantor (whether, corporate or personal) are so closely or inseparably linked, that the meaningful resolution is not viable in a separate proceeding. For instance, while a building, plant, or machinery may belong to the corporate debtor, the land on which it is situated may belong to a guarantor. In such cases, restricting the resolution process of the debtor to its assets results in inefficient outcomes. Therefore, it is being proposed that a mechanism should be provided under the Code to include such assets of the guarantor in the general pool of assets available for the insolvency resolution process for efficient resolution of the corporate debtor.

EPILOGUE
Giving a guarantee has now become a very risky proposition. One could paraphrase Shakespeare’s famous quote from Hamlet which read, “Neither a Borrower Nor a Lender be” to now read “Neither a Borrower nor a Guarantor be!!”

shailesh.kwebmaker

SPES Successionis: Expectation of a Heir to Succeed to Property of Deceased

INTRODUCTION

‘Spes Successionis’ is a Latin phrase which means the hope / expectation of a legal heir to succeed to the property of the deceased. The Privy Council in the case of Lala Duni Chand vs. Mst. Anar Kali, 1946 AIR(PC) 173, explained this term in the context of Hindu Law. It held that a legal heir had no vested interest in the estate of a person (property owner) who was alive but he only has a mere ?Spes Successionis’ or a chance of succession, which was a purely contingent right which might or might not accrue. The succession would take place only once the property owner died, and hence, the right of the heir was contingent upon the same. It is founded on the principle that a living man has no heirs. They come into existence only once he dies. The Supreme Court in Elumalai @ Venkatesan vs. M. Kamala, CA No. 521-522/2023, order dated 25th January, 2023 had an occasion to consider this right when viewed against a release deed executed by a son in respect of his father’s self-acquired property. The decision examined the position under the Transfer of Property Act, the Hindu Succession Act, Hindu Minority and Guardianship Act, etc.

FACTS OF THE CASE

In Elumalai’s case (supra), a person who owned a self-acquired property, had two wives. The son from his first wife executed a Release Deed, in respect of this property of his father, in favor of his step-brother. The releaser son received consideration from his father for executing this Release Deed and he also stated in the Deed that he had no connection with his father other than that of blood relation. After the releaser son passed away, his children filed a suit that they too were eligible to succeed to the property of their deceased grandfather notwithstanding the Release Deed executed by their father. They contended that they were minors / not even born when their father executed the Release Deed. When the Release Deed was executed by their father, he had a mere ?Spes Successionis’ in the property of his father who was alive at that time. Hence, there was no way in which their father could transfer a contingent right. The mere expectation of succeeding to a property at a future date could not form the subject matter of a legitimate transfer. For this they relied upon section 6(a) of the Transfer of Property Act, 1882. This section deals with property which could be validly transferred by a person. It states that the chance of an heir-apparent succeeding to an estate / any other mere possibility of a like nature cannot be transferred. In this respect the Gujarat High Court in CWT vs. Ashokkumar Ramnlal, [1967] 63 ITR 133 (Guj), has explained that a ?Spes Successionis’ is a bare or naked possibility such as the chance of a relation obtaining a legacy on the death of a kinsman or any other possibility of a like nature and it is non-transferable by reason of section 6(a) of the Transfer of Property Act. Further, it was contended that under the Hindu Minority and Guardianship Act, 1956, the natural guardian of a Hindu minor has power to do all acts which are necessary or reasonable for the benefit of / protection of the minor’s estate. However, this Act provides that a natural guardian can in no case bind the minor by a personal covenant. Accordingly, they contended that the father could not execute a Release Deed.The Madras High Court in Elumalai’s case (supra) negated the claim of these grandchildren on the ground that their father had executed a Release Deed and had obtained consideration from his father. Accordingly, they (the grandchildren) would stand estopped from laying a claim to a share in their grandfather’s property.

SUPREME COURT’S VERDICT

The Court held that section 6 of the Transfer of Property Act enumerated property which could be transferred. It declared that property of any kind could be transferred except as otherwise provided by the Transfer of Property Act or by any other law for the time being in force. Section 6(a) declared that a chance of an heir apparent succeeding to an estate, the chance of a relation obtaining a legacy on the death of a kinsman or other mere possibility of a like nature could not be transferred. It held that a living man had no heir. Equally, a person who may become the heir and was entitled to succeed under the law upon the death of his relative would not have any right until succession to the estate is opened up. It held that when the grandfather was alive, his son, at best, had a ?Spes Successionis’. It compared the son to a co-parcener who acquired a right to joint family property by his mere birth, in regard to the separate property of a Hindu, no such right existed. The Madras High Court in Sri Kakarlapudi Lakshminarayana vs. Sri Rajah Kandukuri Veera Sarabha, (1915) 28 MLJ 650 has held that even before the enactment of the Transfer of Property Act, both in England and in India, a mere chance of succeeding to an estate was a bare possibility incapable of assignment (Jones vs. Roe (1789) 3 T.R. 88; In re: Parsons Stockley vs. Parsons (1890) 45 Ch. D. 51). The Apex Court held that the conduct of the son executing a Release Deed and receiving consideration resulted in the creation of an estoppel. The doctrine of equitable estoppel prevented the son from staking a claim if he had survived his father. An estoppel is an impediment to a right of action arising from a man’s own act.

The Supreme Court referred to its earlier decision in the case of Gulam Abbas vs. Haji Kayyam Ali, AIR 1973 SC 554, wherein the Supreme Court referred to the Latin maxim ‘nemo est heres viventis’ ~ a living person had no heir. An heir apparent had no reversionary interest which would enable him to object to any sale or gift made by the owner in possession. The converse was also true, a renunciation by an expectant heir in the lifetime of his ancestor was not valid, or enforceable against him after the vesting of the inheritance. The Court held that this was a correct statement of the law, because a bare renunciation of expectation to inherit would not bind the expectant heir’s conduct in future. However, if the expectant heir went further and received consideration and so conducted himself as to mislead an owner into not making dispositions of his property inter vivos, the expectant heir could be debarred from setting up his right when it vested in him. Thus, the Court held that the principle of estoppel remains untouched by this statement.

The Apex Court further observed that the property in question was not the ancestral property of the father. He would have acquired rights over the same only if the grandfather had died intestate. The father was, thus, only an heir apparent. Transfer by an heir apparent being mere spes successonis was ineffective to convey any right. By the mere execution of Release Deed, in other words, in the facts of this case, no transfer took place. This was for the simple reason that the transferor, namely, the father of the appellants did not have any right at all which he could transfer or relinquish.

The Court observed that the intention of the grandfather would have been to secure the interest of the son from his second marriage. For this, the son from his first marriage was given some valuable consideration, which persuaded him to release all his rights in respect of the property in question. The words in the ‘Release Deed’ that hereafter he did not have any other connection except blood relation appeared to signify that the intention of the grandfather was to deny any claim to his son in regard to the property. The father receiving consideration for the Release Deed was held to be a very important factor in deciding that the father (and hence, the grandchildren) was estopped from staking any claim to the estate of the grandfather. The fact that the grandfather had not executed a Will in favour of his son showed that he too intended to cut him from inheritance to the self-acquired property.The Court also considered the impact of Hindu Minority and Guardianship Act, 1956 on powers of a natural guardian. That Act provided that in case of a Hindu, the father and after him the mother would be the natural guardian. However, the powers of a natural guardian are limited by the Act. If, in regard to the property of the minor, the natural guardians were to enter into a covenant, then, it may be open to the minor to invoke the prohibition against the natural guardian, binding the minor by a personal covenant. The Court held that it was unable to discard the Release Deed executed by their father as a personal covenant within the meaning of this Act.

It also referred to the Hindu Succession Act, 1956 which deals with the succession rules for the property of a Hindu male. The grandchildren could not claim adefence against the principle of estoppel on the basis of the Hindu Succession Act. The estoppel applied both to the person executing his Release Deed as well as his children.

CONCLUSION

The principle of estoppel can prevent a person from claiming a right to a property. In this case, even though the Release Deed per se was not valid but since the father had received consideration under it, that fact created an estoppel against his heirs from claiming to their grandfather’s property.

shailesh.kwebmaker

Maintenance under Criminal Procedure Code

INTRODUCTION

The duty to maintain certain relatives is a subject covered by different statutes. The Hindu Adoption and Maintenance Act, 1956 deals with the maintenance to be provided by a Hindu male for his wife, parents, children and certain other relations. Another Hindu Law statute which deals with this is the Hindu Marriage Act, 1955. Maintenance payable by a Hindu to his wife is also covered under the Protection of Women from Domestic Violence Act, 2005. This Law applies to people of all religions.

However and interestingly, maintenance as an obligation is also covered under the Code of Criminal Procedure, 1973 (CrPC). The CrPC is a criminal procedure law, whilst maintenance is a civil obligation. Nevertheless, sections 125 to 128 of the CrPC deal with this important civil duty. The Bombay High Court in Zahid Ali Imdadali vs. Fahmida Begum 1988 (4) BomCR 366 has observed that the right of an aggrieved claiming maintenance u/s 125 of the CrPC was essentially a civil right. The remedies provided in the said sections were in the nature of civil rights. The proceedings u/s 125 were essentially civil in nature.

In Badshah vs. Urmila Badshah Godse (2014) 1 SCC 188, the Supreme Court explained that the purpose of these sections of the CrPC was to achieve “social justice”, which was the constitutional vision enshrined in the Preamble of the Constitution of India.

APPLICABILITY

The provisions of the CrPC come into force where any person having sufficient means neglects or refuses to maintain:

(a) His wife who is unable to maintain herself;

(b) His minor child (even if illegitimate) unable to maintain itself;

(c) His major child (even if illegitimate) who cannot maintain itself owing to any physical/mental abnormality/injury; or

(d) His parent who is unable to maintain itself.

Thus, any of the above four categories could petition the Court, and if such proof of neglect/refusal exists, then the Court would order an interim/final maintenance order for the aggrieved on such terms as it deems fit. A First Class Judicial Magistrate (the starting point of Courts in the Criminal hierarchy) is empowered to pass such maintenance order.

The onus to prove neglect/refusal lies on the claimant. She/he must demonstrate willful default on the other person’s part.

The Supreme Court in Kirtikant D. Vadodaria vs. State of Gujarat (1996) 4 SCC 479 explained that the dominant and primary object of the section was to provide social justice to women, children, infirm parents etc., and to prevent destitution and vagrancy by compelling those who can support those who are unable to support themselves but have a moral claim for support. The provisions provide a speedy remedy to those women, children and destitute parents who are in distress. The provisions were intended to achieve this special purpose. The dominant purpose behind the benevolent provisions was that the wife, child and parents should not be left in a helpless state of distress, destitution and starvation.

In Savitaben Somabhai Bhatiya vs. State of Gujarat 2005 AIR(SC) 1809, it was held that the provisions of CrPC were applicable and enforceable whatever was the personal law by which the persons concerned were governed. Hence, even Muslims were covered by it (Mohd.Ahmed Khan vs. Shah Bano Begum, 1985 SCC (Cri) 245).

PERSON OF SUFFICIENT MEANS

In Anju Garg vs. Deepak Garg, Cr. Appeal 1693/2022 (SC) it was held that it is the sacrosanct duty of the husband to provide financial support to his wife and minor children. The husband is required to earn money even by physical labour if he is an able-bodied man. In this case, the husband contended that he had no source of income as his business had been closed. The Supreme Court held that it was neither impressed by nor ready to accept such submissions. The respondent being an able-bodied man, was obliged to earn by legitimate means and maintain his wife and the minor child.

Thus, if he has sufficient means at his disposal, either in the form of property, assets, employment or even physical capacity to be employed, then an order of maintenance would be passed against him for neglect of duty.

The Apex Court in Dr. Mrs. Vijaya Arbat vs. Kashirao Sawaui and another (AIR 1987 SC 1100) held that, under this section, even a daughter is liable to maintain her parents, without making any distinction between an unmarried daughter and a married daughter. It held that even though the section had used the expression “his father or mother”, the use of the word ‘his’ did not exclude the parents claiming maintenance from their daughter. The Court explained that if the contention of the daughter was accepted that she had no liability whatsoever to maintain her parents, in that case, parents having only daughters and unable to maintain themselves, would go destitute, if the daughters even though they had sufficient means refused to maintain their parents!

In an interesting recent decision, the Supreme Court in Kiran Tomar vs. State of UP, Cr. Appeal No. 1865/2022 dealt with a petition u/s 125 of the CrPC. The Family Court fixed a certain sum of maintenance based on the Income-tax returns of the husband, which was appealed against by the wife. The Supreme Court held that it was well-settled that income tax returns did not necessarily furnish an accurate guide of the real income! Particularly, when parties were engaged in a marital conflict, there was a tendency to underestimate income. Hence, it was for the Family Court to determine on a holistic assessment of the evidence what would be the real income of the husband to enable the wife and children to live in a condition commensurate with the status to which they were accustomed when they stayed together.

MAINTENANCE AND ITS QUANTUM

In Bhuwan Mohan Singh vs. Meena, 2014 AIR (SC) 2875, the Court held that the section was conceived to ameliorate the agony, anguish and financial sufferings of a woman so that the Court could make some suitable arrangements and she could sustain herself and also her children if they were with her. The concept of sustenance did not necessarily mean to lead an animal’s life, feel like an unperson to be thrown away from grace and roam for her basic maintenance somewhere else. She was entitled to lead a life in a similar manner as she would have lived at her husband’s house. That is where the status and strata came into play, and that is where the obligations of the husband, in the case of a wife, became prominent. In a proceeding of this nature, the husband could not take subterfuges to deprive her of the benefit of living with dignity. Regard being had to the solemn pledge at the time of marriage and, in consonance with the statutory law that governed the field, it was the obligation of the husband to see that the wife did not become a destitute, a beggar. A situation was not to be maladroitly created whereby she was compelled to resign to her fate and think of life “dust unto dust”. In fact, it was the husband’s sacrosanct duty to render financial support even if he was required to earn money with physical labour if he was able bodied. The object of the section was to prevent vagrancy and destitution. It provided a speedy remedy for the supply of food, clothing and shelter to the deserted wife.

In Rajnesh vs. Neha 2021 AIR(SC) 569, it was held that the objective of granting interim/permanent alimony was to ensure that the wife was not reduced to destitution or vagrancy on account of the failure of the marriage and not as a punishment to the other spouse. There was no straitjacket formula to fix the quantum of maintenance to be awarded. The factors which would weigh with the Court included the status of the parties; reasonable needs of the wife and dependent children; whether the applicant was educated and professionally qualified; whether the applicant had any independent source of income; whether the income was sufficient to enable her to maintain the same standard of living as she was accustomed to in her matrimonial home; whether the applicant was employed before her marriage; whether she was working during the subsistence of the marriage; whether the wife was required to sacrifice her employment opportunities for nurturing the family, child-rearing, and looking after adult members of the family; and reasonable costs of litigation for a non-working wife.

One of the inseparable conditions for claiming maintenance that also had to be satisfied was that the wife could not maintain herself – Chaturbhuj vs. Sita Bai, 2008 AIR(SC) 530. However, in Shailja & Anr. vs. Khobbanna, (2018) 12 SCC 199, the Supreme Court held that merely because the wife was capable of earning, it would not be sufficient ground to reduce the maintenance awarded by the Family Court. The Court had to determine whether the wife’s income was sufficient to enable her to maintain herself in accordance with her husband’s lifestyle in the matrimonial home. Sustenance did not mean mere survival. Similarly, in Sunita Kachwaha vs. Anil Kachwaha, (2014) 16 SCC 715, it was held that merely because the wife was earning some income, it could not be a ground to reject her maintenance claim.

In the case of minor children, the Court, in Rajnesh’s case (supra), held that maintenance would include expenses for food, clothing, residence, medical expenses and children’s education. Extra coaching classes or other vocational training courses to complement the basic education must be factored in while awarding child support. However, it should be a reasonable amount awarded for extra-curricular/coaching classes and not an overly extravagant amount.

MAINTENANCE UNDER THE DOMESTIC VIOLENCE ACT

In addition to maintenance under Hindu Law, it also becomes essential to understand maintenance payable to a wife under the Protection of Women from Domestic Violence Act, 2005. It is an Act to provide for more effective protection of the rights, guaranteed under the Constitution of India, of those women who are victims of violence of any kind occurring within the family. It provides that if any act of domestic violence has been committed against a woman, then such aggrieved woman can approach designated Protection Officers to protect her. The Supreme Court in Shome Danani vs. Tanya Danani 2019 (3) RLW 2124, held that a lady can approach both remedies under the CrPC as well as under the Domestic Violence Act. The object of both laws is different. This feature has earlier dealt in detail with the provisions of this law [refer BCAJ February 2021 and June 2022].

In Rajnesh vs. Neha 2021 AIR(SC) 569, the Apex Court held that maintenance might be claimed under one or more statutes (e.g., CrPC, Domestic Violence Act, Hindu Adoption and Maintenance Act), since each of these enactments provided an independent and distinct remedy framed with a specific object and purpose. The remedy provided by Section 125 was summary in nature, and the substantive disputes with respect to the dissolution of marriage could be determined by a Civil/Family Court in an appropriate proceeding, such as the Hindu Marriage Act, 1956. It further held that maintenance granted under the Domestic Violence Act to an aggrieved woman and children would be given effect to, in addition to an order of maintenance awarded under the CrPC or any other law in force.

The Court, however, held that while it was well settled that a wife could make a claim for maintenance under different statutes, it would be inequitable to direct the husband to pay maintenance under each of the proceedings, independent of the relief granted in a previous proceeding. Accordingly, to overcome the issue of overlapping jurisdiction, and avoid conflicting orders being passed in different proceedings, the Court directed that in a subsequent maintenance proceeding, the applicant must disclose the previous maintenance proceeding and the orders passed therein so that the Court would take into consideration the maintenance already awarded during the last proceeding, and grant an adjustment or set-off of the said amount. If the order passed in the previous proceeding required any modification or variation, the party would be required to move the concerned Court in the previous proceeding.

A compromise decree entered into by a husband and wife agreeing for a consolidated amount towards permanent alimony, thereby giving up any future claim for maintenance, accepted by the Court in a proceeding u/s 125 of the CrPC, would not preclude the wife from claiming maintenance in a suit filed under the Hindu Adoption and Maintenance Act, 1956 – Nagendrappa Natikar vs. Neelamma, 2013 AIR(SC) 1541.

In Bhagwan Dutt vs. Kamla Devi, (1975) 2 SCC 386, the Supreme Court held that under CrPC, only a wife who was “unable to maintain herself” was entitled to seek maintenance.

ENFORCEMENT

Section 125(3) of the CrPC provides that if the party against whom the order of maintenance is passed fails to comply with it, the same shall be recovered in the manner as provided for fines. The Magistrate may award a sentence of imprisonment for a term which may extend to one month, or until payment, whichever is earlier. However, the imprisonment is resorted to only against non-payment under the order.

The Court in Chaturbhuj’s case (supra) explained that the object of maintenance proceedings was not to punish a person for his past neglect but to prevent vagrancy and destitution of a deserted wife by providing her food, clothing, and shelter by a speedy remedy.

In addition, the Supreme Court in the case of Rajnesh (supra) directed that enforcement/execution of orders of maintenance, may be enforced as a money decree of a Civil Court as per the provisions of the CrPC, i.e., by attachment of property, arrest, detention, appointing a Court Receiver for his property, etc.

CONCLUSION

The right to claim maintenance has been provided to several persons under the Code. The Courts have been eager to uphold the claim of the aggrieved wife/others and have been very liberal in construing the provisions of these sections. As explained by the Supreme Court in Badshah’s case (supra), Courts would bridge the gap between Law and society using purposive interpretation to advance the cause of social justice!

shailesh.kwebmaker

Debts and their Treatment

INTRODUCTION

The Black’s Law Dictionary, 6th Edition, defines a debt as a sum of money due by certain and express agreement; a specified sum of money owing to one person from another, including not only an obligation to pay but right of creditor to receive and enforce payment. The relation between a debtor and a creditor is the result of a debt. However, would the treatment of a debt in the books of account have any legal bearing? Would the treatment impact the tax position of the debtor or the creditor? Let us examine some of these facets.

MEANING UNDER IBC, 2016

The Insolvency and Bankruptcy Code, 2016 (“the Code”) deals with the insolvency resolution of debtors who are unable to pay their debts. The trigger point of the Code is a default by the debtor. A default is defined u/s 3 to mean non-payment of a debt when it has become payable and is not so paid by the debtor. Thus, the entire Code pivots on a debt and its default. If there is no default of a debt, then the Code does not come into play. The Supreme Court in Dena Bank vs. C. Shivakumar Reddy, [2021] 129 taxmann.com 60 (SC) has held that under the scheme of the Code, the Insolvency Resolution Process begins, when a default takes place, in the sense that a debt becomes due and is not paid.

Section 3 of the Code defines a debt to mean a liability or obligation in respect of a claim and could be a financial debt or an operational debt. A financial debt is defined to mean a debt along with interest, if any, which is disbursed against the consideration for the time value of money. An operational debt is defined as a claim for provision of goods or services or employment dues or Government dues. The initiation (or starting) of the corporate insolvency resolution process under the Code, may be done by a financial creditor (in respect of default of a financial debt) u/s 7 or by an operational creditor (in respect of default of an operational debt) u/s 9 or by the corporate itself (in respect of any default) u/s 10 of the Code.

LIMITATION ACT AND IBC

Section 238A of the Code provides that the Limitation Act, 1963 shall apply to the proceedings or appeals before the NCLT, NCLAT, DRT, etc., under the Code. In this respect, Section 18 of the Limitation Act is relevant. It provides that where, before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgment of liability has been made in writing signed by the debtor, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed. Section18 was explained by the Supreme Court (Khan Bahadur Shapoor Fredoom Mazda vs. Durga Prasad, (1962) 1 SCR 140) to mean that the acknowledgement as prescribed merely renewed a debt; it did not create a new right of action. It was a mere acknowledgement of the liability in respect of the right in question; it need not be accompanied by a promise to pay either expressly or even by implication. The statement on which a plea of acknowledgement was based must relate to a present subsisting liability though the exact nature or the specific character of the said liability might not be indicated in words. Words used in the acknowledgement must, however, indicate the existence of jural relationship between the parties such as that of debtor and creditor, and it must appear that the statement was made with the intention to admit such jural relationship.

In the case of Sesh Nath Singh vs. Baidyabati Sheoraphuli Co-operative Bank Ltd. [2021] 125 taxmann.com 357, the Supreme Court held that u/s 18 of the Limitation Act, an acknowledgement of present subsisting liability, made in writing in respect of any right claimed by the opposite party and signed by the party against whom the right is claimed, has the effect of commencing of a fresh period of limitation, from the date on which the acknowledgement is signed. However, the acknowledgement must be made before the period of limitation expires.

In Laxmi Pat Surana vs. Union Bank of India [2021] 125 taxmann.com 394, the Supreme Court held that Section18 of the Limitation Act gets attracted the moment acknowledgement in writing signed by the party against whom such right to initiate resolution process u/s 7 of the Code ensues. Section 18 of the Limitation Act would come into play every time when the principal borrower and/or the corporate guarantor (corporate debtor), as the case may be, acknowledge their liability to pay the debt. Such acknowledgement, however, must be before the expiration of the prescribed period of limitation including the fresh period of limitation due to acknowledgement of the debt, from time to time, for institution of the proceedings under the Code.

One question that arises is whether Section 18 of the Limitation Act, which extends the period of limitation depending upon an acknowledgement of debt made in writing and signed by the corporate debtor, is also applicable u/s 238A of the Code to a debt entry appearing in the debtor’s Balance Sheet? In other words, if the debtor shows a debt as payable in its Balance Sheet would that accounting entry, give rise to a fresh period of limitation u/s 18 of the Limitation Act and thereby under the Code?

ACKNOWLEDGEMENT OF DEBT IN BALANCE SHEET BY DEBTOR

The Calcutta High Court in Bengal Silk Mills Co. vs. Ismail Golam Hossain Ariff AIR 1962 Cal 115, in an exhaustive decision held that an acknowledgement of liability that is made in a balance sheet can amount to an acknowledgement of debt. It held that each of the balance sheets contained an admission that balances had been struck at the end of the previous year, and that a definite sum was found to be the balance then due to the creditor. The natural inference to be drawn from the balance sheet was that the closing balance due to the creditor at the end of the previous year would be carried forward as the opening balance due to him at the beginning of the next year. In each balance sheet there was an admission of a subsisting liability to continue the relation of debtor and creditor and a definite representation of a present intention to keep the liability alive until it was lawfully determined by payment or otherwise. This judgment held that though the filing of a balance sheet was by compulsion of law, the acknowledgement of a debt was not necessarily so. In fact, it was not uncommon to have an entry in a balance sheet with Notes annexed to or forming part of such balance sheet, or in the auditor’s report, which were to be read along with the balance sheet, indicating that the impugned entry would not amount to an acknowledgement of debt for reasons given in the said Note.

The above decision of the Calcutta High Court has been approved by a Three-Judge Bench of the Supreme Court in the case of Asset Reconstruction Co. (India) Ltd. vs. Bishal Jaiswal, [2021] 126 taxmann.com 200 (SC). It perused various decisions on this issue and various sections of the Companies Act 2013 and held that there was no doubt that the filing of a balance sheet in accordance with the provisions of the Companies Act was mandatory, any transgression of the same being punishable by law. However, what was of importance was that the Notes annexed to or forming part of such financial statements were expressly recognised by Section 134(7).

Equally, the Auditor’s Report could also enter caveats with regard to acknowledgements made in the books of accounts including the balance sheet. A perusal of the aforesaid would show that the statement of law contained in the Calcutta High Court decision, that there was a compulsion in law to prepare a balance sheet but no compulsion to make any particular admission, was correct in law as it would depend on the facts of each case as to whether an entry made in a balance sheet regarding any particular creditor is unequivocal or has been entered into with caveats, which then had to be examined on a case by case basis to establish whether an acknowledgement of liability had, in fact, been made, thereby extending limitation u/s 18 of the Limitation Act.

The Supreme Court also referred to a Delhi High Court decision in CIT-III vs. Shri Vardhman Overseas Ltd. [2011] 343 ITR 408, which held that the assessee had not transferred the said amount from the creditors’ account to its profit and loss account. The liability was shown in the balance sheet. The assessee, being a limited company, this amounted to acknowledging the debts in favour of the creditors and Section 18 of the Limitation Act stood attracted.

It also referred to the decision in Al-Ameen Limited vs. K.P. Sethumadhavan, 2017 SCC OnLine Ker 11337, wherein the Kerala High Court held that, a balance sheet was a statement of assets and liabilities of the company as at the end of the financial year, approved by the Board of Directors and authenticated in the manner provided by law. The persons who authenticated the document did so in their capacity as agents of the company. The inclusion of a debt in a balance sheet duly prepared and authenticated would amount to admission of a liability and therefore satisfied the requirements of law for a valid acknowledgement u/s 18 of the Limitation Act, even though the directors by authenticating the balance sheet merely discharged a statutory duty and may not have intended to make an acknowledgement.

Ultimately, the Apex Court concluded that an entry made in a balance sheet of a corporate debtor would amount to an acknowledgement of liability u/s 18 of the Limitation Act.

Similarly, in Dena Bank (supra), the Supreme Court held that it was incorrect to state that there was nothing on record to suggest that the ‘Corporate Debtor’ acknowledged the debt within three years and agreed to pay debt, in view of its very own Statement of Accounts/Balance Sheets/Financial Statements which showed the debt as due.

Again, in State Bank of India vs. Krishidhan Seeds (P.) Ltd., [2022] 172 SCL 515 (SC), the Court held that an acknowledgement in a balance sheet without a qualification can furnish a legitimate basis for determining as to whether the period of limitation would stand extended, so long as the acknowledgement was
within a period of three years from the original date of default.

The Supreme Court once again had an occasion to consider this aspect in Asset Reconstruction Company (India) Ltd. vs. Tulip Star Hotels Ltd, [2022] 141 taxmann.com 61 (SC). It held that there was no specific period of limitation prescribed in the Limitation Act, 1963, for an application under the IBC, before the NCLT. An application for which no period of limitation was provided anywhere else in the Limitation Act, was governed by Article 137 of the Schedule to the said Act. Under Article 137 of the Schedule to the Limitation Act, the period of limitation prescribed for such an application was three years from the date of accrual of the right to apply. It further held that the period of limitation for making an application u/s 7 or 9 of the Code was three years from the date of accrual of the right to sue, that is, the date of default in payment of the financial or operational debt. Accordingly, it held that an application u/s 7 of the Code would not be barred by limitation, on the ground that it had been filed beyond a period of three years from the date of declaration of the loan account of the Corporate Debtor as NPA, if there were an acknowledgement of the debt by the Corporate Debtor before expiry of the period of limitation of three years, in which case the period of limitation would get extended by a further period of three years.

EFFECT OF WRITE-OFF OF DEBT BY CREDITOR ON RECOVERY MEASURES

Sometimes, the creditor writes-off the debt as a bad debt in its books of account. In this case, the question which arises is whether the creditor can yet pursue a legal remedy against the debtor for such a debt? Here, one must bear in mind the difference between a debt waiver and a debt write-off. A waiver is one where the creditor is forgoing the entire debt altogether, for example, under a one-time settlement, part of the loan may be waived by the bank. In this case, the debtor is no longer liable to repay the debt waived to the bank. However, in case of a write-off also known as a technical write-off, the creditor is only cleaning up its balance sheet. The loan yet remains payable, and the bank / creditor can yet pursue legal remedies for its recovery. Banks are required, by the RBI, to write-off all loans which have become NPAs. Nevertheless, they would yet continue all civil and criminal recovery methods for such an NPA. Banks and NBFCs must make provision as per the Prudential Norms of the RBI for all loans. A loan may have a 100 per cent provision, i.e., these assets represent little hope of immediate recovery. The Prudential Norms would require the lenders to remove these assets from their balance sheets. This technical writing off helps the bank present a true picture of its asset base and free up provisioning resources.

The Minister of State for Finance, in response to a question raised in the Rajya Sabha (August 2022) as to the magnitude of bank loans written-off has also explained this concept. He replied that as per the RBI guidelines and policies approved by Boards of banks, non-performing loans, including, inter-alia, those in respect of which full provisioning has been made on completion of four years, were removed from the balance-sheet of the bank by way of write-off. Banks evaluate/consider the impact of write-offs as part of their regular exercise to clean up their balance-sheet, avail of tax benefit and optimise capital, in accordance with RBI guidelines and policy approved by their Boards. As borrowers of written-off loans continue to be liable for repayment and the process of recovery of dues from the borrower in written-off loan accounts continues, write-off does not benefit the borrower. Banks continue to pursue recovery actions initiated in written-off accounts through various recovery mechanisms available, such as filing of a suit in civil courts or in the Debts Recovery Tribunals, action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, filing of cases in the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016, through negotiated settlement/compromise, and through sale of non-performing assets. Having said that, in several cases, creditors have been advised by their lawyers that a write-off may impair their chances of recovery in Courts. Several times the Courts may ask the creditor for a copy of the Ledger Account of the debtor and if the debt has been written-off, it could be an issue. In addition, thought should be given as to whether the write-off would impair the position in case of a criminal complaint u/s 138 of the Negotiable Instruments Act for a cheque bouncing. Hence, this is a move which requires due consideration of all facts.

CLAIM OF BAD DEBT BY CREDITOR

In this respect, the Income-tax Act provides that when a creditor writes-off a debt, he can claim a bad debt u/s 36(1)(vii). The Supreme Court recently in Pr. CIT vs. Khyati Realtors (P.) Ltd., [2022] 447 ITR 167 (SC) held, that earlier the law was that even in cases where the assessee had made only a provision in its accounts for bad debts and interest thereon, without the amount actually being debited from the assessee’s profit and loss account, the assessee could still claim deduction u/s 36(1)(vii). However, w.e.f. 1989, with the insertion of the new Explanation u/s 36(1)(vii), any bad debt written-off as irrecoverable in the account of the assessee would not include any ‘provision’ for bad and doubtful debt made in the accounts of the assessee. In other words, before this date, even a provision could be treated as a write off. However, after this date, the Explanation to section 36(1)(vii) brought about a change. As a result, the Court held that merely stating a bad and doubtful debt as an irrecoverable write off without the appropriate treatment in the accounts would not entitle the assessee to a deduction u/s 36(1)(vii).

TAXATION – WRITE BACK OF DEBTS BY DEBTOR

When a loan is waived, the debtor writes-back the quantum so waived. In this case, the issue of taxation of the loan so waived in the hands of the debtor becomes an issue. The Supreme Court in the case of CIT vs. Mahindra & Mahindra Ltd (2018), 404 ITR 1 (SC) had an occasion to consider a case of taxability of the write-back of a loan which was used for capital expenditure / acquiring fixed assets. This ruling has held that the waiver of such a loan by the creditor was neither taxable as a business perquisite u/s 28(iv) of the Income-tax Act nor taxable as a remission of liability u/s 41(1) of the Act. However, waiver of a trading debt by a creditor would lead to income u/s 41(1) in the hands of the debtor.

EPILOGUE

If a debtor desires to dispute a debt, then he should be very careful about its accounting treatment. Similarly, creditors should bear in mind the distinction between a loan waiver and write-off in their books of account.

shailesh.kwebmaker

Gift of Foreign Securities

INTRODUCTION

Who does not like to get a gift? More so, when it comes from abroad? However, there are a variety of laws that apply to a gift of foreign securities received by a resident from a non-resident or vice-versa. Let us consider some of the important provisions in this respect.

FEMA, 1999

The Foreign Exchange Management Act, 1999 and the recently enacted FEM (Overseas Investment) Rules, 2022 permit a person resident in India to receive a gift of foreign securities as follows:

(a) Without any limit from a person resident in India by way of inheritance (i.e., by way of a Will or intestate succession on death) if the donor has been holding the foreign securities in accordance with the applicable FEMA provisions;

(b) Without any limit from a person resident outside India by way of inheritance;

(c) By way of a gift (different than a receipt under inheritance) from a person resident in India if the donor is a relative (as per the definition under the Companies Act, 2013) of the donee, and has been holding the foreign securities in accordance with the applicable FEMA provisions; and

(d) By way of a gift from a person resident outside India on compliance with the applicable provisions of the Foreign Contribution (Regulation) Act, 2010.

An Indian resident is permitted to gift foreign securities to another Indian resident only if the donor is a relative of the donee. Relative for this purpose means the following:

• Members of a Hindu Undivided Family
• Spouse
• Father (including stepfather)
• Mother (including stepmother)
• Son (including stepson)
• Son’s wife
• Daughter (including stepdaughter)
• Daughter’s husband
• Brother (including stepbrother)
• Sister (including stepsister)

An overseas investment by way of receipt of gift, and inheritance is to be categorised as Overseas Direct Investment (ODI) or Overseas Portfolio Investment (OPI) based on the nature of the investment. ODI means investment through acquisition of unlisted equity capital of a foreign entity or investment in 10 per cent or more of the paid-up equity capital of a listed foreign entity, or investment with control where investment is less than 10 per cent of the paid-up equity capital of a listed foreign entity. Anything which is not ODI is OPI. The donee needs to accordingly file Form FC in respect of the gift / inheritance constituting an ODI with the RBI through its Authorised Dealer. If the gift /inheritance constitutes OPI then a resident individual does not need to file Form OPI.

Acquisition of foreign securities by way of inheritance or gift is not to be reckoned towards the Liberalised Remittance Scheme limit of $250,000 and hence, need not be reported under the LRS.

It may be noted that a person resident in India cannot gift foreign securities to a person resident outside India.

FCRA, 2010

The FEM (Overseas Investment) Rules, 2022 permit a person resident in India to receive a gift of foreign securities from a person resident outside India only if the applicable provisions of the Foreign Contribution (Regulation) Act, 2010 have been complied with. Hence, it becomes important to understand the provisions of this Act also.

FOREIGN CONTRIBUTION

A person (individual / HUF/ company) resident in India who is a specified person u/s 3 of the FCRA cannot accept any foreign contribution, i.e., a gift from a foreign source of any security as defined under the Securities Contract Regulation Act, 1956 or the FEMA. These specified persons include: election candidates, judges, civil servants, politicians, journalists, etc.

FOREIGN SECURITIES

The type of securities covered under these two Acts include:

• shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a company or other body corporate
•   derivatives
•   units or any other instrument issued by any collective investment scheme
•   security receipts
•   units under any mutual fund scheme
•   Government securities
•   rights or interest in securities
•    shares, stocks, bonds, debentures or any other instrument denominated or expressed in foreign currency
•   securities expressed in foreign currency, but where redemption or any form of return such as interest or dividends is payable in Indian currency

A gift, delivery or transfer of foreign securities by a person receiving it from a foreign source, either directly or indirectly, is also deemed as a foreign contribution.

FOREIGN SOURCE

The definition of foreign source includes a foreign citizen and an Indian company of which more than 50 per cent of the capital is held by a foreign Government/foreign citizens / foreign companies / foreign trusts, etc. Thus, a non-resident Indian (passport holder of India) residing abroad would not constitute a foreign source. However, a foreign citizen permanently resident in India would constitute a foreign source! This difference is very important and would determine whether or not the gift constitutes a foreign contribution.

The FAQs issued on the FCRA state that contributions made by a citizen of India living in another country (i.e., Non-Resident Indian), from his personal savings, through the normal banking channels, is not treated as foreign contribution. However, while accepting any donations from such NRI, it is advisable to obtain his passport details to ascertain that he/she is an Indian passport holder. Similarly, the FAQs state that a donation from an Indian who has acquired foreign citizenship is treated as foreign contribution.

An Overseas Citizen of India would also constitute a foreign source since an OCI cardholder is not an Indian citizen. An OCI card is granted by the Government of India to a person under the aegis of the Citizenship Act, 1955. Section7A of this Act provides for the registration of OCIs. An OCI cardholder is not a full-fledged India citizen under the Citizenship Act but he is only registered as an OCI.

Interestingly, under FEMA, citizenship has no relevance whereas under FCRA it is material. Hence, an NRI working abroad would be a person resident outside India under FEMA but he would not be a foreign source under FCRA. A gift of foreign securities from such a person would not trigger the FCRA since it would not constitute a foreign source.

Exceptions: While specified person under Section 3 of the FCRA cannot accept any foreign contribution, Section 4 carves out an exception to this rule. Specified persons being an individual / HUF can accept a foreign contribution from his relative. Interestingly, the FCRA definition of the term relative refers to the extended list under the Companies Act 1956, and not the restrictive list under the Companies Act, 2013. Hence, a specified person can receive a gift of foreign securities from the following relatives who are foreign citizens:

• Members of a Hindu Undivided Family
• Spouse
• Father
• Mother (including stepmother)
• Son (including stepson)
• Son’s wife
• Daughter (including stepdaughter)
• Father’s father and mother
• Mother’s mother and father
• Son’s son
• Son’s son’s wife
• Son’s daughter
• Son’s or daughter’s husband
• Daughter’s husband
• Daughter’s son
• Daughter’s son’s wife
• Daughter’s daughter
• Daughter’s daughter’s husband
• Brother (including stepbrother)
• Brother’s wife
• Sister (including stepsister)
• Sister’s husband

It may be noted that the FEMA rules allow a gift of foreign securities from a person resident outside India provided the FCRA rules are complied with. Hence, as far as the FCRA is concerned, a person resident in India can receive a gift from a donor who is a relative under FCRA even if he is not a relative under FEMA.

The FAQs have also clarified that individuals in general as well as those prescribed u/s 3 and an HUF are permitted to accept foreign contribution without permission from relatives.

Intimation: Any individual/HUF (whether or not covered u/s 3 of the FCRA), receiving foreign contribution in excess of R10 lakhs in a financial year from his relatives should inform the Central Government regarding the details of the foreign contribution received by him in Form FC-1 within 3 months from the date of gift. This provision applies to all persons and not just the persons specified u/s 3. This is an information provision and not a prohibitory section. The earlier threshold limit for intimation was Rs. 1 lakh but it has been enhanced to Rs. 10 lakhs from July 2022.

INDIAN TAX TREATMENT

Section 56(2)(x) of the Income-tax Act taxes gifts received without / or for inadequate consideration. In such cases, the donee becomes liable to tax on the receipt of the gift. It also contains several exceptions under which this section does not apply. The relevant exceptions in this respect are:

• A gift from defined relatives
• A gift on the occasion of the marriage of the donee
• A gift under a Will / inheritance from any person (even a non-relative)
• Gifts made in contemplation of death of the donor

The tax position of the donee needs to be examined keeping in mind the provisions of s.56(2)(x) and other provisions, such as, s.68 of the Income-tax Act.

Since the securities acquired would be foreign securities, necessary disclosures in Schedule FA of the Income-tax Return should be made. Failure to do so would entail a penalty under the Black Money Act, 2015.

FOREIGN TAX TREATMENT

In addition, if the country of the donor levies a gift tax then the same should be considered. For instance, the USA levies a gift tax on the donor on all gifts in excess of US$16,000 per donor per calendar year. Thus, a US couple can gift $32,000 per donor every year since US taxes a couples as one unit. Further, the donor can also utilise his lifetime estate duty-cum-gift tax credit to avoid paying the gift tax. Gifts in excess of $16,000 need to be reported by the donor in Form 709 in the USA. In the US, states are also empowered to levy a gift tax and hence, the same should also be examined. Connecticut is one such state which levies a state level gift tax.

The UK does not levy any gift tax but if the donor dies within 7 years of making the gift, then an inheritance tax on the gifts is levied. However, certain gifts are exempt from this inheritance tax.

CONCLUSION

The law relating to gifts is myriad and one needs to consider various factors before contemplating a gift of foreign securities.

shailesh.kwebmaker

Bequests and Legacies Under Wills – Part 2

INTRODUCTION

In the last month’s feature (BCAJ, August 2022), we examined some of the important principles regarding a Will’s valid bequest, the time when it vests, etc. We continue with an examination of some more interesting and vital features in this respect.

TYPES OF LEGACIES

Specific Legacy

When a specific part of the testator’s property is bequeathed to any person and such property is distinguished from all other parts of his property, then the legacy is known as a specific legacy. E.g., A makes a bequest to C of the diamond ring which was gifted to A by his father. This is a specific legacy in favour of C. Thus, the essence of a specific legacy is that it is distinguishable from the other assets of the testator’s estate. A specific legacy is distinguishable from a general legacy, e.g., a bequest of all the residue estate is a general legacy.

What is a specific legacy and what is a general legacy is a question of fact and needs to be determined on a case-to-case basis. If the legacy exists at the time of the testator’s death and his estate is otherwise insufficient to pay off his debts, then the specific legacy must be given to the legatee. The following are the principles with respect to a specific legacy:

(i) Usually, a bequest of money, stocks and shares are general legacies. In some cases, a sum of money is bequeathed and the stock or securities in which the money is to be invested is specified in the Will. Even in such cases, the legacy is not specific. E.g., A makes a bequest of Rs. 10 crores to his son and his Will specifies that the sum is to be invested in the shares of XYZ P. Ltd. The legacy is not specific.

(ii) Even if a legacy is made out under which a bequest is made in general terms and the testator as on the date of the Will possesses stock of the same or greater amount, the legacy does not become specific. E.g., A bequeaths 8% RBI Bonds worth Rs. 10 lakhs to X. On the date of the Will, A has 8% RBI Bonds worth Rs. 10 lakhs. The legacy is not specific. However, if A were to state that “I bequeath to X all my 8% RBI Bonds”, then this would have been a specific legacy.

(iii) A legacy of money does not become specific merely because its payment is postponed until some part of the testator’s estate has been reduced to a certain form or remitted to a certain place.

(iv) A Will may make a specific bequest for some items and a residual bequest for the others. While making a residual bequest, the testator lists down some of the items comprised within the residue. Merely because such items are enlisted they do not become specific legacies.

(v) In the case of a specific bequest to two or more persons in succession, the property must be retained in a form in which the testator left it even if it is a wasting or a reducing asset, e.g., a lease or an annuity.

(vi) A property bequest is generally a specific legacy.

Demonstrative Legacy

A Demonstrative Legacy has the following characteristics:

(a) It means a legacy which comprises a bequest of a certain sum of money or a certain quantity of a commodity but refers to a particular fund or stock which is to constitute the primary fund or stock out of which the payment is to be made. The difference between a specific and a demonstrative legacy is that while in the case of a specific legacy, a specific property is given to the legatee, in the case of a demonstrative legacy, it must be paid out of a specified property.

E.g., A bequeaths Rs. 50 lakhs to his wife and also directs under his Will that his property should be sold and out of the proceeds Rs. 50 lakhs should go to his daughter. The legacy to his wife is specific but the legacy to his daughter is demonstrative.

(b) In case a portion of a fund is a specific legacy and a portion is to be used for a demonstrative legacy, then the specific legacy stands in priority to the demonstrative legacy. If there is a shortfall in paying the demonstrative legacy, then it is to be met from the residue of the estate of the testator.

(c) Similarly, in case a portion of a fund is a specific legacy and a portion is to be used for a demonstrative legacy, and if the testator himself receives a portion of the fund with the result that funds are insufficient, then specific legacy stands in priority to the demonstrative legacy. If there is a shortfall in paying the demonstrative legacy, then it is to be met from the residue of the testator’s estate.

E.g., A bequeaths Rs. 20 lakhs, being part of an actionable claim of Rs. 50 lakhs which he has to receive from B to his wife and also directs under his Will that this claim should be used to pay Rs. 10 lakhs to his daughter. During A’s lifetime he receives Rs. 25 lakhs himself from B. The legacy to his wife is specific, but the legacy to his daughter is demonstrative. Hence, the wife will receive Rs. 20 lakhs in priority to the daughter. Since the balance in the claim is only Rs. 5 lakhs, whereas the daughter has to receive Rs. 10 lakhs, she would have to receive the balance from A’s general estate.

General Legacy

A legacy which is neither specific nor demonstrative is known as a general legacy. E.g., A bequeaths all the residue of his estate to B. This is called a general legacy.

ADEMPTION OF LEGACIES

Ademption of a legacy means that the legacy ceases to take effect, i.e., the legacy fails. Ademption of a legacy takes place when the thing which has been legated does not exist at the time of the testator’s death. The rules in respect of ademption of legacies are as follows:

(a) In the case of a specific legacy, if the subject matter of the item bequeathed does not exist at the time of the testator’s death or it has been converted into some other form, then the legacy is adeemed. Thus, because the bequest is not in existence, the legacy fails. E.g., A makes a Will under which he leaves a gold ring to X. A in his lifetime, sells the ring. The legacy is adeemed. The position would be the same if a stock has been specifically bequeathed and the same is not in existence at the testator’s death.

However, in case the bequest undergoes a change between the date of Will and the death of the testator and the change occurs due to some legal provisions, then the legacy is not adeemed. E.g., A bequeaths 10,000 equity shares in Z Ltd. to B. Z Ltd. undergoes a demerger under a court-approved reconstruction scheme and the shares of A are split into 5,000 2% Preference Shares of Y Ltd. and 4,000 equity shares of Z Ltd. The legacy is not adeemed.

Another exception to the principle of ademption is if the subject matter undergoes a change between the date of the Will and the death of the testator without the testator’s knowledge. In such a case since the change is not with the testator’s knowledge, the legacy is not adeemed. One of the instances where such a change may occur is if the change is made by an agent of the testator without his consent.

(b) Unlike a specific legacy, a demonstrative legacy is not adeemed merely because the property on which it is based does not exist at the time of the testator’s death or the property has been converted into some other form. In such a case the other general assets of the testator would be used to pay off the legacy.

(c) In some specific bequests, debts, receivables, actionable claims, etc., which the testator has to receive from third parties may be bequeathed. In such cases, if the testator receives such dues himself, then the legacy adeems because there is nothing left to be received by the legatee.

However, where the bequest is money or some other commodity and the testator receives the same in his lifetime, then the same is not adeemed unless the testator mixes up the same along with his general property.

(d) If a property has been specifically bequeathed to a person and he receives a part or a portion of the property, then the bequest adeems to the extent of the assets received by the legatee. However, it continues for the balance portion of the bequest.

As opposed to this, if only a portion of the entire fund or property has been specifically bequeathed to a legatee and the testator receives a part or a portion of this fund or property, then there is an ademption to the extent of the receipt. The balance fund or stock shall be used to discharge the legacy.

(e) If a stock is specifically bequeathed to a person and it is lent to someone else and accordingly replaced, then the legacy is not adeemed. Similarly, if a stock which is specifically bequeathed is sold and afterwards before the testator’s death, an equal quantity is replaced, then the legacy is not adeemed.

CONCLUSION

It is important to bear in mind the above principles while drafting a Will so that the bequest does not become void and so that the beneficiaries can receive what the testator intended that they receive!

shailesh.kwebmaker

BEQUESTS AND LEGACIES UNDER WILLS – PART I

MEANING
A bequest may be defined as the property / benefits which flow under the Will from the testator’s estate to the beneficiary. A legacy also has the same meaning. Thus, they are a gift of a personal estate under a Will. Interestingly, while these terms are used extensively in the Indian Succession Act, 1925 (which governs the making of Wills in India), neither has been defined under this Act. Since making a Will is all about making a bequest or a legacy, it is important to understand the principles regarding a valid bequest, the time when it vests, etc.

VOID BEQUESTS
Although a testator can bequeath his property in any manner whatsoever, certain bequests are treated as void under the Indian Succession Act. This is to prevent an embargo upon the free circulation of property. These bequests are as follows:

(a) A bequest made to a person of a particular description who is not in existence at the time of the testator’s death. E.g., A bequeaths land to B’s eldest son. At A’s death, B has no son. The bequest is void subject to certain exceptions to this rule.

(b) A bequest made to a person not in existence at the time of the testator’s death subject to a prior bequest contained in the will. In such cases, the latter bequest would be void unless it comprises the whole of the remaining interest of the testator in the property bequeathed. E.g., X bequeaths property to B for life and after B’s death to B’s son for life. At the time of X’s death, B has no son. The bequest made to B’s son for life is not for the whole interest that remains with X. Hence, the bequest to B’s son is void.

It needs to be noted that a bequest would be void only if all the following conditions are satisfied:

(i) A prior life-interest bequest is created in favour of a person;

(ii) After the life-interest, another interest is created in favour of some other person;

(iii) That other person is not in existence at the time of the testator’s death; and

(iv) Such interest created in favour of the unborn person is not the entire remainder interest of the testator.

Thus, if any of the four conditions is not satisfied, then the bequest remains valid. For instance, if in the above illustration, B has a son at the time of X’s death, then the life-interest bequest in his favour is valid.

(c) One of the situations where a bequest is void is known as the rule against perpetuity which is almost similar to s.14 of the Transfer of Property Act, 1882. A bequest made whereby the vesting of the property is delayed beyond the lifetime of one or more persons living at the testator’s death and the minority of some person who shall be in existence at the expiration of that period, and to whom if he attains full age, the thing bequeathed is to belong. E.g., a property is bequeathed to A for his life and after his death to B for his life; and after B’s death to such of B’s sons who shall first attain 25 years of age. A and B survive the testator. The son of B who attains 25 years may be a son born after the testator’s death, and he may not attain 25 years till more than 18 years have passed from the death of longer liver of A and B. Thus, the vesting is delayed beyond the lifetime of A and B and the minority of the sons of B. The bequest made after B’s death is void.

(d) Where a bequest is made in favour of a class of persons and the bequest to some of the legatees is hit by the conditions specified in (b) and (c) above, then the remaining legatees would not be hit by such void conditions.

(e) If a bequest in favour of someone is void because of the conditions specified in (b) and (c) above, then any bequest contained in the same Will and which is intended to take effect upon the failure of such prior bequest would also be void. E.g., a property is bequeathed to X for his life and after his death to B for his life; and after B’s death to such of B’s sons for life who shall first attain 25 years of age and after that, to all the children of that son. Since the bequest in favour of B’s son is hit by the rule of perpetuity and hence, is void, the subsequent bequest in favour of his children is also void.

(f) A Will cannot give a direction for the accumulation of the income from a property of the testator for a period longer than eighteen years. If it contains any such direction, then at the end of eighteen years, it would be treated as if there is no such direction, and the property and the income would be disposed of. The exception to this rule is applicable for an accumulation made for the following purposes:

(i) The payment of the debts of the testator or any person who takes an interest under the Will; or

(ii) The provision of portions for the children of the testator or any person who takes an interest under the Will; or

(iii) The preservation or the maintenance of any property bequeathed.

(g) One of the interesting situations, when a bequest would be void, is a case of a bequest for charitable or religious uses. If any person, who is not a Parsi, has a nephew or a niece or any nearer relative, then he does not have any power to bequeath his property for religious or charitable uses, except under certain conditions. Thus, this provision seeks to prohibit people with close relations from bequeathing all their property to charity unless a prescribed procedure is followed.

VESTING OF LEGACIES
The Act also contains specific provisions in relation to the time of the vesting of the legacies. These are as under:

(a) Vested Interest: There may be situations where the possession of a legacy is postponed for certain time. In such cases, unless the Will demonstrates a contrary indication, the vesting of the bequest is immediate upon the testator’s death, although its possession or payment may be postponed. The consequence of this vesting is that even if the legatee dies without receiving the bequest, his estate would be entitled to receive the bequest. This is known as a vested interest in a legacy.

In the case of a bequest made to a class of people of a certain age, only those persons who have attained that age can claim a vested interest. E.g., if a will provides for a bequest to all persons above the age of 21, then only those persons who are above 21 have a vested interest.

(b) Contingent Interest: A contingent interest is the opposite of a vested interest. In the case of a vested interest, only the possession of the legacy is postponed, but in the case of a contingent interest, the legacy itself is in doubt, i.e., it may or may not come to the legatee. Thus, in a vested interest, the vesting is unconditional, while in a contingent interest, it is dependent upon the fulfilment of a future uncertain condition.

CONDITIONAL BEQUESTS
Conditional bequests are those bequests which take effect only if certain conditions are fulfilled. Conditional bequests should be distinguished from contingent bequests. While contingent bequests are dependent upon the happening of some events, conditional bequests require the doing or abstinence from doing certain acts.

Conditions may be of two types: conditions precedent and conditions subsequent. While conditions precedent must be fulfilled prior to the vesting of the estate, the conditions subsequent can be fulfilled even after the vesting of the estate. If the conditions are not satisfied, then the vested estate is divested. Thus, in the first case, the estate does not vest itself till compliance with the condition, while in the second case, the estate vests immediately till such time as the condition is broken, after which it is divested. The rules in relation to conditional bequests are as under:

(a) Condition Precedent

(i) A bequest conditional upon an impossible condition is void. E.g., A makes a bequest to P provided he marries his (A’s) daughter S. S is dead at the time of making the will. The bequest is void ab initio as the condition is impossible to be fulfilled. Thus, if a condition precedent is impossible to be fulfilled, then the bequest is void.

(ii) If the condition precedent is either illegal or immoral, then it results in a void bequest. E.g., A leaves Rs. 10 lakhs to C under a will if C robs a bank. The condition precedent is illegal, and hence, the bequest is void.

(iii) In the case of a condition precedent, if the condition is substantially complied with, then the condition is treated as complied with. E.g., S bequeaths Rs. 1 crore to W provided he marries with the prior consent of all his 4 uncles. At the time of W’s marriage, only 3 uncles are alive, whose consent W obtains. The condition is substantially complied. The bequest is valid.

However, if there is a condition precedent and if it is provided that in case the condition is not complied with, the property passes over to another beneficiary, then the condition must be complied with strictly.

(iv) If a bequest is made to a beneficiary only if a prior bequest fails, then the latter bequest takes effect upon failure of the prior bequest even if the failure was not in the manner contemplated by the will. E.g., A makes a bequest to C if she remains unmarried forever, and if she marries, then the bequest would go to X. If C dies unmarried, the bequest to X takes effect.

However, if the latter bequest is only made if the former bequest fails in a particular manner, then the latter bequest does not take effect unless the prior bequest fails in the manner specified.

(v) Where a particular time has been prescribed for the performance of the condition and the same cannot be fulfilled in time due to a fraud, then further time would be allowed to make up for the time lost due to the fraud.

(b) Condition Subsequent

(i) A bequest may be made to any person with the condition superadded that in case of a specified uncertain event occurring or a specified uncertain event not occurring, the bequest shall go to another person. E.g., a sum of money is bequeathed to C with the condition that if he dies before he attains the age of 40 years, then B will get the estate. In this case, C takes a vested interest which may be divested and given to B in the event that he dies before 40 years. However, in such a case, the condition must be strictly fulfilled; it is not adequate if the condition is substantially complied with. Thus, unlike a condition precedent which is deemed to have been complied with if substantially complied with, a condition subsequent must be strictly complied with in the manner laid down. This is because it divests an already vested interest and hence, deprives a legatee of an estate that he was hitherto enjoying. E.g., a bequest is made to B with the condition superadded that if he does not marry with the consent of all his brothers, the legacy would go to X. B marries with the consent of 3 of his 4 brothers. The legacy to X does not take effect.

(ii) In the case of a condition precedent, if the condition is void on the grounds of illegality or immorality or impossibility, then the bequest itself fails. However, in the case of a condition subsequent, if the condition is void on any of these grounds, then the original bequest does not fail, and it continues. E.g., A gets a bequest with the condition that if he does not murder C, then the legacy would go to P. The condition is void, but the bequest continues.

(iii) One type of a condition subsequent could be a condition requiring a legatee to do something after receiving the bequest, failing which the bequest passes on to another person or the bequest ceases to have effect. However, in many cases, no specific time is specified for performing the act. In such cases, if the legatee takes any steps which either render the act impossible to be performed or indefinitely postpones the act, then the legacy would fail as if the legatee had died without performing the act in question. Thus, the act must be completed within a reasonable time. What is a reasonable time is a matter of fact which needs to be ascertained on a case-to-case basis. E.g., A makes a bequest to his niece W with a proviso that her husband would look after his business or else the bequest would go to his nephew X. W becomes a nun and thereby takes a step which renders the act impossible. The bequest goes over to X.

(iv) Where a particular time has been prescribed for the performance of the condition and the same cannot be fulfilled in time due to a fraud, then further time would be allowed to make up for the time lost due to the fraud.

DIRECTIONS AS TO APPLICATION / ENJOYMENT
There may be bequests which lay down specific directions as to the application or the enjoyment of the fund bequeathed. Such conditions restrict the free usage of the estate bequeathed and thereby act as a clog on the property. Hence, the Act lays down certain prohibitions and certain exceptions relating to such restrictive directions in a Will. The provisions in respect of directions as to application and enjoyment of an estate are as follows:

(a) If assets are bequeathed for the absolute benefit of a person but it contains restrictions on the manner in which it can be applied or enjoyed, then the condition is void, and the legatee can enjoy the fund as if there was no such condition. However, for the restriction to be void, it is necessary that the legatee is absolutely entitled to enjoy the property. If the interest created is not absolute, then the condition is valid. For instance, a father bequeaths a large sum of money to his son, which is to be used only for his business. The son buys a house from the money. He is entitled to disregard the restrictive condition. However, if the bequest is not absolute, say, it is a life-interest, then the condition would be valid.

(b) If a testator leaves a bequest absolutely to the legatees but restricts the mode of enjoyment or application of the property in a certain manner which is for the specific benefit of the legatees, and if the legatee is not able to obtain such a benefit, then the estate belongs to the legatee as if the fund contained no such direction. E.g., A gives a fund to his son for life and after him to his son. The son dies without a child. His heirs are entitled to the fund.

(c) If a bequest has been made which is not absolute in nature and is for a specific purpose, but some of those purposes cannot be fulfilled, then such portion of the fund would remain a part of the testator’s estate. This provision applies only when the interest is not absolute but is, say, a life-interest.

[To be Continued Next Month]

Author’s Note: This month marks the 20th Year of this Feature, ‘Laws and Business’, that started in September, 2002 as an experiment to educate readers about certain laws impacting a business. I have thoroughly enjoyed exploring the labyrinth of Indian laws and regulations, and I hope the readers also have!

shailesh.kwebmaker

DONATIO MORTIS CAUSA – GIFTS IN CONTEMPLATION OF DEATH

INTRODUCTION
Death or rather the fear of it makes people do things they might normally not have done. One such act is known as donatio mortis causa or the giving of gifts in contemplation of death. A person on his deathbed gives certain gifts because he does not want to leave to inheritance under his Will or succession. The law deals with such gifts and the Income-tax Act also deals with the taxation of these gifts.

LEGAL PROVISIONS
Black’s Law Dictionary, 6th Edition, defines the Latin maxim “donatio mortis causa” as a gift made in contemplation of the donor’s imminent death.

Section 191 of the Indian Succession Act, 1925 deals with the requirements of gifts made in contemplation of death. It reads as follows:

“191. Property transferable by gift made in contemplation of death. — (1) A man may dispose, by gift made in contemplation of death, of any movable property which he could dispose of by will.

(2) A gift said to be made in contemplation of death where a man, who is ill and expects to die shortly of his illness, delivers, to another the possession of any movable property to keep as a gift in case the donor shall die of that illness.

(3) Such a gift may be resumed by the giver; and shall not take effect if he recovers from the illness during which it was made; nor if he survives the person to whom it was made.”

Thus, the requirements of a gift in contemplation of death as laid down by Section 191 are:

(i) the gift must be of movable property ~ this is a matter of fact;

(ii) it must be made in contemplation of death ~ the donor must be in contemplation of his death. He must be fearful that he is likely to die shortly;

(iii) the donor must be ill and he expects to die shortly of the illness – an illness which is the cause of the fear is a must. A mere statement that the donor was old is not adequate. Medical evidence to prove that he was suffering from an ailment would be helpful in this respect;

(iv) the possession of the property should be delivered to the donee ~ possession should be physical/ actual. It should be clearly demonstrated that the donee has been put in possession of the asset/ money; and

(v) the gift does not take effect if the donor recovers from the illness or if the donee predeceases the donor ~ this is the most important aspect. Such gifts are conditional upon the donor dying. If he survives, the gift is revoked and returns to him.

For instance, a person is suffering from terminal cancer and is not given much hope to live. He makes gifts to his friends/ relatives/ employees of his money, jewellery, precious watches, securities, etc. Such gifts of movables could be treated as gifts in contemplation of death. However, if he miraculously survives, then the gifts would revert back to him. Thus they are conditional gifts.

However, merely because the ‘gift’ is given at the time of illness, or ‘occasioned’ by the donor undergoing medical treatment, it would not by itself make it a gift in contemplation of death.

In CGT vs. Abdul Karim Mohd., [1991] 57 Taxman 238 (SC), the Supreme Court has held that for an effectual donatio mortis causa, three elements must combine:

(i) firstly, the gift or donation must have been made in contemplation, though not necessarily in expectation of death, i.e., the person must have a reasonable apprehension that he would die soon;

(ii) secondly, there must have been delivery to the donee of the subject matter of the gift; and

(iii) thirdly, the gift must be made under such circumstances as showed that the thing was to revert to the donor in case he should recover. The Court held that this last requirement was sometimes put somewhat differently and it was said that the gift must be made under circumstances which showed that it was to take effect only if the death of donor followed.

In the above mentioned case under the Gift-tax Act, a question arose whether the gift deed needed to contain an express clause that the gift would revert to the donor in case, he should recover from the illness? The Supreme Court negated this proposition. It held that the recitals in the deed of the gift were not conclusive to determine the nature and validity of the gift. The party may produce evidence to prove that the donor gifted the property when he was seriously ill and contemplating his death with no hope of recovery. These factors in conjunction with the factum of death of the donor, may be sufficient to infer that the gift was made in contemplation of death. It was implicit in such circumstances that the donee became the owner of the gifted property only if the donor died of the illness and if the donor recovered from the illness, the recovery itself operated as a revocation of the gift. It was not necessary to state in the gift deed that the donee became the owner of the property only upon the death of the donor. Nor it was necessary to specify that the gift was liable to be revoked upon the donor’s recovery from the illness. The law acknowledged these conditions from the circumstances under which the gift was made. The Apex Court cited with approval the following passage from Jerman on Wills (8th edn., Vol. 1, pp. 46-47):

“The conditional nature of the gift need not be expressed: It is implied in the absence of evidence to the contrary. And even if the transaction is such as would in the case of a gift inter vivos confers a complete legal title, if the circumstances authorise the supposition that the gift was made in contemplation of death, mortis causa is presumed. It is immaterial that the donor in that dies from some disorder not contemplated by him at the time he made the gift.”

It also referred to Williams on Executors and Administrators (14th edn., p. 315):

“542. Conditional on death:

‘The gift must be conditioned to take effect only on the death of the donor.But it is not essential that the donor should expressly attach this condition to the gift; for if a gift is made during the donor’s last illness and in contemplation of death, the law infers the condition that the donee is to hold the donation only in case the donor dies’.”

In the case of CGT vs. Late C.V. Ct. Thevanai Achi (2006) 202 CTR 566 (Mad ) a lady was 90 years old and ill. Her great-grandson was taken to her and she placed in her hands the key to her safe. She died within seven days. The Gift-tax Department rejected the plea that it was a gift in contemplation of death as it was of the view that old age of 90 years and death within a week of the gift will not establish the ingredient of expectation to die shortly of her illness, which was so essentially an ingredient to establish a gift in contemplation of death. The Madras High Court negated this view. It held that a person of 90 years old would always be in the belief that he/ she will shortly die of illness caused by old age. There may be exceptional cases where persons of 90 years hoped to live long. But the generality was otherwise. In this case, the fact of 90 years of age led to the conclusion that the donor expected to die shortly. All the more so where the donor actually died a week later and it was a natural death caused by old age.

TAX TREATMENT
Section 56(2)(x) of the Income-tax Act, 1961 taxes gifts received without/ or for inadequate consideration. In such cases, the donee becomes liable to tax on the receipt of the gift of money/ property. It also contains several exceptions under which this section does not apply. One such exception is a gift made in contemplation of death. There are no conditions attached to this exception. Hence, one possible view is that all gifts made in contemplation of death are exempt. The gift could also be of immovable property and the gift need not comply with the conditions laid down under the Indian Succession Act since there is no express reference to that section. Such gifts could even be made to non-relatives and yet remain exempt in the hands of the donees. The erstwhile Gift-tax Act, 1958 also contained a similar exemption from gift tax on the donor.

However, the Chennai ITAT in the case of F. Susai Raju vs. ITO [2017] 78 taxmann.com 81 (Chennai – Trib.), has taken a contrary view. It referred to the Apex Court’s decision in Abdul Karim (supra) and held that the conditions specified under Section 191 of the Indian Succession Act had to be complied with to claim exemption under Section 56(2)(x).

It further held that in the present case, the gift was made eight months in advance. Though it did raise some doubts as to whether it was indeed given in contemplation of death, the matter was to be considered in view of the attending circumstances; rather, the totality of the facts and circumstances. The ITAT held that if a person was, as claimed, sick, with little hope of recovery at the time of gift/s, it would matter little that he survived for eight months thereafter. Though there was no finding in the matter, nor any material on record (except the affidavit by the donor stating that he is being treated for the kidney failure), it was held to be inferable from the circumstances that he was ill at the relevant time.

The ITAT also considered the fact that the gift was not been made per a registered document; rather, not even per a deed of gift, but by an affidavit. This objection of the AO (assessing officer) was set aside as the gift, being of money, i.e., movable property, could be legally valid even if oral when accompanied by delivery of possession. The affidavit clearly reflected the alienation of the money in favour of the assessee and hence, operated as a valid gift. The transfer of movable property was only on its delivery. The fact of acceptance was borne out both by the assessee’s conduct (in utilizing the amount for his purposes) as well as of the money having been transferred to his bank account and, thus, in his possession. The ITAT held that it was not a gift simpliciter, but a gift in contemplation of death, which took place only in the event of the ‘donor’ predeceasing the ‘donee’ and, further, was liable to be revoked where the circumstances changed, as, for example, where the donor recovered from the illness, i.e., the condition under which the disposition was made. It was conditional and took place only on the death of the ‘donor’, so that it assumed the nature of a ‘Will’. A will, was not required to be registered.

CIVIL DEATH OR ACTUAL DEATH? An interesting question arose in the case of JCGT vs. Shreyans Shah, [2005] 95 ITD 179 (Mum.)(TM). A lady renounced the world and became a saint. Before taking up sainthood, she gifted all her movable assets to her relatives. The issue was whether such gifts could be treated as gifts in contemplation of death and hence, exempt from gift tax? It was contended that sainthood was akin to civil death and hence, the exemption was available.

The ITAT held that the law was clear that in order to be treated as a gift in contemplation of death, one of the important conditions was that the donor must be ill and should be expected to die shortly of the illness. The finding about the donor being ill was thus sine qua non for applicability of Gift-tax exemption. Sanyas being civil death will not, therefore, suffice. The ITAT held that one also had to proceed on the basis that planning to take up sanyas was to be treated as an illness, and perhaps terminal illness. That according to the bench, was too far-fetched a proposition to meet judicial approval. Gifts in contemplation of death implied reference to natural death alone. There was nothing to suggest that the gift-tax exemption also takes care of gifts in contemplation of a civil death. The very scheme of gifts in contemplation of death took into account only natural death, as was evident from the specific reference to ‘illness’. An illness was only relevant to natural death and not a civil death.

CONCLUSION
Deathbed gifts have gained popularity in the recent pandemic. Many people have resorted to them when they saw no hope of recovering from COVID. However, a word of caution of their potential misuse would not be out of place. That is probably why the Indian lawmakers did not extend such gifts to immovable properties.

shailesh.kwebmaker

SHARED HOUSEHOLD UNDER THE DOMESTIC VIOLENCE ACT

INTRODUCTION

The Protection of Women from Domestic Violence Act, 2005 (“the DV Act”) is a beneficial Act that asserts the rights of women who are subject to domestic violence. Various Supreme Court and High Court judgments have upheld the supremacy of this Act over other laws and asserted from time to time that this is a law which cannot be defenestrated.

In the words of the Supreme Court (in Satish Chander Ahuja vs. Sneha Ahuja, CA No. 2483/2020), domestic violence in this country is rampant, and several women encounter violence in some form or the other almost every day. However, it is the least reported form of cruel behaviour. The enactment of this Act is a milestone for protecting women in this country. The purpose of the enactment of the DV Act, as explained in Kunapareddy Alias NookalaShanka Balaji vs. Kunapareddy Swarna Kumari and Anr., (2016) 11 SCC 774 – to protect women against violence of any kind, especially that occurring within the family, as the civil law does not address this phenomenon in its entirety. In Manmohan Attavar vs. Neelam Manmohan Attavar, (2017) 8 SCC 550, the Supreme Court noticed that the DV Act had been enacted to create an entitlement in favour of the woman of the right of residence.

Recently, the Supreme Court, in the case of Prabha Tyagi vs. Kamlesh Devi, Cr. Appeal No. 511/2022, Order dated 12th May 2022, has examined various important facets of this law.

WHO IS COVERED?
It is an Act to provide for more effective protection of the rights guaranteed under the Constitution of India of those women who are victims of violence of any kind occurring within the family.

It provides that if any act of domestic violence has been committed against a woman, she can approach the designated Protection Officers to protect her. In V.D. Bhanot vs. Savita Bhanot, (2012) 3 SCC 183, it was held that this Act applied even to cases of domestic violence which had taken place before the Act came into force. The same view has been expressed in Saraswathy vs. Babu, (2014) 3 SCC 712.

Hence, it becomes essential who can claim shelter under this Act? An aggrieved woman under the DV Act is one who is, or has been, in a domestic relationship with an adult male and who alleges to have been subjected to any act of domestic violence by him. A domestic relationship means a relationship between two persons who live or have, at any point of time, lived together in a shared household, when they are related by marriage, or through a relationship in the nature of marriage or are family members living together as a joint family.

WHAT IS DOMESTIC VIOLENCE?
The concept of domestic violence is very important, and s.3 of the DV Act defines the same as an act committed against the lady, which:

(a) harms or injures or endangers the health, safety, or wellbeing, whether mental or physical, of the lady and includes causing abuse of any nature, physical, verbal, economic abuse, etc.; or

(b) harasses or endangers the lady with a view to coerce her or any other person related to her to meet any unlawful demand for any dowry or other property or valuable security; or

Thus, economic abuse is also considered an act of domestic violence under the DV Act. This term is defined in a wide manner. It includes deprivation of all or any economic or financial resources to which she is entitled under any law or custom or which she requires out of necessity, including household necessities, stridhan property, etc.

Shared Household
Under this Act, the concept of a “shared household” is very important and means a household where the aggrieved lady lives or at any stage has lived in a domestic relationship with the accused male and includes a household which may belong to the joint family of which the respondent is a member, irrespective of whether the respondent or the aggrieved person has any right, title or interest in the shared household. S.17 of the DV Act provides that notwithstanding anything contained in any other law, every woman in a domestic relationship shall have the right to reside in the shared household, whether or not she has any right, title or beneficial interest in the same. Further, the Court can pass a relief order preventing her from being evicted from the shared household, against others entering / staying in it, against it being sold or alienated, etc. The Court can also pass a monetary relief order for the maintenance of the aggrieved person and her children. This relief shall be adequate, fair and reasonable and consistent with her accustomed standard of living.

The recent Supreme Court’s decision in Prabha Tyagi (supra) laid down various principles in relation to a shared household.

Facts: In this case, a lady became a widow within a month of her marriage. The widowed daughter-in-law stayed in her in-laws’ house only for 13 days. She left the house due to constant mental torture by her in-laws.

Issues before the Court: Two questions were posed to the Supreme Court: whether it was mandatory for the aggrieved lady to reside with those persons against whom the allegations have been levelled at the point of commission of domestic violence?; and whether there should be a subsisting domestic relationship between the aggrieved lady and the person against whom the relief was claimed?

In a very detailed and far-reaching judgment, the Court reviewed the entire law under this Act. The various findings of the Court were as follows:

Past relationships also covered: The parties’ conduct even prior to coming into force of the Act could also be considered while passing an order under the Act. The wife who had shared a household in the past but was no longer residing with her husband can file a petition if subjected to domestic violence. It was further observed that where an act of domestic violence is once committed, then a subsequent decree of divorce will not change the position. The judicial separation did not alter the remedy available to the lady. The Supreme Court judgments in Juveria Abdul Majid Patni vs. Atif Iqbal Mansoori and Another (2014) 10 SCC 736, V.D. Bhanot vs. Savita Bhanot – (2012) 3 SCC 183, Krishna Bhattacharjee vs. Sarathi Choudhury (2016) 2 SCC 705 support this view.

In Satish Chander Ahuja vs. Sneha Ahuja (2021) 1 SCC 414, a Three-Judge Bench of the Court had to decide whether a flat belonging to the father-in-law could be restrained from alienation under a plea filed by the daughter-in-law under the DV Act? The question posed for determination was whether a shared household has to be read to mean that a shared household can only be that household which is a household of a joint family / one in which the husband of the aggrieved lady has a share? It held that a shared household is the shared household of the aggrieved person where she was living when the application was filed or in the recent past. The words “lives or at any stage has lived in a domestic relationship” had to be given their normal and purposeful meaning. The living of a woman in a household has to refer to a living which has some permanency. Mere fleeting or casual living in different places shall not make a shared household. The intention of the parties and the nature of living, including the nature of household, have to be looked into to find out whether the parties intended to treat the premises as a shared household or not. It held that the definition of a shared household as noticed in s. 2(s) did not indicate that a shared household shall only be one which belongs to or taken on rent by the husband. If the shared household belongs to any relative of the husband with whom the woman has lived in a domestic relationship, then the conditions mentioned in the DV Act were satisfied, and the said house will become a shared household.

Right available to all women: The Supreme Court laid down a very vital tenet that a woman in a domestic relationship who is not aggrieved, i.e., even one who has not been subjected to an act of domestic violence, has a right to reside in a shared household. Thus, a mother, daughter, sister, wife, mother-in-law and daughter-in-law, or such other categories of women in a domestic relationship have the right to reside in a shared household de hors a right, title or beneficial interest in the same. The right of residence of the aforesaid categories of women and such other categories of women in a domestic relationship was guaranteed under the Act and she could not be evicted, excluded or thrown out from such a household even in the absence of there being any form of domestic violence.

Women residing elsewhere: The Apex Court further laid down that even in the absence of actual residence in the shared household, a woman in a domestic relationship can enforce her right to reside therein. Due to professional, occupational or job commitments, or for other genuine reasons, the husband and wife may decide to reside at different locations. Even in such a case where the woman in a domestic relationship was residing elsewhere on account of a reasonable cause, she had the right to reside in a shared household.

It held that the expression ‘right to reside in the shared household’ was not restricted to only actual residence, as, irrespective of actual residence, a woman in a domestic relationship could enforce her right to reside in the shared household. Thus, a woman could not be excluded from the shared household even if she had not actually resided therein. It gave an example to buttress this point. A woman and her husband, after marriage, relocate abroad for work. She may not have had an opportunity to reside in the shared household after her marriage. If she becomes an aggrieved person and is forced to return from overseas, then she has the right to reside in the shared household of her husband irrespective of whether he or she has any right, title or beneficial interest in the shared household. In such circumstances, the parents-in-law of such a lady woman cannot exclude her from the shared household.

Another example given was where soon after marriage, the husband goes to another city due to a job commitment. His wife remains in her parental home and is a victim of domestic violence. It held that she also had the right to reside in the shared household of her husband, which could be the household of her in-laws. Further, if her husband resided in another location, then an aggrieved person had the right to reside with her husband in the location in which he resided which would then become the shared household or she could reside with his parents, as the case may be, in a different location.

Context of the Act: The Supreme Court explained that in the Indian societal context, the right of a woman to reside in the shared household was of unique importance. This was because, in India, most women were not educated nor were they earning; neither did they have financial independence to live singly. She could be dependent for residence in a domestic relationship not only for emotional support but also for the aforesaid reasons. A relationship could be by consanguinity, marriage or through a relationship in the nature of marriage (live-ins), adoption or living together in a joint family. A majority of women in India did not have independent income or financial capacity and were totally dependent vis-à-vis their residence on other relations.

Religion agnostic: The Court laid down a very important principle that the Act applied to every woman in India irrespective of her religious affiliation and/or social background for more effective protection of her rights guaranteed under the Constitution and to protect women victims of domestic violence occurring in a domestic relationship. Therefore, the expression ‘joint family’ did not mean as understood under Hindu Law. Even a girl child/children who were cared for as foster children had a right to live in a shared household if she became an aggrieved person, the protection under the Act applied.

CONCLUSION
Thus, in Prabha Tyagis’s case (supra), the Court answered the first question – the lady had the right to live in her matrimonial home and being a victim of domestic violence, she could enforce her right to live or reside in the shared household irrespective of whether she actually lived in the shared household.

In respect of the second question, the Court held that the question raised about a subsisting domestic relationship between the aggrieved person and the person against whom the relief is claimed must be interpreted in a broad and expansive way, to encompass not only a subsisting domestic relationship in presentia but also a past domestic relationship. While there should be a subsisting domestic relationship at some point in time, it need not be so at the stage of filing the application for relief.

In respect of the case on hand, it held that the lady had a right to reside in the shared household as she was in a domestic relationship with her husband till he died and she had lived together with him. Therefore, she also had a right to reside in the shared household despite the death of her husband. The aggrieved lady continued to have a subsisting domestic relationship owing to her marriage and she being the daughter-in-law, had the right to reside in the shared household.

It is evident that the Act is a very important enactment and a step towards women empowerment. Time and again, the Supreme Court has upheld its supremacy to give relief to aggrieved women!

shailesh.kwebmaker

GIFT BY HUF OF IMMOVABLE PROPERTY

INTRODUCTION

Can the Karta of a HUF make a gift of joint family immovable properties? – a question that keeps cropping up time and again. The answer to this is not a simple yes or a no. It is possible but subject to the facts of each case. There have been several important Supreme Court verdicts on this issue that have dealt with different facets of this question. Let us analyse the position on this topic.

BACKGROUND OF A HUF AND ITS KARTA

As is trite, a HUF is a creature of law. Traditionally speaking, a HUF was a joint family belonging to a male ancestor, e.g., a grandfather, father, etc., and consisted of male coparceners and other members. Thus, the sons and grandsons of the person who was the first head of the HUF automatically became coparceners by virtue of being born in that family. A unique feature of a HUF is that the share of a member is fluctuating and ambulatory, which increases on the death of a member and reduces on the birth of a member. A coparcener is a person who acquires an interest in the joint family property by virtue of being born in the family. Earlier, only men could be coparceners. A wife and a person’s mother also could not become a coparcener in a HUF. However, from 2005, all daughters are at par with sons, and they would now become a coparcener in their father’s HUF by virtue of being born in that family. Importantly, this position continues even after her marriage. Hence, alhough she can only be an ordinary member in her husband’s HUF, she can continue to remain a coparcener in her father’s HUF even after her marriage.

A Karta of a HUF is the manager of the HUF and its joint family property. Normally, the father and, in his absence, the senior-most coparcener acts as the Karta of the HUF. The Karta takes all decisions and actions on behalf of the family. He is vested with several powers for the operation and management of the HUF. After 2005, daughters are at par with sons in their father’s HUF and hence, the eldest child of the father, whether male or female, would become the Karta in the father’s HUF. The Delhi High Court’s verdict in Mrs. Sujata Sharma vs. Shri Manu Gupta, CS(OS) 2011/2006, Order dated 22nd December, 2015 is on the same lines.

SUBJECTIVE TEST
While the Karta has been clearly vested with powers of management of the HUF, the position is not so simple when it comes to making gifts of immovable properties belonging to the HUF. He could do so in certain cases, and that too up to a reasonable extent having regard to the wealth of the HUF. Thus, it is something that needs to be vetted on a case-by-case basis and based on the facts of each family.

In Ammathayee vs. Kumaresan, 1967 AIR(SC) 569, it was held that so far as movable ancestral property was concerned, a gift out of affection may be made to a wife, to a daughter and even to a son, provided the gift was within reasonable limits. A gift, for example, of the whole or almost the whole of the ancestral movable property cannot be upheld as a gift through affection.

Only by way of Gift and Not by Will
However, a Karta cannot make a will/testamentary disposition of HUF property even if it is for the benefit of a charity. There have been several instances where a Karta has included HUF property in his Will. HUF property does not belong to the Karta, even though he is the head. It belongs to the joint family. While he can will away his own share in the HUF, he cannot include the HUF property in his Will. The Karta can alienate that only inter vivos, i.e., by way of a gift. This view has been expressed in the cases of Gangi Reddi vs. Tammi Reddi 14 AIR. 1927 PC 80; Sardar Singh vs. Kunj Bihari Lal 9 AIR 1922 PC 261; Jawahar Lal vs. Sri Thakur Radha Gopaljee Maharaj AIR 1945 All 169. This position has been affirmed by the Supreme Court in R.Kuppayee vs. Raja Gounder, 2004 AIR(SC) 1284.

Pious Purposes and Charity
Gifts of HUF immovable property made for family purposes and especially pious purposes are permissible. The Supreme Court in Guramma Bhratar Chanbasappa Deshmukh vs. Mallappa Chanbasappa, 1964 AIR(SC) 510, has held that the expression pious purposes is wide enough, under certain circumstances, to take in charitable purposes though the scope of the latter purposes has nowhere been precisely drawn.

Gift to Daughters and Sisters
The Supreme Court, in the case of Guramma Bhratar (supra), has laid down the principle in relation to gifts by a HUF to daughters and sisters. It held that the Hindu law conferred a right upon a daughter or a sister, as the case may be, to have a share in the family property at the time of partition. That right was lost by efflux of time. But it became crystallized into a moral obligation. The father or his representative could make a valid gift, by way of reasonable provision for the daughter’s maintenance, regard being had to the financial and other relevant circumstances of the HUF. By custom or by convenience, such gifts were made at the time of marriage, but the right of the father or his representative to make such a gift was not confined to the marriage occasion. It was a moral obligation, and it continued to subsist till it was discharged. Marriage was only a customary occasion for such a gift. But the obligation could be discharged at any time, either during the lifetime of the father or thereafter. It was not possible to lay down a hard and fast rule, prescribing the quantitative limits of such a gift as that would depend on the facts of each case and it could only be decided by Courts, regard being had to the overall picture of the extent of the family estate, the number of daughters to be provided for and other paramount charges and other similar circumstances. The manager was within his rights to make a gift of a reasonable extent of the family property for the maintenance of a daughter. It could not be said that the said gift must be made only by one document or only at a single point of time. The validity or the reasonableness of a gift did not depend upon the plurality of documents but on the power of the father to make a gift and the reasonableness of the gift so made. If once the power was granted, and the reasonableness of the gift was not disputed, the fact that two gift deeds were executed instead of one, did not make the gift invalid. Accordingly, in that case, the Supreme Court concluded that where the HUF had many properties and the father gave the daughter only a life-estate in a small extent of land in addition to what had already been given for her maintenance, the gift made by the father was reasonable in the circumstances of that case.

Another important decision on this issue is Kamla Devi vs. Bachhulal Gupta, 1957 AIR(SC) 434, which laid down certain Hindu law principles. It held that it is the imperative, religious duty and a moral obligation of a father, mother or other guardian to give a girl in marriage to a suitable husband; it is a duty that must be fulfilled to prevent degradation and direct spiritual benefit is conferred upon the father by such a marriage. For pious acts, the family can alienate a reasonable portion of the property. If a promise was made of such a gift for or at the time of the marriage, that promise may be fulfilled afterwards and it was not essential to make a gift at the time of the marriage but it, may be made afterwards in fulfilment of the promise.

A corollary of the above decisions would be that the Karta of a HUF cannot make a gift to other members/coparceners. Of course, if all coparceners agree, then a partial partition of the HUF could be done, partial as regards members or properties. Do remember, that while the Income-tax Act may not recognise a partial partition, the Hindu Law yet recognises the same!

Test of reasonableness
The Supreme Court in R. Kuppayee (supra) held that the question as to whether a particular gift was within reasonable limits or not had to be judged according to the status of the family at the time of making a gift, the extent of the immovable property owned by the family and the extent of property gifted. No hard and fast rule prescribing quantitative limits of such a gift could be laid down. The answer to such a question would vary from family to family. Further, the Apex Court laid down that the question of reasonableness or otherwise of the gift made had to be assessed vis-a-vis the total value of the property held by the HUF. Simply because the gifted property was a house, it could not be held that the gift made was not within reasonable limits.

Gift to the wife of Karta not allowed
In Ammathayee (supra), the Apex Court held that as far immovable ancestral property was concerned, the power of gift by the Karta was much more circumscribed than in the case of gift of movable ancestral property. A Hindu managing member had the power to make a gift of ancestral immovable property within reasonable limits for pious purposes, including, in fulfilment of an antenuptial promise made on the occasion of the settlement of the terms of the daughter’s marriage. However, the Court held that it could not extend the scope of the words pious purposes beyond what had already been held in earlier decisions. It held that a gift in favour of a wife by her Karta husband of ancestral immovable property made out of affection must therefore fail, for no such gift was permitted under Hindu Law insofar as immovable ancestral property was concerned. Even the father-in-law, if he had desired to make a gift at the time of the marriage of his daughter-in-law, would not be competent to do so insofar as immovable ancestral property was concerned. A gift by the father-in-law to the daughter-in-law at the time of marriage could by no stretch of reasoning be called a pious purpose, whatever may be the position of a gift by a father to his daughter at the time of her marriage. After marriage, the daughter-in-law became a member of the family of her father-in-law and she would be entitled after marriage in her own right to the ancestral immovable property in certain circumstances, and clearly therefore her case stood on a very different footing from the case of a daughter who was being married and to whom a reasonable gift of ancestral immovable property could be made. A father-in-law would not be entitled to gift ancestral immovable property to a daughter-in-law so as to convert it into her stridhan.

Gift to Strangers not allowed
The Supreme Court, in the case of Guramma Bhratar (supra), held that a gift to a stranger of joint family property by the manager of the family was void.

TAX ON SUCH GIFTS
The recipient/donee of the gift would have to examine the applicability of section 56(2)(x) of the Income-tax Act in her hands and whether the same would be taxed as a receipt of immovable property without adequate consideration. If the gift is received on occasion of the marriage of the donee then there is a statutory exemption under the Act. Further, as explained above, Courts have held that the right of the daughter/sister to receive a share in the family property was a moral obligation. Hence, a gift received towards the same could be said to be for adequate consideration. In addition, certain Tribunal decisions have held that if a HUF consists of such members who are relatives of the donee, then the HUF as a whole also could be treated as a relative u/s 56(2)(x) – Vineenitkumar Rahgavjibhai Bhalodia vs. ITO (2011) 12 ITR 616 (Rajkot); DCIT vs. Ateev V. Gala, ITA No. 1906/Mum/2014 dated 19th April, 2017. However, Gyanchand M. Bardia vs. ITO, ITA No. 1072/Ahm/2016 has taken a contrary view.

Income earned on property gifted by a member to a HUF is subject to clubbing of income in the donor’s hands. However, no such clubbing exists under the Income-tax Act when a HUF gifts immovable property to a daughter/sister. Income earned on such property would be taxed in the hands of the donee only. However, it is also possible that the Department takes the view that this is a partial partition qua the HUF properties, and hence, income should continue to be taxed in the hands of the HUF only.

STAMP DUTY ON SUCH GIFTS
There is no concessional stamp duty when a HUF gifts property to a daughter/sister. Hence, full stamp duty on a gift of immovable property would be paid on such a gift, and the gift deed would have to be duly registered. For instance, under the Maharashtra Stamp Act, 1958, the duty on such a gift would be 5% of the market value. This duty would be further increased by 1% metro cess levied from 1st April, 2022. The concessional duty of Rs. 500 in case of gift of a residential/agricultural property by a father to daughter would not be available since although the gift may be made by the Karta father, it is the HUF’s property and not that of the father which is being gifted. The position could be different if, instead of a gift, the partial partition route is considered. However, the same would depend upon various facts and circumstances.

CONCLUSION
The law relating to HUFs as a whole is complex and often confusing. This is more to do with the fact that there is no codified statute dealing with HUFs, and there are several conflicting decisions on the same issue. The position is further complicated when it comes to ownership and disposal of property by HUFs. Joint families and buyers dealing with them would be well advised to fully consider the legal position particularly in relation to ancestral property. A slip up could prove fatal to the very title of the property!

shailesh.kwebmaker

PART PERFORMANCE OF CONTRACT

INTRODUCTION
It is said that possession is nine-tenths of the law. Taking a cue from this maxim, s. 53A of the Transfer of Property Act, 1882 (“the Act”) has enacted the concept of part performance of a contract. This concept is based upon the law of possession.

The Income-tax Act at several places makes references to any transaction allowing the possession of any immovable property in part performance of a contract. The concept of part performance of a contract is found in s. 2(47) relating to the definition of ‘transfer’ for capital gains, s. 27 relating to the definition of ‘owner’ under House Property Income and the erstwhile s. 269UA relating to ‘transfer’ for Form 37-I. Thus, it becomes important to understand the meaning of this concept.

DEFINITION
The Supreme Court in Shrimant Shamrao Suryavanshi vs. Pralhad Bhairoba Suryavanshi [2002] 3 SCC 676 has stated that certain conditions are required to be fulfilled if a transferee wants to defend or protect his possession under s. 53A of the Act. The necessary conditions are:

(1) there must be a contract to transfer for consideration of any immovable property;

(2) the contract must be in writing, signed by the transferor, or by someone on his behalf;

(3) the writing must be in such words from which the terms necessary to construe the transfer can be ascertained;

(4) the transferee must in part-performance of the contract take possession of the property, or of any part thereof;

(5) the transferee must have done some act in furtherance of the contract; and

(6) the transferee must have performed or be willing to perform his part of the contract.

If the above mentioned elements are present, then the transferor is debarred from enforcing against the transferee any right in respect of the property in possession of the transferee other than a right expressly provided by the contract. Thus, this section protects certain types of transferees from any action by the transferor. The principle laid down has been explained by the Supreme Court in Sheth Maneklal Mansukhbhai vs. Messrs. Hormusji Jamshedji, AIR 1950 SC 1 as follows:

“The s. is a partial importation in the statute law of India of the English doctrine of part performance. It furnishes a statutory defence to a person who has no registered title deed in his favour to maintain his possession if he can prove a written and signed contract in his favour and some action on his part in part-performance of that contract.”

Let us examine each of the above key elements.

CONTRACT
The starting point of s. 53A is that there must be a contract that must relate to the transfer of specific immovable property. Without a contract, this section has no application. Since a contract is a must, it goes without saying that all the contract prerequisites also follow. Thus, if the contract has been obtained by fraud, misrepresentation, coercion, etc., then it is void ab initio, and the section would also fail – Ariff vs. Jadunath (1931) AIR PC 79.

WRITTEN CONTRACTS
Another important requirement is that the contract must be in writing. Oral contracts are valid under the Indian Contract Act but not for the purposes of s. 53A. The transfer must be by virtue of a written contract. If the contract merely refers to a previous oral understanding, then the same would not fall within the purview of s. 53A – Kathihar Jute Mills Ltd. vs. Calcutta Match Works, AIR 1958 Pat 133.

In Sardar Govindrao Mahadik vs. Devi Sahai, 1982 (1) SCC 237, it was held that to qualify for the protection of the doctrine of part performance it must be shown that there is an agreement to transfer immovable property for consideration and the contract is evidenced by a writing signed by the person sought to be bound by it and from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty. In Mool Chand Bakhru vs. Rohan, CA 5920/1998 (SC), letters were written by a landowner offering to sell half his property in exchange for money which he needed. The Supreme Court letters denied the benefit of s. 53A to the transferee by observing that the letters written could not be termed as an agreement to sell, the terms of which had been reduced into writing. At the most, it was an admission of an oral agreement to sell and not a written agreement. Statutorily the emphasis was not only on a written agreement but also on the terms of the agreement as well which could be ascertained with reasonable certainty from the written document. There was no meeting of minds. The letters did not spell out the other essential terms of an agreement to sell, such as the time frame within which the sale deed was to be executed and who would pay the registration charges etc.

REGISTRATION
Earlier, s. 53A provided that the section would take effect even if the agreement for the transfer of the immovable property had not been registered. However, the Registration and Other Related Laws (Amendment) Act, 2001 modified this position. Now for s. 53A to operate, the agreement must be registered. Hence, registration has been made mandatory, and in its absence, the section would be inoperative. Since the agreement is to be in writing, stamp duty would also follow. Accordingly, if the agreement is inadequately stamped, it would not be admissible as evidence in a Court.

In a recent judgment of Joginder Tuli vs. State NCT of Delhi, W.P.(CRL) 1006/2020 & CRL.M.A. 8649/2020, the Delhi High Court has stated that it is well settled that in order to give benefits of s. 53A, the document relied upon must be a registered document. Any unregistered document cannot be looked into by the court and cannot be relied upon or taken into evidence in view of s. 17(1A) read with s. 49 of the Registration Act. Thus, the benefit of s. 53A would be given, if and only if the Agreement to Sell cum Receipt satisfied the provisions of s. 17(1) A of the Registration Act. It relied upon an earlier decision in the case of Arun Kumar Tandon vs. Akash Telecom Pvt. Ltd. & Anr. MANU/DE/0545/2010.

Another decision of the Delhi High Court, Earthtech Enterprises Ltd. vs. Kuljit Singh Butalia, 199 (2013) DLT 194, has observed that a person can protect his possession under s. 53A on the plea of part performance only if it is armed with a registered document. Even on the basis of a written agreement, he cannot protect his possession.

The decision of the Supreme Court in the case of CIT vs. Balbir Singh Maini, (2017) 398 ITR 531 (SC) under the Income-tax Act has succinctly summed up the relationship between registration of the instrument and s. 53A. It held that the protection provided under s. 53A is only a shield and can only be resorted to as a right of defence. An agreement of sale which fulfilled the ingredients of s. 53A was not required to be executed through a registered instrument. This position was changed by the Registration and Other Related Laws (Amendment) Act, 2001. Amendments were made simultaneously in s. 53A of the Transfer of Property Act and sections 17 and 49 of the Indian Registration Act. By the aforesaid amendment, the words ‘the contract, though required to be registered, has not been registered, or’ in s. 53A of the 1882 Act have been omitted. Simultaneously, sections 17 and 49 of the Registration Act have been amended, clarifying that unless the document containing the contract to transfer for consideration any immovable property (for the purpose of s. 53A) is registered, it shall not have any effect in law other than being received as evidence of a contract in a suit for specific performance or as evidence of any collateral transaction not required to be effected by a registered instrument.

The effect of the aforesaid amendment was that, on and after the commencement of the Amendment Act of 2001, if an agreement, like the Joint Development Agreement in the impugned case, was not registered, then it had had no effect in law for the purposes of s. 53A. In short, there was no agreement in the eyes of the law which could be enforced under s. 53A of the Transfer of Property Act. Accordingly, in order to qualify as a ‘transfer’ of a capital asset under s. 2(47)(v), there must be a ‘contract’ which could be enforced in law under s. 53A of the Transfer of Property Act.

IMMOVABLE PROPERTY ONLY
The contract must pertain to the ‘transfer of an immovable property’. The Act defines this phrase as an act by which a living person conveys property, in present or in future, to one more other living persons or to himself, and one or more other living persons. This is also known as transfer inter vivos. The Act then proceeds to deal with various types of transfer of immovable property – a sale, an exchange, a mortgage and a lease. All these transfers would be covered within the scope of s. 53A. A gift of an immovable property is also a transfer but is not covered within the purview of s. 53A as explained below. Anything which is not a transfer is not covered by s. 53A. For instance, a leave and licence is an easement / personal right and hence, would be outside the purview of this section. Similarly, various Supreme Court decisions have held that a family arrangement is not a transfer, and hence, a family arrangement would be outside the scope of this section.

A movable property would be out of the purview of this section – Bhabhi Dutt vs. Ramlalbyamal (1934) 152 IC 431. The Act defines the term immovable property in a negative manner by stating that it does not include standing timber, growing crops or grass. The General Clauses Act defines it to include land, benefits to arise out of land, and any anything attached to the earth or permanently fastened to anything attached to the earth. The Maharashtra Stamp Act, 1958, defines the term to include land, benefits to arise out of land, and things attached to the earth or permanently fastened to anything attached to the earth. The scope of this section even applies to agricultural properties – Nakul Chand Polley vs. Kalipada Ghosal, AIR 1939 Cal 163.

The Supreme Court has held in UOI vs. M/s. KC Sharma & Co., CA No. 9049-9053 /2011 that the defence under s. 53A was even available to a person who had an agreement of lease in his favour though no lease had been executed and registered. It also protected the possession of persons who have acted on a contract of sale but in whose favour no valid sale deed was executed or registered. The benefit was available, notwithstanding that where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed by the law for the time being in force. In all cases where the section was applicable, the transferor was debarred from enforcing against the transferee any right in respect of the property of which the transferee had taken or continued in possession.

CONSIDERATION
The transfer of immovable property must be for consideration. Hence, gratuitous transfers or gifts of immovable property would be outside the purview of s. 53A – Hiralal vs. Gaurishankar (1928) 30 Bom LR 451. As is the norm in India, adequacy of consideration is immaterial. For instance, in the USA, not only is consideration a must for a valid contract, it must also be adequate. In India, all that is necessary, both for a valid contract as well as for s. 53A, is that there must be consideration.

SIGNATURE
The contract must be signed by the transferor or any person on his behalf, say the power of attorney holder.

TERMS OF CONTRACT
The terms of the contract must be ascertainable with reasonable certainty. If they are ambiguous or cannot be ascertained with reasonable certainty, then the contract cannot be enforced u/s. 53A – Bobba Suramma vs. P Chandramma 1959 AIR AP 568.

POSSESSION
The transferee must take possession of the property for this section to apply – Sanyasi Raju vs. Kamappadu (1960) AIR AP 83. Alternatively, if he is already in possession of the property, then he must continue with such possession. Possession of a part of the property is also enough – Durga Prasad vs. Kanhaiyalal (1979) AIR Raj 200. Further, the possession of the property must be pursuant to part performance of the agreement to sell the property. The onus of proof is on the defendant – Thakamma Mathew vs. Azamathulla Khan 1993 Suppl. (4) SCC 492.

In the case of Roop Singh (Dead) Through Lrs vs. Ram Singh (Dead) Through Lrs, JT 2000 (3) SC 474, the plaintiff pleaded that he owned certain agricultural land. As the land was in illegal possession of the defendant, he filed a suit. The defendant submitted that 14 years prior to the date of institution of the suit, he had purchased the suit land for consideration, had paid full sale consideration to the plaintiff, and since then, he was in possession of the suit land. He contended that his possession is protected under s. 53A. He also pleaded that he had acquired the title by adverse possession (adverse possession is a means of acquiring title to a property by physically occupying it for a long period of time. A person can acquire property if one possesses it long enough and meets the legal requirements). The Supreme Court held that the plea of adverse possession and retaining the possession by operation of s. 53A were inconsistent with each other. Once it was admitted by implication that the plaintiff came into possession of the land lawfully under the agreement and continued to remain in possession till the date of the suit, then the plea of adverse possession would not be available to the defendant.

WILLINGNESS OF TRANSFEREE
The transferee must be willing to complete his part of the contract. Failure on his part to complete his contract, e.g. payment of monthly instalments, would not entitle him to the defence of part performance – Jawaharlal Wadhwa vs. Chakraborthy 1989 (1) SCC 76.

In Ranchhoddas Chhaganlal vs. Devaji Supadu Dorik, 1977 SCC (3) 584, the purchaser paid a portion of the consideration and claimed shelter u/s.53A. Despite demands from the plaintiff, he failed to pay the balance sum. The Supreme Court held that the defendant was never ready and willing to perform the agreement as alleged by the appellant. One of the ingredients of part performance under s. 53A was that the transferee had taken possession in part performance of the contract. In the case on hand there was no performance in part by the respondent. The true principle of the operation of the acts of part performance required that the acts in question must be referred to some contract and must be referred to the alleged one; that they proved the existence of some contract and were consistent with the contract alleged. S. 53A was a right to protect his possession against any challenge to it by the transferor contrary to the terms of the contract.

Again in Ram Kumar Agarwal vs. Thawar Das, (1999) (1) SCC 76, it was held that a plea under s. 53A of the Transfer of Property Act raised a mixed question of law and fact and therefore could not be permitted to be urged for the first time at the stage of an appeal. Further, performance or willingness to perform his part of the contract was one of the essential ingredients of the plea of part performance. The defendant, having failed in proving such willingness, protection to his possession could not have been claimed by reference to s. 53A.

The section does not create a title in the defendant. It only acts as a deterrent against a plaintiff asserting his title. It does not permit the defendant to maintain a suit on title – Ram Gopal vs. Custodian (1966) 2 SCR 214.

NULL AND VOID TRANSACTIONS
The section has no application to transactions which are null and void for any reason. The Supreme Court held in Biswabani (P.) Ltd vs. Santosh Kumar Dutta, 1980 SCR (1) 650 that if a lease was void for want of registration, neither party to the indenture could take advantage of any of the terms of the lease. No other terms of such an indenture inadmissible for want of registration can be the basis for a relief u/s. 53A.

Again in Ligy Paul vs. Mariyakutti, RSA No. 79/2020, the Kerala High Court has reiterated that s.53A is applicable only where a contract for transfer is valid in all respects. It must be an agreement enforceable by law under the Indian Contract Act, 1872.

EXCEPTION
This section does not impact the rights of a buyer who has paid consideration and who has no notice of the contract or the part performance of the contract.

CONCLUSION
The doctrine of part performance is a concept with several important cogs in the wheel. Each of them is vital for the doctrine to be applied correctly. Although it is one of the fundamental tenets in the field of conveyancing, its importance under the Income-tax Act also cannot be belittled!

shailesh.kwebmaker

IBC AND LIMITATION

INTRODUCTION

The Insolvency and Bankruptcy Code, 2016 (“the Code”) provides for the insolvency resolution process of corporate debtors and connected persons, such as guarantors. The Code gets triggered when a corporate debtor commits a default in paying a debt, which could be financial or operational. The initiation (or starting) of the corporate insolvency resolution process under the Code may be done by a financial creditor (in respect of default of financial debt) or an operational creditor (in respect of default of an operational debt) or by the corporate itself (in respect of any default).

One of the crucial aspects of the Code is whether a period of limitation applies for initiating proceedings against the corporate debtor that is very relevant since a time bar would scuttle claims against the company. This provision has seen a great deal of judicial development in recent times. Let us analyse this provision in greater detail.

THE LIMITATION ACT

Before we delve into whether a period of limitation applies to claims under the Code, it is essential to get an understanding of the Limitation Act, 1963 (“the Act”). This is a Central statute that provides for the law of the limitation for initiating suits and other proceedings.

The phrase ‘period of limitation’ is defined under the Act to mean the period of limitation prescribed for any suit, appeal or application by the Schedule. The phrase ‘prescribed period’ means the period of limitation computed under the provisions of this Act.

S.3 of the Act states that every suit instituted, appeal preferred, and the application made after the prescribed period shall be dismissed, although limitation has not been set up as a defence.

APPLICABILITY TO THE CODE

A question that arises is whether the provisions of the Limitation Act can apply to the Code? An answer to this question is given under s.238A of the Code which was incorporated in the Code by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 with effect from 6th June, 2018. It states that the provisions of the Limitation Act, 1963 shall, as far as may be, apply to the proceedings or appeals under the Code filed before the National Company Law Tribunal / National Company Law Appellate Tribunal / the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be. Thus, it is very clear that the Act’s provisions apply to claims filed under the Code.

The decision of the Apex Court in Sesh Nath Singh & Anr. vs. Baidyabati Sheoraphuli Co-operative Bank Ltd. & Anr. [LSI-179-SC-2021(NDEL)] has held that there is no specific period of limitation prescribed in the Limitation Act, 1963 for an application under the Code before the NCLT. Accordingly, an application for which no period of limitation is expressly provided under the Act, is governed by Article 137 of the Schedule to the Limitation Act. Under Article 137 of the Schedule to the Limitation Act, the period of limitation prescribed for such an application is three years from the date of accrual of the right to apply. It held that the provisions of the Limitation Act applied mutatis mutandis to proceedings under the IBC in the NCLT/NCLAT. It also held that the words ‘as far as may be’ found in s.238A were to be understood in the sense in which they best harmonised with the subject matter of the legislation and the object which the Legislature had in view. The Courts would not give an interpretation to those words, which would frustrate the purposes of making the Limitation Act applicable to proceedings in the NCLT / NCLAT.

In Gaurav Hargovindbhai Dave vs. Asset Reconstruction Co. (India) Ltd. [2019] 109 taxmann.com 395 (SC), it was held:—

‘6. ……The present case being “an application” which is filed under Section 7, would fall only within the residuary Article 137.’

In Jignesh Shah vs. Union of India [2019] 156 SCL 542 (SC) the Court established the proposition that the period of limitation for making an application under Section 7 or 9 of the Code was three years from the date of accrual of the right to sue, i.e., the date of default.

In B.K. Educational Services (P.) Ltd. vs. Parag Gupta [2018] 98 taxmann.com 213 (SC), the Supreme Court held:—

‘……“The right to sue”, therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application.’

Again in Sesh Nath Singh (supra), it was held that it was well settled that the NCLT/NCLAT has the discretion to entertain an application/appeal after the prescribed period of limitation. The condition precedent for exercise of such discretion was the existence of sufficient cause for not preferring the appeal and/or the application within the period prescribed by limitation. Section 5 of the Limitation Act, 1963 enables this extension. That section enables a Court to admit an application or appeal if the applicant or the appellant, as the case may be, satisfied the Court that he had sufficient cause for not making the application and/or preferring the appeal within the time prescribed.

EXCLUDE TIME BEFORE WRONG FORUM
Part III of the Limitation Act lays down the manner of computation of the period of limitation. An important provision in this respect is laid down in s.14 of the Act. It states that in computing the period of limitation for any suit the time during which the plaintiff has launched civil proceedings in another Court, then such time shall be excluded provided that those proceedings relate to the same matter have been launched in good faith in a Court which cannot entertain it since it has no jurisdiction to do so. In other words, if the first Court did not have jurisdiction to entertain the plea and if such plea was filed by the plaintiff in good faith, then the time taken for such plea would be excluded in computing the period of limitation. In Commissioner, M.P. Housing Board vs. Mohanlal & Co. [2016] 14 SCC 199, it was held that s.14 of the Limitation Act had to be interpreted liberally to advance the cause of justice. S.14 would be applicable in cases of mistaken remedy or selection of a wrong forum. The Supreme Court in Sesh Nath Singh (supra) has held that:

‘There can be little doubt that Section 14 applies to an application under Section 7 of the IBC. At the cost of repetition, it is reiterated that the IBC does not exclude the operation of Section 14 ….’

Again in Dena Bank vs. C Shivakumar Reddy [2021] 129 taxmann.com 60 (SC) it was held that that default in payment of a debt triggered the right to initiate the Corporate Resolution Process. A Petition under Section 7 or 9 of the Code was required to be filed within the period of limitation prescribed by law, which would be three years from the date of default by virtue of Section 238A of the Code read with Article 137 of the Schedule to the Limitation Act.

EXCLUSION OF PROCEEDINGS UNDER SARFAESI ACT
Another legislation with similar objectives as the Code is the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”). The SARFAESI Act also provides mechanisms for the recovery of debts by banks and financial institutions. This Act enables secured creditors to take possession of secured assets without going to Court.

In the case of Sesh Nath Singh (supra), the bank had resorted to action under the SARFAESI Act in respect of a loan default by a debtor. This debtor challenged this action by filing a Writ Petition before the Court and the Court granted an interim stay. While the Writ was pending, the bank filed a claim under the Code against the corporate debtor. This action was challenged by the corporate debtor contending that the NCLT should not have entertained the application filed by the financial creditor as the same was barred by the period of limitation. This issue reached the Supreme Court. Hence, the moot point before the Supreme Court was whether prior proceedings under the SARFAESI Act qualified for the exclusion of time under Section 14 of the Limitation Act since they were not civil proceedings before a Court?

Upholding the exclusion of time spent under SARFAESI, the Supreme Court held that it was wrong to say that s.14 could never be invoked until and unless the earlier proceedings had actually been terminated for want of jurisdiction or other cause of such nature. It held that s.14 excluded the time spent in proceeding in a wrong forum, which was unable to entertain the proceedings for want of jurisdiction or other such cause. Where such proceedings had ended, the outer limit to claim exclusion under Section 14 would be the date on which the proceedings ended. The Court observed that in the case on hand, the proceedings under the SARFAESI Act had not been formally terminated. The High Court stayed the proceedings by an interim order. The writ petition was not disposed of even after almost four years. The carriage of proceedings was with the Corporate Debtor. The interim order was still in force, when proceedings under Section 7 of the IBC were initiated, as a result of which the Financial Creditor was unable to proceed further under the SARFAESI Act.

Accordingly, it concluded that since the proceedings in the High Court were still pending on the date of filing of the application under s.7 of the Code in the NCLT, the entire period after the initiation of proceedings under the SARFAESI Act could be excluded. If the period from the date of institution of the proceedings under the SARFAESI Act till the date of filing of the application under s.7 of the Code in the NCLT was excluded, the application in the NCLT was well within the limitation of three years. Even if the period between the date of the notice under SARFAESI and the date of the interim order of the High Court staying the proceedings was excluded, the proceedings under Section 7 of IBC were still within limitation of three years.

It also held that the proceedings under the SARFAESI Act, 2002 were undoubtedly civil proceedings. There was no rationale for the view that the proceedings initiated by a secured creditor against a borrower under the SARFAESI Act for taking possession of its secured assets were intended to be excluded from the category of civil proceedings. Even though the SARFAESI Act enabled a secured creditor to enforce the security interest created in its favour, without the intervention of the Court, it did not exclude the intervention of Courts and/or Tribunals altogether. Hence, the Court held that keeping in mind the scope and ambit of proceedings under the Code before the NCLT / NCLAT, the expression ‘Court’ in s. 14 of the Limitation Act would be deemed to include any forum for a civil proceeding including any Tribunal or any forum under the SARFAESI Act.

EXCLUSION OF ACKNOWLEDGEMENT BY DEBTOR
Another important provision while computing the limitation period is s.18 of the Limitation Act. This states that if an acknowledgement of liability has been made in writing signed by the debtor against whom such property or right is claimed, a fresh period of limitation shall be computed from the time when the acknowledgement was so signed.

In Dena Bank vs. C Shivakumar Reddy [2021] 129 taxmann.com 60 (SC), the Apex Court, while explaining the essence of this provision held that as per s.18 of Limitation Act, an acknowledgement of a present subsisting liability, made in writing in respect of any right claimed by the opposite party and signed by the party against whom the right is claimed, had the effect of commencing a fresh period of limitation from the date on which the acknowledgement is signed. Such an acknowledgement need not be accompanied by a promise to pay expressly or even by implication. However, the acknowledgement must be made before the relevant period of limitation has expired. It further held that even if the writing containing the acknowledgement was undated, evidence might be given of the time when it was signed. An acknowledgement may be sufficient even though it was accompanied by refusal to pay, deliver, perform or permit to enjoy or was coupled with claim to set off, or was addressed to a person other than a person entitled to the property or right. The term ‘signed’ was to be construed to mean signed personally or by an authorised agent.

In Sesh Nath Singh (supra), the Court held that the Code did not exclude the application of s.18 or any other provision of the Limitation Act. Again, in Laxmi Pat Surana vs. Union Bank of India & Anr. [LSI-176-SC-2021(NDEL)], the Supreme Court held that there was no reason to exclude the effect of Section 18 of the Limitation Act to proceedings initiated under the IBC.

The issue before the Apex Court in Dena Bank (supra) was whether an offer for one-time settlement signed by the debtor would lead to an exclusion of time under s.18? The Court held that it saw no reason why an Offer of One-Time Settlement of a live claim, made within the period of limitation, should not also be construed as an acknowledgement to attract Section 18 of the Limitation Act. To sum up, an application under s.7 of the IBC would not be barred by limitation, on the ground that it had been filed beyond a period of 3 years from the date of declaration of the loan account of the Corporate Debtor as a Non Performing Asset, if there was an acknowledgement of the debt by the Corporate Debtor before expiry of the period of limitation of 3 years, in which case the period of limitation would get extended by a further period of 3 years.

CONCLUSION
Thus, it is clear that the Limitation Act applies with all its exclusions, even to the Code. Courts are very quick to support this principle and would be wary in holding otherwise.

shailesh.kwebmaker

IBC AND MORATORIUMS

INTRODUCTION

The Insolvency and Bankruptcy Code, 2016 (‘the Code’) has become one of the most dynamic and fast-changing legislations. Not only has the Government been modifying it from time to time, but the Judiciary is also playing a very active role in ironing out creases and resolving controversies. The Code provides for the insolvency resolution process of corporate debtors. The Code gets triggered when a corporate debtor commits a default in payment of a debt, which could be financial or operational. The initiation (or starting) of the corporate insolvency resolution process under the Code may be done by a financial creditor (in respect of default of financial debt) or an operational creditor (in respect of default of an operational debt) or by the corporate itself (in respect of any default).

One of the important facets of this resolution process is a moratorium on legal proceedings against the corporate debtor contained u/s 14 of the Code. This provision has seen a great deal of judicial development in recent times. Let us analyse this crucial section in greater detail.

MORATORIUM
Once the insolvency resolution petition against the corporate debtor is admitted by the National Company Law Tribunal (NCLT), and after the corporate insolvency resolution process commences, the NCLT declares a moratorium prohibiting institution or continuation of any suits against the debtor; execution of any judgment of a Court / authority; any transfer of assets by the debtor; and recovery of any property against the debtor. The moratorium continues till the resolution process is completed. Thus, total protection is offered to the debtor against any suits / proceedings. In Alchemist Asset Reconstruction Company Ltd. vs. Hotel Gaudavan (P.) Ltd. [2018] 145 SCL 428 (SC), it was held that even arbitration proceedings are stayed during this period.

An extract of the relevant provisions is given below:

‘Moratorium.
14. (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:—
(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;
(b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);
(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.
…………………….
(2) The supply of essential goods or services3 to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during the moratorium period.
…………………….
(3) The provisions of sub-section (1) shall not apply to:—
(a) such transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority.
(b) a surety in a contract of guarantee to a corporate debtor.’

(4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process:
Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of the corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.”

The Supreme Court in P. Mohanraj vs. Shah Brothers Ispat P Ltd. [2021] 125 taxmann.com 39 (SC) has explained that the object of a moratorium provision such as s.14 of the Code was to see that there was no depletion of a corporate debtor’s assets during the insolvency resolution process so that it could be kept running as a going concern during this time, thus maximising value for all stakeholders. The idea was that it facilitated the continued operation of the business of the corporate debtor to allow it breathing space to organise its affairs so that new management may ultimately take over and bring the corporate debtor out of financial sickness, thus benefitting all stakeholders, which would include workmen of the corporate debtor. The Apex Court further explained that while s.14(1)(a) referred to monetary liabilities of the corporate debtor, s.14(1)(b) referred to the corporate debtor’s assets. Together, these two clauses formed a scheme that shielded the corporate debtor from pecuniary attacks against it in the moratorium period so that the corporate debtor got breathing space to continue as a going concern in order to rehabilitate itself ultimately. Relying on this explanation, the Supreme Court did not allow cheque bouncing proceedings to continue against the corporate debtor u/s 138 of the Negotiable Instruments Act, 1881. It held that a quasi-criminal proceeding that is contained in Chapter XVII of the Negotiable Instruments Act would, given the object and context of s.14 of IBC, amount to a ‘proceeding’ within the meaning of s.14(1)(a) of the Code. Hence, the moratorium would attach to such a proceeding.

In the case of Sandeep Khaitan vs. JSVM Plywood Industries Ltd. [2021] 166 SCL 494 (SC) the Apex Court dealt with an issue of whether the High Court has inherent powers under s.482 of the Criminal Procedure Code, 1973 to make such orders against the corporate debtor to give effect to any order under that Code, or to prevent abuse of the process of any Court or otherwise to secure the ends of justice? The Court held that the power under s.482 of the CrPC may not be available to the Court to allow the breach of a statutory provision. The words ‘to secure the ends of justice’ in s.482 cannot mean to overlook the undermining of a Statute, i.e., the provisions of s.14 of the Code.

Similarly, in Anand Rao Korada v Varsha Fabrics P Ltd. [2019] 111 taxmann.com 474 (SC), in order to recover labour dues, the High Court ordered the auction of the assets of the corporate debtor after issuance of the moratorium. The Supreme Court set aside this Order and held that if the assets of the company were alienated during the pendency of the proceedings under the IBC, it would seriously jeopardise the interest of all the stakeholders. The sale or liquidation of assets had to be in accordance with the IBC only.

RECOVERY OF PROPERTY
In Rajendra K Bhutta vs. MHADA [2020] 160 SCL 95 (SC), a society redevelopment project was blessed by the Maharashtra Housing and Area Development Authority (MHADA). The developer went into insolvency, MHADA wanted to take over possession of the land given to the developer for demolition and redevelopment. The Supreme Court disallowed this owing to the moratorium u/s. 14(1)(d). It held that under s.14(1)(d) what was referred to was the ‘recovery of any property’ of the corporate debtor. It was clear that when recovery of property was to be made by an owner under s.14(1)(d), such recovery would be of property that was ‘occupied by’ a corporate debtor. The expression ‘occupied by’ would mean or be synonymous with being in actual physical possession of or being actually used by, in contra-distinction to the expression ‘possession’, which would connote possession being either constructive or actual and which, in turn, would include legally being in possession, though factually not being in physical possession. Since it was clear that the Joint Development Agreement had granted a license to the developer (i.e., the corporate debtor) to enter upon the property, with a view to do all the things that were mentioned in it, it is obvious that after such entry, the property would be ‘occupied by’ the developer. Section 14(1)(d) of the Code, when it speaks about recovery of property ‘occupied’ refers to actual physical occupation of the property. Hence, MHADA’s plea for repossession of the land was turned down.

NATURAL PERSONS NOT PROTECTED
In the above referred decision of P.Mohanraj (supra), the Supreme Court also held that it is clear that the moratorium provision contained in s.14 of the IBC would apply only to the corporate debtor, the natural persons, i.e., its Directors in charge of its affairs continued to be statutorily liable under the Negotiable Instruments Act. Accordingly, criminal proceedings could continue unabated against the Managing Director / Other Directors who have drawn the bounced cheque.

Similarly, in Anjali Rathi vs. Today Homes & Infrastructure Pvt. Ltd. [2021] 130 taxmann.com 253 (SC), the Supreme Court allowed proceedings to be carried out against the promoters of a corporate debtor which was a developer for failing to honour the terms of settlement entered into with home buyers.

PERSONAL GUARANTOR NOT SHIELDED
Another novel issue arose in SBI vs. V. Ramakrishnan [2018] 96 taxmann.com 271 (SC) of whether the moratorium extended to the personal guarantor of a corporate debtor also? The Court held that the moratorium under s.14 cannot possibly apply to a personal guarantor. This decision has since been given the shape of law by inserting sub-section (3) in s.14 which expressly provides that the moratorium under s.14 will not apply to a surety in a contract of guarantee to a corporate debtor.

WILFUL DEFAULTER PROCEEDINGS CONTINUE
An interesting question arose before the Calcutta High Court in the case of Gouri Prasad Goenka vs. State Bank of India, LSI-473-HC-2021(CAL). Here the corporate debtor had gone into insolvency resolution. However, the question was whether wilful defaulter proceedings could be initiated against the promoter, in view of the moratorium imposed u/s 14? The Court held that whole-time directors and promoters who were in charge of the affairs of the defaulting company during the relevant period, when the default was committed, could not be said to be absolved of their act of wilful default committed prior to final approval and acceptance of a resolution plan. The moratorium in no way prevented this. The wilful defaulter declaration proceeding were to disseminate credit information for cautioning banks and financial institutions so as to ensure that further bank finance was not made available to them and not for recovery of debts or assets of the corporate debtor, which could hamper the corporate resolution process.

PMLA ATTACHMENT OF ASSETS
In Directorate of Enforcement vs. Manoj Kumar Agarwal [2021] 126 taxmann.com 210 (NCL-AT), the National Company Law Appellate Tribunal was determining whether an attachment order passed by the Enforcement Directorate under the Prevention of Money Laundering Act, 2002 before the start of the resolution process of the corporate debtor could survive in view of s.14?

The NCL-AT held that the aim and object of the PMLA for attaching the property alleged to be involved in money laundering was to avoid concealment, transfer or dealing in any manner which may result in frustrating any proceedings relating to the confiscation of such proceeds of crime under PMLA. Thus, Provisional Attachment Order was issued for a period not exceeding 180 days from the date of Order. Now if s.14(1)(b) of IBC relating to the moratorium was seen, the NCLT was required to pass an order declaring a moratorium, inter alia prohibiting ‘transferring, encumbering, alienating or disposing of by the Corporate Debtor any of its assets or any legal right or beneficial interest therein? thus the moment an insolvency was initiated, the property of the corporate debtor was protected by such a moratorium. Thus, both the provisions sought to protect the property of corporate debtor from transfer etc. till further actions take place. It further held s.14 would be attracted in all such cases. Once the moratorium was ordered, even if the Enforcement Directorate moved the Adjudicating Authority under PMLA, further action before the Adjudicating Authority under PMLA must be said to have been prohibited. Section 14 of IBC will hit the institution and continuation of proceedings before Adjudicating Authority under PMLA.

CONCLUSION
The provisions relating to the moratorium are very important to protect the assets and going concern of the corporate debtor. However, Courts are quick to ensure that while it is a shield for the debtor it cannot be used as a shield by its promoters / directors.

shailesh.kwebmaker

SALE DEED SANS CONSIDERATION IS VOID

INTRODUCTION

One of the first lessons learnt in Contract Law is that agreements without consideration are void ab initio. The Latin Maxim for the same is ‘ex nudo pacto non oritio action’. Of course, there are some statutory exceptions to the above under the Indian Contract Act, 1872; for example, one of the exceptions is a gift made for natural love and affection. However, by and large one cannot have an agreement for which there is no consideration. Recently, this issue was examined once again by the Supreme Court of India in the context of a sale deed without consideration. Let us examine this important proposition in the light of this recent decision.

WHAT IS CONSIDERATION?

Under the Indian Contract Act, consideration has been defined to mean any act or abstinence on the part of one party to the contract at the desire of the other. Such act or abstinence may be past, present or future. Thus, it is a valuable consideration, in the sense of the law and it may be in the form of some right, interest, profit, benefit, etc., which accrues to one of the parties to the contract or it may also be some forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other party.

It is important to note that unlike in many other countries, e.g., the USA, adequacy of consideration is immaterial in India. If there exists a consideration for a contract and the parties to the contract have consented to the same, then the Courts would not examine whether the consideration is adequate for the contract or not. The Act does not require that the value of the consideration by one party must be equivalent to the value of the goods / services provided or promises made by the other party. Thus, if two parties contract to sell a horse for Rs. 1,000 and the seller has freely consented to the same, then there exists a valid consideration for the horse. Under the Contract Act, consideration must be something which the law can consider of value but it need not necessarily be money or money’s worth. Sir Pollock in his famous book on Contracts has opined that ‘It does not matter whether the party accepting the consideration has any apparent benefit thereby or not; it is enough that he accepts it and the party giving it does thereby undertake some burden, or lose something which in contemplation of law must be of some value’. Section 25 of the Act provides that an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but the inadequacy of the consideration may be taken into account by the Court in determining whether the consent was freely given. Of course, this position of adequacy of consideration has been altered to some extent by the Income-tax Act, 1961 by the introduction of deeming provisions such as sections 50C, 50CA, 56(2)(x), etc.

Under the Act, consideration may move from the party to the contract or even any other person who is a stranger to the contract. Based on this, the Madras High Court has held in the case of Chinnaya vs. Ramayya (1881) 4 Mad 137 that consideration in India can move from a person who need not be a party to the contract. In this case, a mother agreed to gift certain properties to her daughter in consideration for her daughter agreeing to maintain her uncle (mother’s brother). After the death of the mother, the daughter refused to maintain her uncle and in response to a suit filed by the uncle, she stated that the uncle was not privy to the contract as no consideration had flown from him to her. The Court upheld the maintenance suit of the uncle and held that under the Act consideration could flow from a third party, i.e., in this case the mother, and hence there was a valid consideration to the contract between the daughter and her uncle.

Similarly, under the Act the consideration need not flow directly to a party to the contract, it can also flow to a third party and that would be treated as a valid consideration. An important case in this respect is that of Keshub Mahindra & Other, 70 ITR 1 (Bom). In this case, three brothers were substantial shareholders and in the employment of a company. The brothers agreed to transfer some of their shares in the company to certain foreign entities in return for a good business relationship of the company with these foreign entities on favourable payment terms. The Gift Tax Officer held that since the brothers had not directly received any consideration for the sale of their shares, there was a gift by them to the foreign entities. Negating this argument, the Bombay High Court held that under the Indian Contract Act, consideration can not only flow from a third party but it can also flow to a third party. The Court held that the term consideration was defined in the Contract Act. Although the shareholders of the company were distinct from the company, as per the definition of the term consideration there was nothing to show that the benefit of the act or abstinence of the promisee must go directly to the other party only, i.e., the promisor. A contract can arise even though the promisee does an act or abstains from doing something for the benefit of a third party, i.e., the company in this case, and that was a good consideration for the three brothers to transfer their shares.

In this backdrop of consideration let us examine the ratio of the Supreme Court decision.

APEX COURT’S VERDICT
The Supreme Court’s verdict in Kewal Krishan vs. Rajesh Kumar & Ors., CA No. 6989-6992/2021, Order dated 22nd November, 2021 is relevant on the subject of consideration. In this case, the appellant had executed a power of attorney in favour of his brother. The Power of Attorney holder executed two sale deeds for selling immovable properties of the appellant. One was for selling to his wife and the other to his son. The appellant objected to these sales on various grounds. One of them was that the entire sale consideration for acquiring suit properties was not paid by the purchasers. Accordingly, it was prayed that the sale deeds should be set aside.

The Supreme Court held that there was no evidence adduced to show that the purchasers had indeed paid the consideration as shown in the sale deeds. It examined section 54 of the Transfer of Property Act, 1882 in this respect. This section deals with the definition of sale of immovable property. It defines a sale (in respect of immovable property) to mean a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised. In Samaratmal vs. Govind, (1901) ILB 25 Bom 696, the word ‘price’ as used in the sections relating to sales in the Transfer of Property Act was held to be in the sense of money.

The Apex Court in Kewal’s case (Supra) went on to hold that a sale of an immovable property had to be for a price. The price may be payable in future. It may be partly paid and the remaining part can be made payable in future. The payment of price was an essential part of a sale covered by section 54 of the Transfer of Property Act. If a sale deed in respect of an immovable property was executed without payment of price and if it did not provide for the payment of price at a future date, it was not a sale at all in the eyes of law. It was of no legal effect. Therefore, such a sale would be void. It would not impact the transfer of an immovable property.

The Court deduced that since no evidence was provided to show payment of sale consideration, the sale deeds would have to be held as void being executed without consideration. Hence, the sale deeds did not affect in any manner the share of the appellant in the suit properties. In fact, such a transaction made by the Power of Attorney holder of selling the suit properties on the basis of the power of attorney of the appellant to his own wife and minor sons was nothing but a sham transaction! Thus, the sale deeds did not confer any right, title and interest on his wife and children as the sale deeds were to be ignored being void. It further held that a document which was void need not be challenged by claiming a declaration as the said plea could be set up and proved even in collateral proceedings. As no title was transferred under the said sale deeds, the appellant continued to have undivided share in the suit properties.

Thus, it is clear that for a sale transaction presence of consideration in the form of money would be a must. If the consideration is anything other than money, i.e., in kind, then it would be an exchange and not a sale. However, a sale can also take place where instead of the buyer paying the seller, some debt owed by the seller to the buyer is set off. For instance, in Panchanan Mondal vs. Tarapada Mondal, 1961 (1) I.L.R. (Cal) 619, the seller agreed to sell a property to the buyer for a certain price by one document and by a second document he also agreed to buy another property of the buyer for the same amount. Instead of the buyer paying the seller and vice versa, they agreed to set-off the two amounts. It was held that the transactions were for execution of two sale agreements.

INCOME-TAX CONSEQUENCES
One related issue would be could section 56(2)(x) of the IT Act be invoked by the Department against the purchaser? Since the agreements were without consideration could it be held that the buyer received the immovable property without payment of adequate consideration, and conversely could section 50C be invoked on the seller as being a transfer less than the stamp duty ready reckoner value? One would have to go back to the decision of the Supreme Court for the answer.

The Court has clearly held that the sale deeds did not affect in any manner the share of the appellant in the properties. It was nothing but a sham transaction. The sale deeds did not confer any right, title and interest on the buyers and the seller’s share remained intact. Hence, in such a scenario there is no receipt of immovable property by the buyer and there is no transfer by the seller. Accordingly, it stands to reason that neither section 50C could be invoked on the seller nor could section 56(2)(x) be invoked on the buyer.

STAMP DUTY CONSEQUENCES
A sale deed is liable to be stamped with duty as on a conveyance. However, what happens when the sale deed is held to be a sham as in the above case? The Maharashtra Stamp Act, 1958 provides for the refund of stamp duty paid in case it has been used on an instrument which is afterwards found to be absolutely void in law from the beginning. An application for refund must be made to the Collector, normally within a period of six months from the date of the sale deed. Some amount is deducted while making refund of Stamp Duty, which is as follows – for stamps falling in the category of e-payment (simple receipt / e-challan and e-SBTR), 1% of the duty amount is deducted with a minimum of Rs. 200- and a maximum of Rs. 1,000. For stamp categories other than mentioned above a deduction of 10% of the duty is made.

CONCLUSION
This Supreme Court decision has once again highlighted the importance of consideration in the context of any agreement. Due care and caution should be exercised as to the manner and mode of consideration. Failure to do so could invalidate the entire transaction as seen above.

shailesh.kwebmaker

OCI: A FEW CHANGES, BUT LOTS OF CONFUSION

INTRODUCTION
The Overseas Citizen of India or OCI was a modified form of dual citizenship introduced by the Indian Government in 2005 for the benefit of Non-Resident Indians (NRIs) and Persons of Indian Origins (PIOs) resident abroad. India currently does not permit dual citizenship, i.e., a person cannot be the citizen of both India and a foreign country, say the USA. He must select any one. An OCI cardholder is not a full-fledged citizen but he has certain benefits at par with a citizen. As of 2020, there were over six million OCIs abroad.

This scheme has seen certain regulatory and legal developments which have caused a great deal of confusion and anxiety amongst the OCI cardholders resident abroad. The University of WhatsApp (sic!) has played a stellar role in fuelling this fire. The intent of this article is to discuss those forwards and dispel some myths.

WHAT IS REGULATORY FRAMEWORK?
An OCI card is granted by the Government of India to a person under the aegis of the Citizenship Act, 1955. Section 7A of this Act provides for the registration of OCIs. At the cost of repetition, an OCI is not a full-fledged Indian citizen under the Citizenship Act but he is only registered as an OCI. Section 7A allows the Government to register the following individuals as OCIs on an application made by them:

(a) Any person who currently is a foreign citizen but was an Indian citizen at the time of commencement of the Constitution of India, i.e., in 1950;
(b) Any person who currently is a foreign citizen but was eligible to be an Indian citizen at the time of commencement of the Constitution of India, i.e., in 1950;
(c) Any person who currently is a foreign citizen but belonged to a territory that became part of India after Independence;
(d) Any person who is a child or a grandchild of the above persons;
(e) A minor child of a person mentioned in the clause above;
(f) A minor child both of whose parents are citizens of India or one of whose parents is a citizen of India;
(g) Spouse of a citizen of India or spouse of an Overseas Citizen of India cardholder;
(h) Spouse of a person of Indian origin who is a citizen of another country and whose marriage has been registered and subsisted for a continuous period of not less than two years immediately preceding the presentation of the application under this section.

Thus, all of the above persons are eligible to be registered as OCIs. Interestingly, even a person of non-Indian origin can be registered as an OCI if he marries a citizen / an OCI cardholder. For example, a Caucasian American man marries an Indian OCI woman residing in the USA. He, too, would be eligible to be registered as an OCI along with their children. The Act further provides that the OCI card granted u/s 7A to a spouse is liable to be cancelled upon dissolution of marriage by the competent court. The special privileges can then be withdrawn.

The Bombay High Court in Lee Anne Arunoday Singh vs. Ministry of Home Affairs, WP 3443/2020 has held that the provisions of section 7 of the Act cast a duty on the Government to take necessary steps regarding cancellation of the OCI card issued on spouse basis, if the marriage is dissolved by a competent court of law.

The Government of India has recently made a submission in a similar case before the Delhi High Court that a foreigner registered as an OCI on the strength of marriage to an Indian citizen loses that status when the marriage is dissolved. Such foreigners are no longer eligible to be registered as OCIs under the Citizenship Act. Such a person could, however, continue to visit India by applying for an ordinary / long-term visa. A PIL (public interest litigation) has also been filed before the Delhi High Court in Jerome Nicholas Georges Cousin vs. Union of India, W.P. (C) 8398/2018 by a French national against this provision. In his plea he states that he would have to close down his business and go back to France since he would now not have permission to run a business in India.

WHAT ARE THE BENEFITS AVAILABLE TO AN OCI?
The OCI card is a life-long visa granted to these foreign citizens. While their passport is the primary document to enter India, the OCI card is an additional document that they receive. They can visit India as many times as they want and stay as long as they wish. They can even permanently reside in India and work and study here. Non-OCI cardholders need to get registered with the Foreigners Regional Registration Office if they want to stay for more than six months in India. These procedures are not applicable to OCIs.

Earlier, there was a concept of a Person of Indian Origin (PIO) card which was also a long-term visa. However, issuance of new PIO cards has been discontinued and all PIO cardholders are being encouraged to migrate to the OCI card.

The Government has made some changes in the benefits available to OCIs by a Notification issued in March, 2021. This Notification has caused a lot of confusion amongst the Indian diaspora. The revised list of benefits available to OCIs is as follows:

(1) It grants a multiple entry life-long visa for visiting India for any purpose. The revised Notification has added that for undertaking the following activities, the OCI cardholder shall be required to obtain a special permission or a Special Permit, as the case may be, from the competent authority or the Foreigners Regional Registration Officer or the Indian Mission concerned, namely:
(i) to undertake research;
(ii) to undertake any missionary or tabligh or mountaineering or journalistic activities. This amendment is to overrule the Delhi High Court’s decision in the case of Dr. Christo Thomas Philip vs. Union of India, W.P. (C) 1775/2018 where an OCI card was cancelled on the ground that the person was involved in missionary activities in India. The Court held that there is no law which prevents missionary activities by an OCI and hence the cancellation was invalid. The Court had held that prima facie the rights under Article 14 (equality before law) and 19 (freedom of speech and expression) of the Constitution of India which are guaranteed to the citizen of India, also appear to be extended to an OCI card-holder;
(iii) to undertake internship in any foreign Diplomatic Missions or foreign Government organisations in India or to take up employment in any foreign Diplomatic Missions in India;
(iv) to visit any place which falls within the Protected or Restricted or prohibited areas as notified by the Central Government or competent authority.

(2) Exemption from registration with the Foreigners Regional Registration Officer or Foreigners Registration Officer for any length of stay in India. The revised Notification has added that the OCI cardholders who are normally resident in India shall intimate the jurisdictional Foreigners Regional Registration Officer or the Foreigners Registration Officer by email whenever there is a change in permanent residential address and in their occupation.

(3) It provides parity with NRIs in the matter of
(i) inter-country adoption of Indian;
(ii) appearing for the all-India entrance tests to make them eligible for admission against any NRI seat. However, the OCI cardholder shall not be eligible for admission against any seat reserved exclusively for Indian citizens. This overrules the decision of the Karnataka High Court in the case of Pranav Bajpe vs. The State of Karnataka, WP 27761/2019 which held that when the parity between the OCI cardholder and Non-Resident Indians is removed, the concept of OCI cardholder cannot be given a restricted meaning as Non-Resident Indian so as to restrict such admission only to Non-Resident Indian quota in the State quota of seats and not in the institutional quota or Government quota of seats under the NEET Scheme. It had concluded that the minor children of Indian citizens born overseas must have the same status, rights and duties as Indian citizens, who are minors;
(iii) purchase or sale of immovable properties other than agricultural land or farmhouse or plantation property; and
(iv) pursuing the following professions in India as per the provisions contained in the applicable relevant statutes or Acts as the case may be, namely, doctors, dentists, nurses and pharmacists; advocates; architects; chartered accountants.

(4) In respect of all other economic, financial and educational fields not specified in this Notification or the rights and privileges not covered by the Notifications made by the Reserve Bank of India under the Foreign Exchange Management Act, 1999, the OCI cardholder shall have the same rights and privileges as a foreigner. This is a new addition by the March, 2021 Notification. Thus, if any benefit is not specifically conferred either under the Citizenship Act or under the FEMA, 1999, then the OCI would only be entitled to such privileges as are available to a foreigner.

An OCI is not entitled to vote in India, whether for a Legislative Assembly or Legislative Council, or for Parliament, and cannot hold Constitutional posts such as those of President, Vice-President, Judge of the Supreme Court or the High Courts, etc., and he / she cannot normally hold employment in the Government.

CAN AN OCI BUY PROPERTY IN INDIA?
One of the benefits of being an OCI is that such a person can buy immovable property in India other than agricultural land. The Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 deal with this aspect. Rule 21 permits an OCI to purchase any immovable property in India other than agricultural land or farmhouse or plantation property. An OCI is also allowed to get a gift of such a property from an Indian resident / NRI / OCI who is a relative as per the definition under the Companies Act, 2013. Citizens of certain countries, such as Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Hong Kong or Macau, or the Democratic People’s Republic of Korea (DPRK), cannot purchase immovable property in India without permission from the RBI but even this prohibition is not applicable to OCI cardholders. It may be noted that the above relaxations under the FEMA Rules are only for OCI cardholders and not for all persons of Indian origin. If a foreign citizen of Indian origin does not have an OCI card, then he cannot buy immovable property in India without prior permission of the RBI. This is one of the biggest benefits of having an OCI card.

In this respect, misunderstanding of a Supreme Court decision in Asha John Divianathan vs. Vikram Malhotra, CA 9546/2010 Order dated 26th February, 2021 has created great heartburn amongst the OCI community. This was a decision rendered under the erstwhile Foreign Exchange Regulation Act, 1973 (which has been superseded by the FEMA in 1999). Section 31 of the erstwhile law provided that any foreign citizen desirous of buying immovable property in India required the prior approval of the RBI. The Court held that entering into any such transaction without RBI approval was treated as an unenforceable act and prohibited by law. It further held that when penalty was imposed by law for the purpose of preventing something on the ground of public policy, the thing prohibited, if done, would be treated as void, even though the penalty if imposed was not enforceable. It is important to note that this decision is not applicable in the light of the current provisions of the FEMA Regulations. As explained above, the law now, by virtue of Rule 21 of the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 expressly provides that an OCI can purchase any immovable property in India other than agricultural land or farmhouse or plantation property.

WHAT DOES FEMA PROVIDE IN RESPECT OF OCIs?
The provisions relating to OCIs have been dealt with in great detail under the FEMA Regulations and it would be difficult to elaborate on all of them here. However, a few examples are explained here. At most places under the FEMA Regulations, the provisions available to persons of Indian origin have been replaced with OCIs. Thus, it is mandatory for the PIOs to have an OCI card. For instance, the facility of investment on a non-repatriable basis under Schedule IV of the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 is allowed only to Non-Resident Indians and OCI cardholders. Persons of Indian origin who do not have OCI cards cannot avail of this facility.

Similarly, under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 an Indian bank is allowed to lend in Indian rupees only to an NRI or an OCI cardholder.

However, in a few Regulations under FEMA, it is not mandatory to have an OCI card. For example, a Non-Resident External (NRE) Bank Account or a Non-Resident Ordinary (NRO) Bank Account can be opened by any Person of Indian origin. It is not necessary that such a person has an OCI card. Similarly, the Foreign Exchange Management (Remittance of Assets) Regulations, 2016 allows a PIO to remit up to US $1 million every year out of balances held in the NRO account and from the sales proceeds of assets.

IS THE DEEMED RESIDENCY PROVISION APPLICABLE?
Under section 6 of the Income-tax Act, any Indian citizen having total Indian income exceeding Rs. 15 lakhs during the previous year is deemed to be an Indian tax resident in that year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature. This provision is applicable only to an Indian citizen, i.e., a person holding an Indian passport. An OCI does not have an Indian passport and so he would be out of the deemed taxation net.

CONCLUSION
The law relating to OCIs is dynamic in nature. In respect of all other economic fields not expressly specified or not covered by the Notifications under the FEMA, 1999, the OCI cardholder is equated with the same rights and privileges as a foreigner. Thus, it becomes very important to understand what are the benefits and provisions for an OCI cardholder.

shailesh.kwebmaker

GIFTS FROM ‘GIFT CITY’

INTRODUCTION

The Gujarat International Financial Tec-City (‘GIFT City’) in Gujarat is India’s first International Financial Service Centre (‘IFSC’). Many nations such as Singapore, the UAE, etc., have successfully developed IFSCs which have become financial service hubs and have attracted foreign investments. India aims to do so through the GIFT City. Several sops have been provided for setting up financial service intermediaries in the GIFT City both by the RBI and by SEBI. While GIFT City is a subject which merits a publication to itself, this article only looks at some of the key features and benefits available to financial service intermediaries for setting up an entity in the GIFT City.

REGULATORY REGIME
Instead of multiple financial services regulators such as SEBI, RBI and IRDA, the GIFT City is regulated by only one body – the International Financial Services Centres Authority set up under the Finance Ministry. The IFSC Authority is based in Gujarat. The unified IFSC Authority aims to ease the business environment for the intermediaries. However, multiple legislations continue to impact the GIFT City.

Units set up in the IFSC are treated as SEZ Units set up under the Special Economic Zones Act, 2005. Accordingly, units set up in an IFSC must conform to the provisions of the SEZ Act and its regulations.

Some of the key regulations pertaining to the setting up of financial institutions in the GIFT City are:

Special Economic Zones Act, 2005

Foreign Exchange Management (International Financial Services Centre) Regulations, 2015

International Financial Services Centres Authority Act, 2019

International Financial Services Centres Authority (Banking) Regulations, 2020

Securities and Exchange Board of India (International Financial Services Centre) Guidelines, 2015

SEBI’s Operating Guidelines for Alternative Investment Funds in International Financial Services Centres of 2018

IFSCA’s Guidelines of 2020 for AIFs in IFSCs.

PERSON RESIDENT OUTSIDE INDIA
One of the most salient features of the GIFT City is that any entity set up here would be treated as a Person Resident Outside India under the Foreign Exchange Management Act, 1999. Thus, even though the unit is physically incorporated in India, it would be treated as if it is a non-resident under the FEMA. A financial institution is an entity engaged in rendering financial services or carrying out financial transactions and includes banks, NBFCs, insurance companies, brokerages, merchant bankers, securities exchanges, mutual funds, etc. On the other hand, a financial service is defined to mean any activity allowed to be carried out by SEBI / RBI / IRDA or any authority empowered to regulate the financial institution.

Consequently, a financial institution set up in the GIFT City must conduct business only in foreign currency and not in Indian Rupees. This feature has certain unique consequences which are explained below.

Any SEBI-registered intermediary may provide financial services relating to the securities market in the IFSC without forming a separate company.

FOREIGN PORTFOLIO INVESTORS
SEBI has liberalised the regime for foreign investors operating in the GIFT City as well as for FPIs to operate in it. Any applicant incorporated in the GIFT City shall be deemed to be appropriately regulated for the purposes of being registered as an FPI with SEBI. Hence, such an entity can apply for registration as a Category-I FPI.

Eligible Foreign Investors (EFIs) operating in IFSCs / GIFT City shall not be treated as entities regulated by SEBI. Further, SEBI-registered FPIs shall be permitted, without undergoing any additional documentation and / or prior approval process, to operate in the IFSC. The following are eligibility and KYC norms for EFIs:

Eligibility norms: EFIs are those foreign investors who are eligible to invest in IFSCs by satisfying the following conditions:
a) the investor is not resident in India,
b) the investor is not resident in a country identified in the public statement of the Financial Action Task Force as a deficient jurisdiction, and
c) the investor is not prohibited from dealing in the securities market in India.

KYC norms: An intermediary operating in an IFSC needs to ensure that the records of its clients are maintained as per the Prevention of Money-Laundering Act, 2002 and the rules made thereunder. The following KYC norms may be made applicable to EFIs:

In case of participation of an EFI, not registered with SEBI as an FPI but desirous of operating in the IFSC, a trading member of the recognised stock exchange in the IFSC may rely upon the due diligence carried out by a bank which is permitted by RBI to operate in the IFSC during the account opening process of the EFI.

In case of EFIs that are not registered with SEBI as FPIs and also not having bank accounts in the IFSC, KYC as applicable to Category-II FPI as per the new FPI categorisation shall be made applicable. However, PAN shall not be applicable for KYC of EFIs in the IFSC.

In case of participation of FPIs in the IFSC, due diligence carried out by a SEBI-registered intermediary during the time of account opening and registration shall be considered.

Segregation of accounts: FPIs who operate in the Indian securities market and also propose to operate in the IFSC shall be required to ensure clear segregation of funds and securities. The custodians shall, in turn, monitor compliance of this provision for their respective FPI clients. Such FPIs shall keep their respective custodians informed about their participation in the IFSC.

AIFs IN THE GIFT CITY
Alternative Investment Funds (AIFs) are investment vehicles set up in India which privately pool funds / monies from domestic as well as foreign investors and invest such funds / monies in securities as per a defined investment policy. In India, an AIF along with its constituents is regulated by SEBI under the SEBI (AIF) Regulations, 2012 (SEBI AIF Regulations). SEBI has provided several incentives for setting up an AIF in the GIFT City / IFSCs. The IFSC Authority has further liberalised the framework for setting up AIFs in the GIFT City. The combined regulations for setting up an AIF are explained below.

Incorporation of the AIF
Any trust / LLP / company set up in the IFSC can be registered with SEBI as an AIF. If the sponsor / manager of an Indian AIF wishes to set up an AIF in the IFSC, it must first set up a branch / company in the IFSC which will act as the sponsor / manager of the AIF. Thus, the Indian sponsor cannot directly sponsor the IFSC AIF. It must first set up a foreign branch / foreign company in the IFSC. The investment in the IFSC sponsor would be treated as an overseas direct investment in a Joint Venture / Wholly-Owned Subsidiary under the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (FEMA No. 120/RB-2004). Since this would be an investment in the Financial Services Sector, the provisions of Regulations 6 and 7 of these Regulations would need to be adhered to.

The SEBI IFSC guidelines along with the SEBI AIF Regulations recognise the following types of AIFs:
(a) Category-I AIF: Funds which invest in startups, early-stage ventures, social ventures, small and medium enterprises, infrastructure sector, etc. These include Venture Capital Funds.
(b) Category-II AIF: Residual category, i.e., other than Category I and III AIFs and which do not undertake leverage other than to meet day-to-day operational requirements as per SEBI AIF Regulations. These include Private Equity Funds / Debt Funds.
(c) Category-III AIF: Funds which employ diverse or complex trading strategies and leverage including through investments in listed or unlisted securities / derivatives. These would include Hedge Funds.

Each scheme of the AIF shall have a corpus of at least US $3 million. The manager or sponsor shall have a continuing interest in the AIF of not less than 2.5% of the corpus or US $750,000, whichever is lower, in the form of investment in the AIF and such interest shall not be through the waiver of management fees. Further, for Category-III AIFs the continuing interest shall be not less than 5% of the corpus or US $1.5 million, whichever is lower. The AIF must raise money only in foreign currency and not in Indian Rupees.

Investments permissible by the AIF
SEBI has harmonised the provisions governing investments by AIFs incorporated in IFSCs with the provisions regarding investments applicable for domestic AIFs. Accordingly, AIFs set up in the IFSC can invest in

Securities which are listed in the IFSC

Securities issued by companies incorporated in the IFSC

Securities issued by companies in India or belonging to foreign jurisdictions

Units of other AIFs located in India as well as in the IFSC

Any company, Special Purpose Vehicle or Limited Liability Partnership or body corporate or Real Estate Investment Trust or Infrastructure Investment Trust in which a domestic AIF can make an investment

It can also co-invest in a portfolio company through a segregated portfolio by issuing a separate class of units. However, the investments by such segregated portfolios shall, in no circumstances, be on terms more favourable than those offered to the common portfolio of the AIF and appropriate disclosures must be made in the placement memorandum regarding creation of the segregated portfolio.

AIFs operating in India are subject to leverage restrictions under the SEBI Regulations. Accordingly, AIF Category-I cannot borrow, while Category-II can only borrow for meeting daily expenses. However, these restrictions have been removed for AIFs set up in the GIFT City. An AIF in an IFSC may borrow funds or engage in leveraging activities without any regulatory limit, subject only to the following conditions:
(a) The maximum leverage by the AIF, along with the methodology for calculation of leverage, shall be disclosed in the placement memorandum;
(b) The leverage shall be exercised subject to consent of the investors;
(c) The AIF employing leverage shall have a comprehensive risk management framework appropriate to the size, complexity and risk profile of the fund.

Further, AIFs operating in India have a maximum investment diversification rule. Thus, under the SEBI Regulations a Category-I AIF can invest a maximum of 25% of its investible funds in one investee company. Similarly, a Category-II AIF can invest a maximum of 10% of its investible funds in one investee company. The guidelines for AIFs in the IFSC have removed these diversification rules. Accordingly, they shall not apply to AIFs in IFSCs, subject to the conditions that appropriate disclosures have been made in the placement memorandum and the investments by the AIFs are in line with the risk appetite of the investors.

Most offshore financial centres do not have restrictions on leveraging or diversification guidelines. This is a very welcome move since now AIFs in IFSCs can set up tailor-made schemes for investing in a very select pool of companies. These guidelines should encourage more foreign institutions to set up AIFs in India.

Lastly, Indian AIFs are subject to a monetary limit when they want to invest abroad. AIFs set up in the IFSC are exempt from this limit since they are treated as set up in an offshore jurisdiction.

Nature of Indian investments by the AIF
Under the FEM (Non-Debt Instruments) Rules, 2019 an AIF is treated as an Investment Vehicle. If the control and management of the sponsor and manager of the AIF are ultimately with resident Indian citizens, then the entire investment made in India by such an AIF is treated as a domestic investment. It does not then matter whether the corpus of the scheme is foreign or Indian. Thus, if the AIF in the GIFT City is set up by and managed by another Indian entity which in turn is ultimately controlled and managed by resident Indian citizens, then the downstream investment by such an AIF in Indian entities would be treated as domestic investment. Such investment would then be outside the purview of the FEMA Regulations and would not be subject to pricing / sectoral conditions / sectoral caps under the FEM (Non-Debt Instruments) Rules, 2019 even if the entire corpus is raised from non-residents.

Eligible investors in the AIF
The following persons can make investments in an AIF operating in the IFSC:

A person resident outside India;

A non-resident Indian;

Institutional investor resident in India who is eligible under FEMA to invest funds offshore, to the extent of outward investment permitted;

A person resident in India having a net worth of at least US $1 million during the preceding financial year who is eligible under FEMA to invest funds offshore, to the extent allowed in the LRS (US $250,000) of RBI. The minimum investment by an investor in an AIF is US $40,000 for employees or directors of the AIF or its manager and US $150,000 for all other investors.

The RBI has recently expressly allowed resident individuals to make remittances under LRS to IFSCs set up in India. Resident individuals may also open non-interest-bearing Foreign Currency Accounts (FCAs) in IFSCs for making the above permissible investments under LRS. Any funds lying idle in the account for a period up to 15 days from the date of receipt into the account shall be immediately repatriated to the domestic Rupee account of the investor in India. This is an example of express round-tripping being permissible by the RBI ~ Indian money under LRS would go abroad to an offshore AIF (although physically the AIF is in India) and could be routed back into India since such an AIF can invest in Indian companies!

Under the International Financial Services Centres Authority (Banking) Regulations, 2020 Qualified Resident Individuals (meaning an individual who is a person resident in India having net worth not less than US $1 million or equivalent in the preceding financial year) are permitted to open, hold and maintain accounts in a freely convertible foreign currency, with a banking unit, for undertaking transactions connected with or arising from any permissible transaction specified in the Liberalised Remittance Scheme of the Reserve Bank of India. The IFSCA has clarified that the net worth criteria shall not be applicable for an individual, being a person resident in India who opens an account with the bank for the purpose of investing in securities under the LRS. This is because of the fact that the purpose of such remittance under the LRS is investment in securities and the opening of a bank account with a banking unit is incidental to the same.

Triple role of the AIF
The AIF set up in the IFSC can also invest in India under the FDI Route, the FPI Route or the Foreign Venture Capital Investor (FVCI) Route. If it desires to come under the FPI or the FVCI Route, then it must get a separate registration for the same with SEBI. All such investments would be subject to the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 administered by the RBI and the relevant SEBI Regulations.

CONCLUSION
The GIFT City at Gujarat is an excellent idea to attract foreign investment and foreign financial institutions to set up shop in India. Along with the regulatory concessions provided to AIFs, there are several income-tax benefits which are also afforded to AIFs established in the IFSC. While the Government has given a strong impetus to the GIFT City, it remains to be seen whether financial institutions actually set up shop.

shailesh.kwebmaker

HINDU LAW: THE RIGHTS OF AN ILLEGITIMATE CHILD

INTRODUCTION

The codified and uncodified aspects of Hindu Law deal with several personal issues pertaining to a Hindu. One such issue is the rights of an illegitimate child in relation to inheritance of ancestral property, self-acquired property of his parents, right to claim maintenance, etc.

VOID / VOIDABLE MARRIAGE

The Hindu Marriage Act, 1955 applies to and codifies the law relating to marriages between Hindus. It states that an illegitimate child is one who is born out of a marriage which is not valid. A valid marriage is one which does not suffer from the disabilities mentioned in this Act, viz., neither partner has another spouse living at the time of the marriage; neither of them is of unsound mind / has a mental disorder / is insane; they are not under the marriageable age; the parties are not within prohibited degrees of relationship as laid down in Hindu law; the parties are not sapindas (defined common relationships) of each other. For all void marriages, the Act provides that a decree of nullity can be obtained from a court of law. Hence, the marriage is treated as null and void. Thus, if there is a marriage which suffered from any of these defects then the same would be void. Certain marriages under the Act are voidable at the option of the party who is aggrieved.

ILLEGITIMATE CHILD – MEANING

A child born out of such a void or voidable wedlock would have been treated as an illegitimate child prior to the amendment of the Hindu Marriage Act in 1976. From 1976, the Hindu Marriage Act has been amended to expressly deal with an illegitimate child. Section 16(1) provides that even if a marriage is null and void, any child born out of such marriage who would have been legitimate if the marriage had been valid, shall be considered to be a legitimate child. This is true whether or not such child is born before or after the commencement of the Marriage Laws (Amendment) Act, 1976. This would also be the case whether or not a decree of nullity is granted in respect of that void marriage under this Act.

It also provides that if a decree of nullity is granted in respect of a voidable marriage, any child begotten or conceived before the decree is made, who would have been the legitimate child of the parties to the marriage if at the date of the decree it had been dissolved instead of being annulled, shall be deemed to be their legitimate child notwithstanding the decree of nullity.

Hence, now all children of void / voidable marriages under the Act are treated as legitimate. The Act also provides that such children would be entitled to rights in the property of their parents.

The Supreme Court in Bharatha Matha & Anr. vs. R. Vijaya Renganathan, AIR 2010 SC 2685 has held that ‘it is evident that Section 16 of the Act intends to bring about social reforms, conferment of social status of legitimacy on a group of children, otherwise treated as illegitimate, as its prime object.’

In Jinia Keotin & Ors. vs. Kumar Sitaram Manjhi & Ors. (2003) 1 SCC 730, the Apex Court explained the meaning behind the Amendment as follows:

‘4 … Under the ordinary law, a child for being treated as legitimate must be born in lawful wedlock. … The legitimate status of the children which depended very much upon the marriage between their parents being valid or void, thus turned on the act of parents over which the innocent child had no hold or control. But for no fault of it, the innocent baby had to suffer a permanent setback in life and in the eyes of society by being treated as illegitimate. A laudable and noble act of the legislature indeed in enacting section 16 to put an end to a great social evil.’

In S.P.S. Balasubramanyam vs. Suruttayan @ Andali Padayachi & Ors. AIR 1992 SC 756 the Supreme Court held that if man and woman are living under the same roof and cohabiting for a number of years, there will be a presumption u/s 114 of the Evidence Act that they live as husband and wife and the children born to them will not be illegitimate. Thus, even children born out of a live-in relationship were accorded legitimacy.

In Rameshwari Devi vs. State of Bihar & Ors. AIR 2000 SC 735 the Supreme Court dealt with a case wherein after the death of a government employee, the children born illegitimately to the woman who had been living with the said employee, claimed a share in the pension / gratuity and other death-cum-retirement benefits along with children born out of a legal wedlock. The Court held that u/s 16 of the Act, children of a void marriage are legitimate. As the employee, a Hindu, died intestate, the children of the deceased employee born out of the void marriage were entitled to a share in the family pension, death-cum-retirement benefits and gratuity.

SUCCESSION TO PROPERTIES OF OTHER RELATIVES

However, the Amendment Act has also introduced an interesting caveat, that while such a child born out a void or voidable wedlock would be deemed to be legitimate, the Amendment would not be treated as conferring any rights in the property of any person other than its parents.

In Smt. P.E.K. Kalliani Amma & Ors. vs. K. Devi & Ors. AIR 1996 SC 1963 the Apex Court held that section 16 of the Act was not ultra vires of the Constitution of India. In view of the legal fiction contained in section 16, the illegitimate children, for all practical purposes, including succession to the properties of their parents, had to be treated as legitimate. They could not, however, succeed to the properties of any other relation on the basis of this rule which in its operation was limited to the properties of the parents.

Again, in Jinia Keotin & Ors. vs. Kumar Sitaram Manjhi & Ors. (2003) 1 SCC 730 the Supreme Court held that section 16 of the Act, while engrafting a rule of fiction in ordaining the children, though illegitimate, to be treated as legitimate, notwithstanding that the marriage was void or voidable, chose also to confine its application, so far as succession or inheritance by such children is concerned, to the properties of the parents only. It held that conferring any further rights upon such children would be going against the express mandate of the Legislature.

This view was once again endorsed by the Supreme Court in Bharatha Matha (Supra) where it held that a child born of a void or voidable marriage is not entitled to claim inheritance in ancestral coparcenary property but is entitled only to claim share in self-acquired properties, if any.

CONTROVERSY IN THE ISSUE

The above issue of whether illegitimate children can succeed to ancestral properties or claim a share in the HUF was given a new twist by the Supreme Court in 2011 in the case of Revanasiddappa and Anr. vs. Mallikarjun and Ors. (2011) 11 SCC 1. The question which was dealt with in that case was whether illegitimate children were entitled to a share in the coparcenary property or whether their share was limited only to the self-acquired property of their parents u/s 16(3) of the Hindu Marriage Act? It disagreed with the earlier views taken by the Supreme Court in Jinia Keotin (Supra), Bharatha Matha (Supra) and in Neelamma & Ors. vs. Sarojamma & Ors. (2006) 9 SCC 612, wherein the Court had held that illegitimate children would only be entitled to a share of the self-acquired property of the parents and not to the joint Hindu family property.

The Court observed that the Amendment had used the word ‘property’ and had not qualified it with either self-acquired property or ancestral property. It has been kept broad and general. It explained that if they have been declared legitimate, then they cannot be discriminated against and they will be at par with other legitimate children and be entitled to all the rights in the property of their parents, both self-acquired and ancestral. The prohibition contained in section 16(3) will apply to such children only with respect to property of any person other than their parents. Qua their parents, they can succeed to all properties. The Court held that there was a need for a progressive and dynamic interpretation of Hindu Law since the society was changing. It stressed the need to recognise the status of such children who had been legislatively declared legitimate and simultaneously recognise the rights of such children in the property of their parents. This was a law to advance the socially beneficial purpose of removing the stigma of illegitimacy on such children who were as innocent as any other children.

The Supreme Court also explained the modus operandi of succession to ancestral property. Such children will be entitled only to a share in their parents’ property, but they could not claim it in their own right. Logically, on the partition of an ancestral property the property falling in the share of the parents of such children would be regarded as their self-acquired and absolute property. In view of the Amendment, such illegitimate children will have a share in such property since such children were equated under the amended law with the legitimate offspring of a valid marriage. The only limitation even after the Amendment was that during the lifetime of their parents such children could not ask for partition, but they could exercise this right only after the death of their parents.

Hence, the Court in Revanasiddappa (Supra) concluded that it was constrained to take a view different from the one taken earlier by it in Jinia Keotin (Supra), Neelamma (Supra) and Bharatha Matha (Supra) on section 16(3) of the Act. Nevertheless, since all these decisions were of two-member Benches, it requested the Chief Justice of India that the matter should be reconsidered by a larger Bench.

CURRENT STATUS

It has been close to ten years since the above request for a larger Bench, but the matter has not yet been resolved. This issue once again cropped up in the Supreme Court in the case of Jitender Kumar vs. Jasbir Singh CA 18858/2019 order dated 21st October, 2019. The Supreme Court observed that since this issue has been referred to a larger Bench, the current case would be decided only after its hearing.

MAINTENANCE

Section 20 of the Hindu Adoptions and Maintenance Act, 1956 also needs to be noted; it provides for maintenance of children by a Hindu. A Hindu is bound, during his or her lifetime, to maintain his or her legitimate or illegitimate children during their minority. In addition, an unmarried Hindu daughter (even if illegitimate) can claim maintenance from her father till she is married relying on section 20(3) of this Act, provided that she pleads and proves that she is unable to maintain herself from her own earnings. This is also the view expressed by a three-Judge Bench of the Supreme Court in Abhilasha vs. Parkash, Cr. Appeal No. 615/2020, order dated 15th September, 2020.

GUARDIANSHIP

Who would be the natural guardian of such an illegitimate child is another interesting question. The Hindu Minority and Guardianship Act, 1956 states that a natural guardian of a Hindu minor (if he is a boy or an unmarried girl) and / or his property, is the father and after him the mother. In case the minor is below the age of five years, the child’s custody ordinarily vests with the mother. However, the Act provides an exception to this Rule that in the case of an illegitimate boy or an illegitimate unmarried girl, the mother would be the natural guardian and only after her can the father be the natural guardian. Recently, the Bombay High Court in Dharmesh Vasantrai Shah vs. Renuka Prakash Tiwari, 2020 SCC OnLine Bom 697, reiterated that in case of an illegitimate child it is only the mother who can be the natural guardian under Hindu Law. The only exception is if the mother has renounced the world by becoming a hermit or has ceased to be a Hindu. The Court held that since it was the father’s own case that the child was an illegitimate child, it was difficult to see how he could claim the custody of the child over the biological mother. The Supreme Court has taken a similar view in the case of the guardianship of an illegitimate Christian child in the case of ABC vs. State of Delhi (NCT) (2015) 10 SCC 1.

CONCLUSION

The issue relating to various rights of illegitimate children has been quite contentious and litigation prone. One eagerly awaits the constitution of the larger Supreme Court Bench. Clearly, it is high time for a comprehensive legislation dealing with all issues pertaining to such children. In the words of the Apex Court, ‘they are as innocent as any other children!’

shailesh.kwebmaker

FAMILY SETTLEMENTS: OPENING UP NEW VISTAS

INTRODUCTION

As families grow, new generations join the business, new lines of thinking emerge and disputes originate between family members regarding assets, properties, businesses, etc. Finally, these lead to a family settlement. Such a family arrangement is one of the oldest alternative dispute resolution mechanisms. The scope of a family arrangement is extremely wide and is recognised even in ancient English Law. This is because the world over, courts lean in favour of peace and amity within the family rather than on disputes. In the last 60 years or so, a good part of the law in India relating to family settlements is well settled through numerous court decisions. In recent years, both the Supreme Court and the High Courts have delivered some important judgments on this very vital issue. The key tenets from these decisions have been culled out and analysed in this month’s feature.

PRINCIPLES SETTLED SO FAR

From an analysis of the earlier judgments, such as Maturi Pullaiah vs. Maturi Narasimham, AIR 1966 SC 1836; Sahu Madho Das vs. Mukand Ram, AIR 1955 SC 481; Kale vs. Dy. Director of Consolidation, (1976) AIR SC 807; Hiran Bibi vs. Sohan Bibi, AIR 1914 PC 44; Hari Shankar Singhania vs. Gaur Hari Singhania, (2006) 4 SCC 658, etc., the settled principles that have emerged are summarised below:

(a) A family arrangement is an agreement between members of the same family intended to be generally and reasonably for the benefit of the family either by compromising doubtful or disputed rights, or by preserving the family property, or the peace and security of the family by avoiding litigation and saving its honour.

(b) An oral family settlement involving immovable property needs no registration. Registration (where immovable property is involved) is necessary only if the terms of the family arrangement are reduced to writing. Here, a distinction should be made between a document containing the terms and recitals of a family arrangement made under the document and a mere memorandum prepared after the family arrangement has already been made either for the purpose of the record, or for information of the court for making necessary mutation. In such a case the memorandum itself does not create or extinguish any rights in immovable properties and it is, therefore, not compulsory to register it.

(c) A compromise or family arrangement is based on the assumption that there is an antecedent title of some sort in the parties and the agreement acknowledges and defines what that title is, each party relinquishing all claims to property other than that falling to his share and recognising the right of the others, as they had previously asserted it, to the portions allotted to them respectively. That explains why no conveyance is required in these cases to pass the title from one in whom it resides to the person receiving it under the family arrangement. It is assumed that the title claimed by the person receiving the property under the arrangement had always resided in him or her so far as the property falling to his or her share is concerned and therefore no conveyance is necessary.

(d) By virtue of a family settlement or arrangement, the members of a family descending from a common ancestor or a near relation seek to sink their differences and disputes, settle and resolve their conflicting claims or disputed titles once and for all in order to buy peace of mind and bring about complete harmony and goodwill in the family.

(e) A family settlement is different from an HUF partition. While an HUF partition must involve a joint Hindu family which has been partitioned in accordance with the Hindu Law, a family arrangement is a dispute resolution mechanism involving personal property of the members of a family who are parties to the arrangement. A partition does not require the existence of disputes which is the substratum for a valid family arrangement. An HUF partition must always be a full partition unlike in a family settlement.

DOCUMENT WHICH BRINGS ABOUT A FAMILY SETTLEMENT MUST BE REGISTERED AND STAMPED

The decision in the case of Sita Ram Bhama vs. Ramvatar Bhama, (2018) 15 SCC 130 is different from the scores of decisions which have held that family settlements do not require registration. However, this difference is on account of the facts of this case. Here, a father agreed to divide his self-acquired properties between his two sons. He died without doing so and also did not make a Will. Consequently, the two brothers, their two sisters and mother all became entitled to the properties under the Hindu Succession Act. The brothers executed a document titled ‘Memorandum of Family Settlement’ dividing the properties between the two of them as per their late father’s wishes. This document was also signed by their sisters and mother. The question was whether the instrument was to be registered or whether stamp duty was to be paid on the same? Distinguishing (on facts), the catena of decisions on the issue, the Supreme Court held that the document was to be registered and duly stamped. This was because it was not a memorandum of family settlement. The properties in question were the self-acquired properties of the father in which all his legal heirs had a right. The instrument took away the rights of the sisters and the mothers. It was a relinquishment of rights by them in favour of the brothers. It did not merely record the pre-existing rights of the brothers. Hence, it was held that the properties could not be transferred on the basis of such an instrument.

When on this subject, one must also consider the three-judge bench decision in the case of Vineeta Sharma vs. Rakesh Sharma, CA 32601/2018, order dated 11th August, 2020. Though not directly on the issue, it is equally relevant. It held that a daughter would not have a coparcenary right in her father’s HUF which was partitioned before 20th December, 2004. For this purpose, the partition should be by way of a registered partition deed / a partition brought about by a Court Decree. The Supreme Court held that the requirement of a registered deed was mandatory. The intent of the provisions was not to jeopardise the interest of the daughter but to take care of sham or frivolous transactions set up in defence unjustly to deprive the daughter of her right as coparcener. In view of the clear provisions of section 6(5), the intent of the Legislature was clear and a plea of oral partition was not to be readily accepted. However, in exceptional cases where the plea of oral partition was supported by public documents and partition was finally evinced in the same manner as if it had been effected by a decree of a Court, it may be accepted. A plea of partition based on oral evidence alone could not be accepted and had to be rejected outright.

Another relevant decision is that of the Delhi High Court in the case of Tripta Kaushik vs. Sub-Registrar, Delhi, WP(C) 9139/2019, order dated 20th May, 2020. In that case, a Hindu male died intestate and his wife and son inherited his property. The son renounced his share in favour of his mother by executing an instrument. The issue was one of stamp duty on such instrument. It was contended that the son had inherited half share in the property on the death of his father under the Will left by his father and, therefore, the Relinquishment Deed be considered as a family settlement not chargeable to Stamp Duty. It was held that the Relinquishment Deed did not make any reference to the Will of the late father of the petitioner, or to any purported family settlement. Accordingly, it was held that the instrument was a Release Deed liable to stamp duty and registration.

MEMORANDUM OF FAMILY SETTLEMENT NEEDS NO REGISTRATION

As opposed to the above case, the decision of the Supreme Court in Ravinder Kaur Grewal vs. Manjit Kaur, CA 7764/2014, order dated 31st July, 2020 is diametrically opposite. In this case, a family settlement was executed in relation to a dispute between three brothers and their families. There was a specific recital in the memorandum that the appellant was accepted as the owner in possession of the suit property. He had constructed 16 shops and service stations on the same. In other words, it proved that he was being considered as the owner in possession of the suit property. Prior to execution of the memorandum on that day the family compromised not to raise any dispute regarding his ownership. Accordingly, the Court held that the document in question was a writing with regard to a fact which was already being considered and admitted by the parties. Hence, it could not be said that the document itself created rights in immovable property for the first time. Further, the parties to the document were closely related and hence the instrument did not require any registration. It was only a memorandum of family settlement and not a document containing the terms and recitals of a family settlement. Accordingly, the Court concluded that the document was valid and all parties were bound to act in accordance with the same. This decision reiterates the principle laid down by the Supreme Court in Kale’s case (Supra). Further, the case held that once the memorandum is acted upon, the same is binding upon the parties even though it is unregistered.

VALIDITY OF UNSTAMPED, UNREGISTERED DOCUMENT FOR OTHER PURPOSES

In the above case of Sita Ram (Supra), the Supreme Court also examined whether such an instrument which was required to be registered and stamped could be used for any collateral purpose. It held that it was not possible to admit such an instrument even for any collateral purpose till such time as the defect in the instrument was cured. It relied on Yellapu Uma Maheswari and another vs. Buddha Jagadheeswararao and others, (2015) 16 SCC 787 for this purpose. The documents could be looked into for collateral purpose provided the parties paid the stamp duty together with penalty and got the document impounded.

However, the Supreme Court in the recent case of Thulasidhara vs. Narayanappa, (2019) 6 SCC 409 and also in the earlier case of Subraya M.N. vs. Vittala M.N. and Others, (2016) 8 SCC 705 has held that even without registration, a written document of family settlement / family arrangement can be used as corroborative evidence as explaining the arrangement made thereunder and the conduct of the parties.

PARTIES WITH WHOM A HINDU WOMAN CAN ENTER INTO A FAMILY SETTLEMENT

The decision in Khushi Ram vs. Nawal Singh, CA 5167/2010, order dated 22nd February, 2021 is a landmark decision. It has examined the scope of the term family when it comes to a Hindu woman. The issue here was whether a married woman could execute a valid family settlement with the heirs from her father’s side. The woman had executed a memorandum of family settlement with the sons of her late brother, i.e., her nephews. The Court referred to an old three-judge bench decision in Ram Charan Das vs. Girjanandini Devi, 1965 (3) SCR 841 which had analysed the concept of family with regard to which a family settlement could be entered. It was held that every party taking benefit under a family settlement must be related to one another in some way and have a possible claim to the property, or a claim, or even a semblance of a claim. In Kale’s case (Supra) it was held that ‘family’ has to be understood in a wider sense so as to include within its fold not only close relations or legal heirs, but even those persons who may have some sort of antecedent title. In the Kale case, a settlement between a person and the two sisters of his mother was upheld.

The Court looked at the heirs who could succeed to Hindu women. It held that the heirs of the father are covered in the heirs who could succeed. When the heirs of the father of a woman were included as persons who can possibly succeed, it could not be held that they were strangers and not members of the family qua the woman. Hence, the settlement between the aunt and her nephews was upheld.

This decision, along with the vital three-judge bench decision in the case of Vineeta Sharma vs. Rakesh Sharma, CA 32601/2018, order dated 11th August, 2020, has upheld the rights of Hindu daughters in their father’s family. While this case reiterates her right to enter into settlements with the heirs from her father’s side, the latter decision has explicitly laid down that a Hindu daughter, whenever born, has a right as a coparcener in her father’s HUF.

As an aside, a settlement from an aunt in favour of her nephews is covered by the exemption for relatives u/s 56(2)(x) of the Income-tax Act but a reverse case is not covered since a nephew is not a relative for an aunt. In such a case, reliance would have to be placed on the family settlement itself to show that the receipt of property is not without adequate consideration.

BENAMI LAW AND FAMILY ARRANGEMENTS

In the case of Narendra Prasad Singh vs. Ram Ashish Singh, SA No. 229/2002, order dated 4th July, 2018, the Patna High Court was faced with the question whether a property purchased in the name of one family member out of joint family funds would be hit by the provisions of the Benami Transaction (Prohibition) Act, 1988. The Court held that this proposition could not at all be accepted since acquisition of the land in the name of a member of a family from the joint family property was not regarded as a benami transaction within the meaning of section 2 of that Act. A benami transaction had been defined u/s 2(a) of the Act as any transaction in which property is transferred to one person and a consideration is paid or provided by another person. In the present case, the consideration had been found to have been provided by the joint family fund which could not be treated as the fund of another person. In any event, the owner claimed his title purely on the basis of a family arrangement and not as a benamidar and, therefore, the case was not said to be hit by the Act.

In this respect it should be noted that the Act requires that the property should be purchased out of ‘known sources of funds’. Earlier, the Bill contained the words ‘known sources of income’ which were replaced with the present wordings. The Finance Minister explained the reason for this change as follows:

‘…. The earlier phrase was that you have purchased this property so you must show money out of your known sources of income. So, the income had to be personal. Members of the Standing Committee felt that the family can contribute to it, ……which is not your income. Therefore, the word “income” has been deleted and now the word is only “known sources”. So, if a brother or sister or a son contributed to this, this itself would not make it benami, because we know that is how the structure of the family itself is….’

CAN MUSLIMS ENTER INTO A FAMILY SETTLEMENT?

This issue was dealt with by the Karnataka High Court in Smt. Chamanbi and Others vs. Batulabi and Others, RSA No. 100004/2015, order dated 15th March, 2018. An oral family settlement was executed between a Muslim family and pursuant to the same a Memorandum of Family Settlement was executed for mutation of rights in the land records. The plea was that the document was unenforceable since Muslims could not execute a family settlement. The Court held that it was true that there was no joint family under Mohammedan Law but family arrangement was not prohibited. The Court referred to the Supreme Court’s decision in Shehammal vs. Hasan Khani Rawther, (2011) 9 SCC 223 which had held that a family arrangement would necessarily mean a decision arrived at jointly by the members of a family. Accordingly, the memorandum was upheld.

CONCLUSION

From the above discussion it would be obvious that our present laws relating to family settlement, be it stamp duty, registration, income-tax, etc., are woefully inadequate. Rather than making possible a family settlement, they do all they can to hamper it! India is a land of joint families and family-owned assets and yet we have to run to the courts every time a family settlement is to be acted upon. Consider the precious time and money lost in litigations on this count. It is high time amendments are made to various laws to facilitate family settlements.

shailesh.kwebmaker

LIABILITY OF NON-EXECUTIVE DIRECTORS FOR BOUNCED CHEQUES

INTRODUCTION
Section 138 of the Negotiable Instruments Act, 1881 (‘the Act’) is one of the few provisions which is equally well known both by lawmen and laymen. The section imposes a criminal liability in case of a dishonoured or bounced cheque. In cases where the defendant is a company, there is a tendency on the part of the plaintiff to implicate all the Directors of the company, irrespective of whether they are professional Directors / Independent / Non-Executive Directors. There have been numerous representations from chambers of commerce and professional / trade bodies to the Government that this section should be amended to exempt Independent and Non-Executive Directors who are not connected with the day-to-day management of the company. However, there has been no action on this front. Interestingly, the Act was amended in 2002 to provide that the provisions of section 138 would not apply to a Nominee Director appointed by the Central / State Government or by a financial corporation owned / controlled by the Central / State Government. One wonders why a similar exemption was not provided to other professional Directors.

SECTION 138 OF THE ACT
Let us pause for a moment and examine the impugned section. Section 138 provides that if any cheque is drawn by a person to another person and if the cheque is dishonoured because of insufficient funds in the drawer’s bank account, then such person shall be deemed to have committed an offence. The penalty for this offence is imprisonment for a term which may extend to two years and / or with a fine which may extend to twice the amount of the cheque. Earlier, the maximum imprisonment was for one year; however, it was extended to two years by the Amendment Act of 2002.

In order to invoke the provisions of section 138, the following three steps are necessary:
(i) the cheque must be presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;
(ii) once the payee is informed by the bank about the dishonour of the cheque, he (the payee) must, within 30 days of such information, make a demand for the payment of the amount of the cheque by giving a notice in writing to the drawer of the cheque; and
(iii) the drawer of such cheque fails to make the payment of the said amount of money to the payee of the cheque within 30 days of the receipt of the said notice. Earlier, the time given to the drawer for responding to the notice was 15 days; but this was extended to 30 days by the Amendment Act of 2002.

A fourth step is specified under section 142 which provides that a complaint must be made to the Court within one month of the date from which the cause of action arises (i.e., the notice period). A rebuttable presumption is drawn by the Act that the holder of the cheque received it for the discharge, in whole or in part, of any debt or other liability.

VICARIOUS LIABILITY OF PERSONS IN CHARGE
Section 141 provides that in case the drawer of the cheque is a company then every person who at the time the offence was committed was in charge of and was responsible for the company’s conduct of business, shall be deemed to be guilty of the offence and liable to be proceeded against and punished. However, if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence, then he would not be liable to the punishment. The section also exempts Government Nominee Directors. Although the section speaks about a company, the explanation to the section extends the same position to a firm, any other body corporate or association of individuals.

In almost all cases of cheque-bouncing involving companies, firms, etc., the complainant files a case and implicates all the Directors of the company, including the Independent and Non-Executive Directors. Thus, professionals such as Chartered Accountants, lawyers, etc., who are only involved in broader policy and strategic decisions of the company, or with the Audit Committee or Shareholders’ Grievance Committee and are in no way connected with the day-to-day management of the company, are also made a party to the criminal proceedings.

SUPREME COURT JUDGMENTS
The Supreme Court has passed a landmark decision in the case of S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla (2005) 8 SCC 89. This decision is by a three-Member Larger Bench in response to a reference application made to it by a two-Member Bench of the Supreme Court. Three very important issues were placed before the Court for its consideration:
(a) Whether while making a complaint under the Negotiable Instruments Act must the complaint specifically state that the persons accused were in charge of, or responsible for, the conduct of the business of the company?
(b) Whether merely because a person is a Director of a company would he be deemed to be in charge of and responsible to the company for the conduct of its business and, therefore, deemed to be guilty of the offence unless he proves to the contrary?
(c) Would the signatory of the cheque and / or the Managing Directors / Joint Managing Director always be responsible to the company for the conduct of its business and hence could be proceeded against?

The Court held that since the provision fastens criminal liability, the conditions have to be strictly complied with. The conditions are intended to ensure that a person who is sought to be made vicariously liable for an offence of which the principal accused is the company, had a role to play in relation to the incriminating act and further that such a person should know what is attributed to him to make him liable. Persons who had nothing to do with the matter need not be roped in. A complaint must contain material to enable the Magistrate to make up his mind for issuing the process. A ground should be made out in the complaint for proceeding against the respondent. At the time of issuing of the process the Magistrate is required to see only the allegations in the complaint, and where the allegations in the complaint or the chargesheet do not constitute an offence against a person, the complaint is liable to be dismissed.

The Supreme Court observed that there is nothing in the Act to suggest that simply by being a Director in a company, one is supposed to discharge particular functions on its behalf. It may happen that a Director may not know anything about the day-to-day functioning of the company. He may only attend Board meetings, decide policy matters and guide the course of business of a company. The role of a Director in a company is a question of fact depending on the peculiar facts in each case. There is no universal rule that a Director of a company is in charge of its everyday affairs.

A very fitting comment made by the Court was that ‘…there is no magic as such in a particular word, be it Director, Manager or Secretary.’ What is relevant is the roles assigned to the officers in a company and not the mere use of a particular designation of an officer. Thus, merely mentioning all Directors in a compliant without anything more may not be enough. The accused should be in charge of and responsible to the company for the conduct of its business and a person cannot be subjected to liability of criminal prosecution without it being averred in the complaint that he satisfies those requirements. It is not that all and sundry connected with a company are made liable u/s 141. A person who is in charge of and responsible for the conduct of the business of a company would naturally know why the cheque in question was issued and why it was dishonoured. Specific allegations in the complaint would also serve the purpose that the person sought to be made liable would know what is the case that is alleged against him. This will enable him to meet the case at the trial.

When it came to the position of a Managing Director or a Joint Managing Director, the Court took a different view since these are persons in charge of a company and are responsible for the conduct of its business. In respect of such persons, the onus is on them to prove their innocence, i.e., when the offence was committed they had no knowledge of the offence or that they exercised all due diligence to prevent the commission of the offence.

The Supreme Court laid down another important principle, that the liability arises from being in charge of and responsible for the conduct of the business of the company at the relevant time when the offence was committed and not on the basis of merely holding a designation or office in a company. Conversely, a person not holding any office or designation in a company may also be liable if he satisfies the main requirement of being in charge of and responsible for the conduct of the business of a company at the relevant time. It once again reiterates that liability depends on the role he plays in the affairs of a company and not on the designation or status. If being a Director or Manager or Secretary was enough to cast criminal liability, the section would have said so. Instead of ‘every person’ the section would have said ‘every Director, Manager or Secretary in a Company is liable’ …etc. The Court held that the Legislature was aware that a case of criminal liability has serious consequences for the accused. Therefore, only persons who can be said to be connected with the commission of a crime at the relevant time have been subjected to action. Thus, even a non-Director can be liable u/s 141.

Ultimately, the Supreme Court answered the queries posed to it as under:

(a) It is necessary to specifically aver in a complaint u/s 141 that at the time the offence was committed, the person accused was in charge of and responsible for the conduct of the business of the company. This averment is an essential requirement of section 141 and has to be made in the complaint. Without this averment being made in a complaint, the requirements of section 141 cannot be said to be satisfied.
(b) Merely being a Director of a company is not sufficient to make the person liable u/s 141. A Director in a company cannot be deemed to be in charge of and responsible to the company for the conduct of its business. The requirement of section 141 is that the person sought to be made liable should be in charge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a Director in such cases.
(c) The Managing Director or Joint Managing Director would be in charge of the company and responsible to the company for the conduct of its business. Holders of such positions in a company become liable u/s 141. Merely by virtue of being a Managing Director or Joint Managing Director these persons are in charge of and responsible for the conduct of the business of the company. Therefore, they get covered u/s 141. So far as the signatory of a cheque which is dishonoured is concerned, he is clearly responsible for the dishonour and will be covered u/s 141.

This very vital decision has been followed by the Supreme Court in cases such as S.K. Alagh vs. State of Uttar Pradesh, 2008 (5) SCC 662; Maharashtra State Electricity Distribution Co. Ltd. vs. Datar Switchgear Ltd., 2010 (10) SCC 479; GHCL Employees Stock Option Trust vs. India Infoline Limited, 2013 (4) SCC 505, etc.

RECENT SUPREME COURT DECISION
This issue was again examined recently by the Supreme Court in the case of Ashutosh Ashok Parasrampuriya vs. M/s Gharrkul Industries Pvt. Ltd., Cr. A, No. 1206/2021, order dated 27th September, 2021. In this case, the respondent filed a complaint u/s 138 with specific averments in the complaint that all the Directors (including those who were not signatories to the bounced cheque) were involved in the day-to-day management / business affairs of the company whose cheque had bounced.

Accordingly, the trial court issued summonses against all the Directors. The Directors contended that they were only Non-Executive Directors and, hence, no complaint could lie against them. Against this argument, the respondent proved that the Form filed with the Ministry of Corporate Affairs showed the Directors as Executive Directors. Hence, the matter was a fit case for a trial which needed to be decided by the Court and the entire process needed to be gone through without quashing the summons at source.

The Court held that the settled principle was that for Directors who were not signatories / not MDs, it was clear that it was necessary to aver in the complaint filed u/s 138 that at the relevant time when the offence was committed the Directors were in charge and were actually responsible for the conduct of the business of the company.

The Court further held that this averment assumed more importance because it was the basic and essential averment which persuaded the Magistrate to issue a process against the Director. If this basic averment was missing, the Magistrate was legally justified in not issuing a process. In the case on hand, the Court observed that the complainant had specifically averred that all the Directors were in charge. Further, the MCA Forms also demonstrated the same. Hence, this was an issue on which a trial is appropriate and the complaint cannot be quashed at source.

EPILOGUE
Although this is a judgment under the Negotiable Instruments Act, it has several far-reaching consequences and its ratio descendi can be applied under various other statutes which affix a vicarious criminal liability on Directors in respect of offences committed by a company.

One can only hope that taking a cue from this epoch-making Supreme Court judgment, the Government would amend the Negotiable Instruments Act to exempt Independent and Non-Executive Directors. In fact, such an amendment is also welcome in other similar statutes prescribing a criminal liability on the Directors.

shailesh.kwebmaker

PARTNERSHIP FIRM – STAMP DUTY ISSUES

INTRODUCTION

Partnerships are probably one of the oldest forms of doing business. Even today, a majority of the businesses in India are organised as ‘partnerships’. And stamp duty is an important source of revenue for the Maharashtra Government. This article deals with some issues relating to stamp duty which are peculiar to partnerships.

CHARGE OF STAMP DUTY

The Maharashtra Stamp Act, 1958 (‘the Act’), which is applicable to the State of Maharashtra, levies stamp duty u/s 3 of the Act which reads as follows:

‘3. Instrument chargeable with duty
Subject to the provisions of this Act and the exemptions contained in Schedule I, the following instruments shall be chargeable with duty of the amount indicated in Schedule I as the proper duty therefor respectively, that is to say –
(a) every instrument mentioned in Schedule I, which is executed in the State … …
(b) every instrument mentioned in Schedule I, which is executed out of the State, relates to any property situate, or to any matter or thing done or to be done in this State and is received in this State:’

From an analysis of section 3, the following points emerge:
(a) The stamp duty is leviable on an instrument and not on a transaction;
(b) The stamp duty is leviable only on those instruments which are mentioned in Schedule I to the Act;
(c) The stamp duty is leviable on the instrument if it is executed in the State of Maharashtra or on the instrument which, though executed outside the State of Maharashtra, relates to any property situate, or to any matter or thing done or to be done in the State and is received in the State. Hence, for example, even if the instrument of partnership is executed outside the State of Maharashtra but if the partnership is located in Maharashtra, and the instrument of partnership is received in Maharashtra, then it would be subject to stamp duty under the Act.
(d) The charge of stamp duty is subject to the provisions of this Act and the exemptions contained in Schedule I.

INSTRUMENT
The term ‘instrument’ is defined in section 2(1) of the Act to include every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded. However, it does not include a bill of exchange, cheque, promissory note, bill of lading, letter of credit, policy of insurance, transfer of share, debenture, proxy and receipt. Stamp duty is leviable only on a written document which falls within the definition of instrument. If there is no instrument, then there is no duty.

Schedule I
Since stamp duty is levied only on the instruments specified in Schedule I, let us look at Schedule I. Only Article 47 of Schedule I specifically provides for levy of stamp duty on a partnership.

Stamp duty on formation of partnership
Stamp duty on formation of partnership is levied under Article 47(1). According to this Article, the stamp duty on the instrument of partnership or the deed of partnership depends upon the capital contribution made by the partners as explained below:
(a) If the capital contribution is made only by way of cash, then the minimum amount of stamp duty is Rs. 500. Where the contribution brought in in cash is in excess of Rs. 50,000, the stamp duty is Rs. 500 for every Rs. 50,000 or part thereof. However, the maximum amount of stamp duty payable is Rs. 5,000. In other words, if the capital ranges from Rs. 50,000 to Rs. 5,00,000, the stamp duty would range from Rs. 500 to Rs. 5,000. If the capital contributed in cash is in excess of Rs. 5,00,000, then the stamp duty payable would be the maximum amount of Rs. 5,000.
(b) Where capital contributed by the partners is by way of property other than cash, then the stamp duty payable is that leviable on a conveyance under Article 25.

Article 25 on Conveyance
Since Article 25 is made applicable to an instrument of partnership, the relevant provisions of Article 25 are summarised below:
* It levies a stamp duty on movable property @ 3% of the value of the property;
* It levies a stamp duty on immovable property. The stamp duty depends upon the location of the property, that is, whether it is in a rural area or in an urban area and also upon the class of municipality. The stamp duty for the city of Mumbai is 5%. Further, this duty is based on the stamp duty ready reckoner value of the property.

ADMISSION OF PARTNER OR ADDITIONAL CAPITAL BY PARTNERS
Since admission of a partner requires a fresh instrument of partnership, the question of payment of stamp duty under Article 47 would arise. However, it would be restricted only to the share of contribution brought in by the incoming partner or additional contribution brought in by the existing partners. If the incoming partner does not bring in any capital, stamp duty payable would be the minimum sum of Rs. 500.

If in an existing partnership additional capital is brought in by one or more partners, would it attract stamp duty under Article 47(1)? It is submitted that if a fresh partnership deed is not executed, then stamp duty is not payable, otherwise it would be payable only on the additional capital. The following decisions under the Income-tax Act have held that a registered document is not required when a partner introduces his immovable property into a partnership firm as his capital contribution but a registered document is required when a partner wants to withdraw an immovable property from the firm:

(a)   Abdul Kareemia & Bros. vs. CIT [1984] 145 ITR 442
   (AP)
(b)   CIT vs. S.R. Uppal [1989] 180 ITR 285 (Punj & Har)
(c)   Ram Narain & Bros. vs. CIT [1969] 73 ITR 423 (All)
(d)   Janson vs. CIT [1985] 154 ITR 432 (Kar)
(e)   CIT vs. Palaniappa Enterprises [1984] 150 ITR 237
   (Mad)

RETIREMENT OF A PARTNER OR DISSOLUTION OF PARTNERSHIP
Earlier, there was no express provision for levy of stamp duty in the case of retirement of a partner. Now, it is expressly provided for and the stamp duty payable is the same as in the case of dissolution as discussed below.

Where on dissolution of a partnership (or on retirement of a partner), any property is taken as his share by a partner other than a partner who brought in that property as his share of contribution in the partnership, stamp duty is payable as on a conveyance under Article 25, clauses (a) to (d), on the market value of the property so taken by a partner. In any other case, stamp duty of only Rs. 500 is payable.

The implications of these provisions are as follows:
(a) If a partner has introduced certain property in a partnership and on dissolution of the partnership or on his retirement from that partnership he takes that property, then the stamp duty of only Rs. 500 would be payable.
(b) If a partner has introduced certain property in partnership and on dissolution of the partnership or on retirement of another partner from that partnership that partner takes the property, then the stamp duty as is leviable on a conveyance under Article 25 would be payable. Hence, if the property is an immovable property, then the stamp duty would be 5% as explained above. If the property is a movable property, then stamp duty would be payable at the rate of 3%.
(c) If the property acquired by the firm itself has been given to a partner on retirement or dissolution, then stamp duty of only Rs. 500 is payable.

An issue arises in the case of simultaneous admission-cum-retirement of partners done by the same deed: would the stamp duty be payable on the amount brought in by the incoming partner (gross amount) or this amount should be net of the withdrawals? Section 5 of the Act states that if an instrument relates to several distinct matters, it shall be chargeable with the aggregate amount of duties with which separate instruments each relating to separate matters would have been chargeable under the Act. Hence, the stamp duty on the instrument of partnership should be payable with reference to the gross amount brought in by the incoming partner and should not be with reference to the net amount. In addition, the stamp duty would be payable also as on a deed of retirement, under Article 47(2).

ARRANGEMENTS RESEMBLING
A PARTNERSHIP
In several cases, the owner and the builder enter into a profit-sharing arrangement, which is quite similar to that under a partnership. An issue in such a case would be whether the arrangement is one of a Development Rights Agreement or a partnership. The stamp duty consequences on the owner and the developer would vary depending on the nature of the arrangement.

Section 4 of the Partnership Act defines a partnership as ‘the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all’. Thus, a partnership must contain three elements:
(a) there must be an agreement entered into by all the persons concerned;
(b) the agreement must be to share the profits of a business; and
(c) the business must be carried on by all or any of the persons concerned acting for all.

ELEMENT OF PROFIT-SHARING
Sharing of profits is an essential element of a partnership. The instrument must demonstrate that what is happening in effect is that it is the net profits that are being shared and not the gross returns. Various English decisions such as Lyons vs. Knowles, 1863 3 B&S, 556 have held that a mere agreement to share gross returns of any property would be very little evidence of a partnership between them and there is much less possibility of there being a partnership between them. In certain English cases such as Cox vs. Coulson (1916) 2 KB 177 (lessee of a theatre and manager of a theatrical company), French vs. Styring [1857] Eng R 509 (joint owners of a race horse – expenses jointly borne), it was held that the mere circumstance of their sharing gross returns would be very little evidence of the existence of a partnership.

In Sutton & Co. vs. Gray (1894) 1 QB 285, S, a share broker, entered into an agreement with G, a sub-broker, that G should introduce his clients to S, receive half the brokerage in respect of the transactions of such clients put through on the Exchange by S and should bear the losses in respect thereof; it was held that this did not create a partnership between S and G as no partnership was intended and that the agreement was merely to divide gross returns and not the profits of a common business.

Further, section 6 of the Partnership Act is also relevant. It provides that the sharing of profits or of gross returns arising from property by persons holding a joint or common interest in the property does not of itself make such persons partners.

The relevant extracts are given below :

‘6. Mode of determining existence of partnership – In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together.
Explanation I – The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners.
Explanation II – the receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not of itself make him a partner with the persons carrying on the business; and, in particular, the receipt of such share or payment
(a) by lender or money to person engaged or about to engage in any business,
(b) by a servant or agent as remuneration,
(c) by the widow or child of a deceased partner, as annuity, or
(d) by a previous owner or part-owner of the business, as consideration for the sale of the goodwill or share thereof,
does not of itself make the receiver a partner with the persons carrying on the business.’

A relevant case in this respect is the decision of the Madras High Court in the case of Vijaya Traders, 218 ITR 83 (Mad). In this case, a construction partnership was entered into between two persons, wherein one partner S contributed land while the other was solely responsible for construction and finance. S was immune to all losses and was given a guaranteed return as her share of profits. The other partner who was the managing partner was to bear all losses. The Court held that the relationship is similar to the Explanation 1 to section 6 and there were good reasons to think that the property assigned to the firm was accepted on the terms of the guaranteed return out of the profits of the firm and she was immune to all losses. The relationship between them was close to that of lessee and lessor and almost constituted a relationship of licensee and licensor and was not a valid partnership.

MUTUAL AGENCY CONCEPT
Mutual agency is also a key condition of a partnership. Each partner is an agent of the firm and of the other partners. The business must be carried on by all or any partner on behalf of all.

What would constitute a mutual agency is a question of fact. For instance, in the case of K.D. Kamath & Co., 82 ITR 680 (SC), the Court held that control and management of the business of the firm can be left by agreement between the parties in the hands of one partner to be exercised on behalf of all the partners.

Consequently, in the case of M.P. Davis, 35 ITR 803 (SC), it was held that the provisions of the deed taken along with the conduct of the parties clearly indicated that it was not the intention of the parties to bring about the relationship of partners but they only intended to continue under the cloak of a partnership the pre-existing and real relationship of master and servant. The sharing of profits or the provision for payment of remuneration contingent upon the making of profits or varying with the profits did not itself create a partnership.

The Bombay High Court in the case of Sanjay Kanubhai Patel, 2004 (6) Bom C.R. 94 had an occasion to directly deal with this issue. The Court after reviewing the Development Rights Agreement held that it is settled law that in order to constitute a valid partnership, three ingredients are essential. There must be a valid agreement between the parties, it must be to share profits of the business and the business must be carried on by all or any of them acting for all. The third ingredient relates to the existence of mutual agency between the parties concerned inter se. The Court held that merely because an agreement provided for profit-sharing it would not constitute a partnership in the absence of mutual agency.

LLP
To incorporate a Limited Liability Partnership, the partners need to execute an LLP agreement. This agreement would lay down the respective capital contributions, whether they would be in the form of cash or property, etc. This Act has now been amended for an express provision of levying stamp duty on an LLP agreement. Article 47 of Schedule I to the Act now even applies to an instrument of an LLP.

AOP Deed
If, instead of a partnership, an association of persons is selected as an entity for the development business, then the above discussion would apply to the same. The law now contains an express provision that stamp duty on joint venture agreements would be also governed by Article 47.

Conversion of firm into company
The conversion of a firm into a company under Chapter XXI of the Companies Act, 2013 / Part IX of the Companies Act, 1956 should not attract any incidence of stamp duty, as there is a statutory vesting of the assets of the firm in the company and there is no transfer. This view is supported by the decision in the cases of Vali Pattabhirama Rao 60 Comp Cases 568 (AP) and Rama Sundari Ray vs. Syamendra Lal Ray, ILR (1947) 2 Cal 1 which state that under Part IX of the Companies Act there is a statutory vesting of the assets of the firm in the company and there is no transfer. Therefore, there is no conveyance and hence there should not be any incidence of stamp duty.

CONCLUSION
From the above discussions it would be clear that a proper structuring of the transaction and a proper drafting of the relevant documents is essential to achieve the desired results.

shailesh.kwebmaker

GAMING NOT GAMBLING

INTRODUCTION

While the difference in the spelling of gaming and gambling is only of two letters, there is a world of difference between the two in reality. India’s online gaming market is growing by leaps and bounds and there is keen interest in setting up gaming ventures and investing in / acquiring Indian gaming companies. In India, gaming is a permissible activity, but gambling is either prohibited or heavily regulated. Some recent court decisions have helped clear the regulatory shroud covering gaming activities.

LEGAL ECOSYSTEM

Let us first understand the various laws which deal with this subject:
(a) Under the Constitution of India, the Union Government is empowered to make laws regulating the conduct of lotteries.
(b) Under the Constitution, the State Governments have been given the responsibility of authorising / conducting lotteries and making laws on betting and gambling.
(c) Hence, we must look at the Acts of each of the 28 States and seven Union Territories regarding gambling / gaming.
(d) The following are the various laws which regulate / restrict / prohibit gambling in India:

• Public Gambling Act, 1867: This Central Legislation provides for the punishment of public gambling in certain parts of India. It is not applicable in Maharashtra and other States which have repealed its application.
• Maharashtra Prevention of Gambling Act, 1887: It applies in Maharashtra and regulates gaming in the State.
• Other State legislations: Acts of other States, such as the Delhi Public Gambling Act, 1955, the Madras Gambling Act, etc., are more or less similar to the Public Gaming Act, 1867 as the object of these Acts is to ban / restrict gambling. The State Acts repeal the applicability of the Public Gambling Act in their respective States.

* Section 294-A of the Indian Penal Code, 1860: This section provides for punishment for keeping a lottery office without the authorisation of the State Government. Section 30 of the Indian Contract Act, 1872: This Section prevents any person from bringing a suit for recovery of any winnings won by way of a ‘wager.’
* The Lotteries (Regulation) Act, 1998: This Central Legislation lays down guidelines and restrictions on conducting lotteries.

* The Prevention of Money Laundering Act, 2002: It requires maintenance of certain records by entities engaged in gambling.

Some States which expressly permit gambling are

* Sikkim: The Sikkim Casino Games (Control and Tax Rules), 2002 permits setting up of casinos in Sikkim.

* The Sikkim Online Gaming (Regulation) Act, 2008, along with the Sikkim Online Gaming (Regulation) Rules, 2009 provides for licences to set up online gaming websites (for gambling and also betting on games like cricket, football, tennis, etc.) with the servers based in Sikkim. Other than this law, India does not have any specific laws targeting online gambling or gaming.

* Goa: An amendment to the Goa, Daman and Diu Public Gambling Act, 1976 provides for casinos to be set up only at five star hotels or offshore vessels with permission. This is the reason Goa has floating casinos or casinos in five star hotels.

* West Bengal: The West Bengal Prize Competition and Gambling Act, 1957 excludes ‘skill-based’ card games like poker, bridge, rummy and nap from its operation. Thus, in West Bengal a game of poker is expressly excluded from the definition of gambling.

* Nagaland: The Nagaland Prohibition of Gambling and Promotion and Regulation of Online Games of Skill Act, 2015 regulates online games of skill in the State of Nagaland.

PUBLIC GAMBLING ACT
Since this is a Central Act on which several State Acts have been based, we may examine this Act. Section 1 of this Act has laid down three conditions all of which must be fulfilled in order that a place is treated as a common gaming house:
(a) It must be a house, walled enclosure, room or place;
(b) cards, dice, tables or other instruments of gaming are kept in such place; and
(c) these instruments are used for profit or gain of the occupier whether by way of charging for the instruments or for the place.

It is a moot point whether these definitions can even be extended to online gaming ventures.

Section 3 of the Act levies a penalty for owning or keeping or having charge of a common gaming house. The penalty is a fine not exceeding Rs. 200 or imprisonment for any term up to three months. It may be noted that the public gaming house concept can even be extended to a private residence of a person if gambling activities are carried on in such a place. Thus, casual gambling at a house party may be treated, if all the conditions are fulfilled, as gambling and the owner of the house may be prosecuted.

Exception u/s 12: Even if all the above-mentioned three conditions are fulfilled, if it is a game of mere skill, the penal provisions do not apply. What is a game of skill is a question of fact and has been the subject matter of great debate. In Chamarbaugwalla vs. UOI, AIR 1957 SC 628, it was held that competitions which involve substantial skill are not gambling activities.

In State of AP vs. K. Satyanarayana, 1968 AIR 825 (SC), the Court analysed whether a game of rummy was a game of skill and held as follows:
• Rummy is not a game of mere chance like three cards;
• It requires considerable skill as fall of cards (is) to be memorised;
• The skill lies in holding and discarding cards;
• It is mainly and preponderantly a game of skill;
• Chance is a factor but not the major factor.

The Court held that rummy is not a game of chance but a game of skill.

In Dr. K.R. Lakshmanan vs. State of TN, 1996 2 SCC 226, the Court analysed whether betting on horses is a game of chance or mere skill:
• Gambling is payment of a price for a chance to win. Gaming may be of skill alone or both skill and chance;
• In a game of skill chance cannot be entirely eliminated but it depends upon the superior knowledge, training, attention, experience and adroitness of the players;
• A game of chance is one in which chance predominates over the element of skill, and a game of skill is one in which the element of skill dominates over the chance element;
• It is the dominant element which determines the game’s character;
• In horse-racing, the person betting is supposed to have full knowledge of the horse, jockey, trainer, owner, turf, race system, etc.;
• Horses are given specialised training;
• Books are printed giving details of the above, which are studied.

Hence, betting on horse-racing is a game of skill since skill dominates over chance.

In Bimalendu De vs. UOI, AIR 2001 Cal 30, it was held that Kaun Banega Carodpati, which was aired on TV channels, was not a game of chance but a game of skill. Elements of gambling, i.e., wagering and betting, were missing from this game. Only a player’s skill was tested. He did not have to pay or put any stake in the hope of a prize.

In M.J. Sivani vs. State of Karnataka, AIR 1995 SC 1770, video games parlours were held to be common gaming houses. Video games are associated with stakes of money or money’s worth on the result of a game, be it a game of pure chance or of mixed skill or chance. For a commoner it is difficult to play a video game with skill. Hence, they are not a game of mere skill.

In this respect, the Nagaland Prohibition of Gambling and Promotion and Regulation of Online Games of Skill Act, 2015 defines games of skill to include all such games where there is preponderance of skill over chance, including where the skill relates to strategising the manner of placing wagers or placing bets or where the skill lies in team selection or selection of virtual stocks based on analyses or where the skill relates to the manner in which the moves are made, whether through deployment of physical or mental skill and acumen. It further states that games of skill may be (a) card-based, (b) action / virtual sports / adventure / mystery, and (c) calculation / strategy / quiz-based. This is one of the first examples of a statutory definition of what constitutes a game of skill. ‘Gambling’, on the other hand, has been defined by this Act to mean and include wagering or betting on games of chance (meaning all such games where there is a preponderance of chance over skill) but does not include betting or wagering on games of skill.

Thus, the facts and circumstances of each game would have to be examined as to whether it falls within the domain of mere skill and hence is a game, or is it more a game of chance and hence gambling.

MAHARASHTRA PREVENTION OF GAMBLING ACT, 1887
This Act is similar in operation to the Public Gambling Act but has some differences. It defines the term ‘gaming’ to include wagering or betting except betting or wagering on horse races and dog races in certain cases.

‘Instruments of gaming’ are defined to include any article used as a subject matter of gaming or any document used as a register or record for evidence of gaming / proceeds of gaming / winnings or prizes of gaming.

The definition of common gaming house includes places where the following activities take place:
• Betting on rainfall;
• Betting on prices of cotton, opium or other commodities;
• Betting on stock market prices;
• Betting on cards.

The imprisonment under this Act extends up to two years and the fine is also higher. Police officers have been given substantial powers to search and seize and arrest under this Act.

INDIAN PENAL CODE
Section 294A of the Indian Penal Code provides that whoever keeps any office or place for drawing any lottery not authorised by the Government is punishable with a fine of up to Rs. 1,000. What is a lottery has not been defined. Courts have held that it includes competitions in which prizes are decided by mere chance. However, if the game requires skill then it is not a lottery. A newspaper contained an advertisement of a coupon competition which included coupons to be filled by the newspaper buyers with names of horses selected by them as likely to finish 1st, 2nd or 3rd in a race. The Court held that the game was one of skill since filling up the names of the horses required specialised knowledge about the horses and some element of skill – Stoddart vs. Sagar (1895) 2 QB 474.

Further, it must verify and maintain the records of the identity of all its clients / customers.

RECENT MADRAS HIGH COURT DECISION ON ONLINE RUMMY / POKER
In the recent case of Junglee Games India vs. State of Tamil Nadu, WP No. 18022/2020, the Madras High Court had occasion to consider whether an amendment to the Tamil Nadu Gaming Act, 1930 which ended up banning online rummy / poker was unconstitutional. The amended statute prohibited all forms of games being conducted in cyberspace, irrespective of whether the game involved being a game of mere skill, whether such game was played for a wager, bet, money or other stakes. The High Court held that gambling is often equated with gaming and the activity involved chance to such a predominant extent that the element of skill that may also have been involved could not control the outcome. A game of skill, on the other hand, might not necessarily be such an activity where skill must always prevail; however, it would suffice for an activity to be regarded as a game of skill if, ordinarily, the exercise of skill could control the chance element involved in the activity such that the better skilled would prevail more often than not. It held that the wording of the amending Act was so crass and overbearing that it smacked of unreasonableness in its every clause and could be seen to be manifestly arbitrary.

Whatever may have been the pious intention of the Legislature, the reading of the impugned statute and how it might operate amounted to the baby being thrown out with the bath. It even held that broadly speaking, games and sporting activities in the physical form could not be equated with games conducted in virtual mode or in cyberspace. However, when it came to card games or board games such as chess or scrabble, there was no distinction between the skill involved in the physical form of the activity or in the virtual form. The Court held that such distinction was completely lost in the amending Act as all games were outlawed if played for a stake or for any prize.

It came out with a very interesting take on the difference – ‘Seen from the betting perspective, if the odds favouring an outcome are guided more by skill than by chance, it would be a game of skill. The chance element can never be completely eliminated for it is the chance component that makes gambling exciting and it is the possibility of the perchance result that fuels gambling.’

The Bench categorically held that there appeared to be a little doubt that both rummy and poker were games of skill as they involved considerable memory, working out of percentages, the ability to follow the cards on the table and constantly adjust to the changing possibilities of the unseen cards. The Madras High Court laid down the principle that the betting that a State can legislate on has to be the betting pertaining to gambling; ergo, betting only on games of chance. At any rate, even otherwise, the judgments in the cases of Chamarbaugwalla (Supra) and K.R. Lakshmanan (Supra) also instruct that the concept of betting in the Constitution cannot cover games of skill. It concluded that the amendment to the Tamil Nadu Gaming Act, 1930 was capricious, irrational and without an adequate determining principle such that it was excessive and disproportionate.

RECENT DECISION ON FANTASY SPORTS LEAGUES
One of the biggest revolutions in the gaming industry has been that of Online Fantasy Sports Leagues, be it in cricket, football, hockey, etc. Time and again there have been writs filed before the High Courts to decree these as games of chance.

The Punjab & Haryana High Court in the case of Varun Gumber vs. Union Territory of Chandigarh, 2017 Cri LJ 3827 and the Order dated 15th September, 2017 passed by the Supreme Court dismissing the Special Leave Petition against the aforesaid judgment, have held that the fantasy games of Dream 11 were games of mere skill and their business has protection under Article 19(1)(g) of the Constitution of India, i.e., freedom to carry out trade / vocation / business of one’s choice.

In Gurdeep Singh Sachar vs. Union of India, Cr. PIL Stamp No. 22/2019, the Bombay High Court held that success in Dream 11’s fantasy sports depended upon a user’s exercise of skill based on superior knowledge, judgement and attention, and the result thereof was not dependent on the winning or losing of a particular team in the real world game on any particular day. It was undoubtedly a game of skill and not a game of chance. The attempt to reopen the issues decided by the Punjab & Haryana High Court in respect of the same online gaming activities, which are backed by a judgment of the three-judge Bench of the Apex Court in K.R. Lakshmanan (Supra), that, too, after dismissal of the SLP by the Apex Court, was wholly misconceived. The Supreme Court dismissed the SLP [SLP (Crl.) Diary No. 43346 of 2019] against this decision inasmuch as it related to whether or not it involved gambling. Again, on 31st January, 2020, the Supreme Court reiterated on an application seeking clarification of its earlier Order, that it does not want to revisit the issue as to whether gambling is or is not involved.

In the cases of Ravindra Singh Chaudhary vs. Union of India, D.B. Civil Writ Petition No. 20779/2019 and Chandresh Sankhla vs. State of Rajasthan, reported in 2020 SCC Online Raj 264, the Rajasthan High Court dismissed a petition against Dream11. The Madurai Bench of the Madras High Court in D. Siluvai Venance vs. State, Criminal O.P. (MD) No.6568/2020 has passed a similar order. Recently, the Supreme Court in Avinash Mehrotra vs. State of Rajasthan, SLP (Civil) Diary No(s). 18478/2020, dismissed an SLP against the Rajasthan High Court Order in the Ravindra Singh case (Supra). It held that the matter was no longer res integra as SLPs have come up from the Punjab & Haryana and the Bombay High Courts and have been dismissed by the Supreme Court.

All of the above judgments analysed what was a fantasy league. They held that any fantasy sports game was a game which occurred over a pre-determined number of rounds (which may extend from a single match / sporting event to an entire league or series) in which participating users selected, built and acted as managers / selectors of their virtual team. The drafting of a virtual team involved the exercise of considerable skill as the user had to first assess the relative worth of each athlete / sportsperson as against all athletes / sportspersons available for selection. The user had to study the rules and make evaluations of the athlete’s strengths and weaknesses based on these rules. Users engaged in participating in fantasy sports read and understood the rules of the game and made their assessment of athletes and the selection of athletes in their virtual team on the basis of the anticipated statistics of their selection.

It was held that the element of skill and the predominant influence on the outcome of the fantasy league was more than any other incidents and, therefore, they were games of ‘mere skill’ and not falling within the activity of gambling. It did not involve risking money or playing stakes on the result of a game or an event, hence, the same did not amount to gambling / betting. It was even held that the fantasy sports formats were globally recognised as a great tool for fan engagement as they provided a platform to sports lovers to engage in their favourite sport along with their friends and family. This legitimate business activity having protection under Article 19(1)(g) of the Constitution contributed to Government Revenue not only vide GST and income tax payments, but also by contributing to increased viewership and higher sports fan engagement, thereby simultaneously promoting even the real world games.

FEMA
The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 and the Consolidated FDI Policy state that Foreign Direct Investment (FDI) of any sort is prohibited in gambling and betting, including casinos. Thus, no FDI is allowed in any gambling ventures, whether online or offline. However, if the ventures are gaming ventures, then there are no sectoral caps or conditions for the FDI and there are no restrictions for foreign technology collaboration agreements. And, 100% FDI is allowable in gaming ventures, online and offline. Thus, one comes back to the million-dollar question – is the venture one of gambling or gaming? The tests explained above would be applicable even to determine whether FDI is permissible in the venture.

Similar tests may also be used under the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 for overseas direct investments in a foreign company. If it is an online gaming company, then it would constitute a bona fide business activity and foreign investment should be permissible.

CONCLUSION
Recent judicial thinking seems to be changing along with the times. When one looks at the Court decisions delivered on new topics such as cryptocurrencies, fantasy sports, online poker, etc., it is clear that the trend is to allow businesses in these sunrise areas. If the Legislature also moves at the same speed and in the same direction, we would have a wonderful environment which could spawn exciting businesses!

shailesh.kwebmaker

CRYPTOCURRENCIES: TRAPPED IN A LEGAL LABYRINTH (Part – 2)

In the last issue, BCAJ, July, 2021, we looked at the legal background of cryptocurrencies and various issues relating to them. We continue examining the legal problems associated with Virtual Currencies (VCs) in India.
This month, we take up the FEMA provisions in relation to VCs

RBI PUTS TO REST 2018 CIRCULAR

In May, 2021, the RBI issued a Circular to all banks asking them not to refer to its own Circular of April, 2018 cautioning customers against VCs. This was in light of the fact that the Supreme Court in Internet and Mobile Association of India vs. Reserve Bank of India, WP(C) No. 528/2018, order dated 4th March, 2020 (SC) had held that the RBI Circular of April, 2018 was liable to be set aside on the ground of being ultra vires the Constitution (explained in detail in last month’s feature). Therefore, the RBI directed banks that in view of the order of the Supreme Court, the April, 2018 Circular was no longer valid and hence could not be cited or quoted from. It, however, added that banks may continue to carry out customer due diligence processes in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act (PMLA), 2002, in addition to ensuring compliance with relevant provisions under the Foreign Exchange Management Act.

CAN LRS BE USED FOR INVESTING IN CRYPTOCURRENCIES?

The Liberalised Remittance Scheme or LRS is a Scheme of the RBI under which any individual resident in India can remit abroad up to US $250,000 per financial year for permissible capital and current account transactions.

The million-dollar question is can the LRS be used for buying foreign crypto assets such as Bitcoins, Dogecoins? Alternatively, can a resident carry out a crypto arbitrage, i.e., buy cryptocurrencies from abroad and sell them in India? This is an issue on which there is no express prohibition under the LRS and there is more confusion than clarity.

When the LRS was introduced in February, 2004, the RBI stated that it could be used for any current or capital account transactions, or a combination of both. In May, 2007, the RBI clarified that remittances under the LRS were allowed only in respect of permissible current or capital account transactions. However, in June, 2015 the RBI introduced a novel concept of defining the permissible capital account transactions for an individual under the LRS. It defined them as follows:

(i) Opening of foreign currency account abroad with a bank;
(ii)   Purchase of property abroad;
(iii)   Making investments abroad;
(iv)   Setting up wholly-owned subsidiaries and joint ventures abroad;
(v)   Extending loans, including loans in Indian Rupees, to Non-Resident Indians (NRIs) who are relatives as defined in the Companies Act, 2013.

The decision of the Supreme Court in the case of Internet and Mobile Association of India (Supra) examined various facets of cryptocurrencies. The ratio of this decision is relevant even for determining the issue under LRS. Various important issues were examined in this case and one of the most important of these was ‘Are Virtual Currencies (VCs) “currency” under Indian laws?’ After examining various provisions of law, the Apex Court concluded that it was not possible to accept the contention that VCs were just goods / commodities and could never be regarded as real money! This decision has been analysed in great detail in last month’s feature.

One may consider whether VCs can be considered to be securities and, hence, permissible under the LRS as an investment in securities. FEMA defines a security to mean shares, stocks, bonds and debentures, Government securities as defined in the Public Debt Act, 1944, savings certificates to which the Government Savings Certificates Act, 1959 applies, deposit receipts in respect of deposits of securities and units of the Unit Trust of India established under sub-section (1) of section 3 of the Unit Trust of India Act, 1963 or of any mutual fund, and includes certificates of title to securities, but does not include bills of exchange or promissory notes other than Government promissory notes or any other instruments which may be notified by the Reserve Bank as security for the purposes of this Act. VCs are not shares, stocks, bonds, debentures, Government securities, savings certificates, deposit receipts in respect of deposits of securities or units of any mutual fund. Hence, it is not possible to contend that purchase of VCs from abroad tantamounts to an investment in securities.

The truth of the matter is that the RBI is not comfortable with the LRS being used to buy VCs. RBI’s view is that VCs are not currencies. Hence, bankers are shy to allow the LRS to buy VCs. However, what would be the position if a resident were to use the balance standing in his foreign bank account to buy VCs? How would the bankers then restrict the usage? The moot point is can the RBI have jurisdiction in such a case? Can one use credit cards and buy VCs on the ground that they are goods / intangibles and hence the transaction is a current account transaction and credit cards can be used on the internet for any permissible current account transaction? Some Indian banks have started asking their customers remitting money abroad for investment purposes to provide a declaration that such funds will not be used for buying cryptocurrencies such as Bitcoins.

In fact, some private banks have gone a step forward and added a clause in the LRS declaration which doesn’t stop at cryptocurrencies but also wants customers to declare that funds would not be used to buy units of mutual funds or any other capital instrument of a company dealing in Bitcoins / cryptocurrencies / virtual currencies. Further, the LRS declaration even stipulates that the source of funds for LRS remittances should not come from investments in Bitcoins or cryptocurrencies. Clearly, a case of throwing the baby out with the bathwater!

One point to be considered when dealing with this issue is that under FEMA one cannot do indirectly what one cannot do directly. Thus, if the RBI considers that VCs cannot be bought under the LRS, then one cannot buy them indirectly.

Another issue to be considered is that when remitting money under the LRS one needs to file Form A2 and fill in the Purpose Code. What Purpose Code would the bank show for cryptocurrencies – would it be Capital Account / Foreign Portfolio Investment? Without this clarity, a bank would not allow remittance for buying VCs.

ARE VCs GOODS?

In the aforesaid case of Internet and Mobile Association of India (Supra), the RBI contended that Virtual Currencies are not legal tender but tradable commodities / digital goods. If this proposition is upheld then the question which arises is whether the buying and selling of VCs would attract the provisions under FEMA relating to export and import of goods?

The Foreign Exchange Management (Export of Goods and Services) Regulations, 2015 defines ‘software’ to mean any computer programme, database, drawing, design, audio / video signals, any information by whatever name called in or on any medium other than in or on any physical medium. VCs are also computer programmes stored in a virtual medium and, hence, the question arises whether they can be considered goods.

If a resident buys VCs from abroad would it be treated as import of goods? In this case, the provisions of the Master Direction on Import of Goods and Services amended up to 1st April, 2019 would be applicable.

Similarly, if a resident pays for foreign services / goods availed of by him by way of VCs, then would the payment by VCs be treated as an export of goods and the receipt of the foreign services / goods as an import? In this case, the provisions of the Foreign Exchange Management (Export of Goods and Services) Regulations, 2015 read with the Master Direction on Export of Goods and Services amended up to 12th January, 2018 would be applicable. If one considers the payment by VCs to be an export and the receipt of goods from abroad to be an import, then this would constitute a set-off of export receivables against import payables. The FEMA Regulations permit a set-off of exports against imports only if it is in accordance with the procedure laid down therein. A payment by VCs is not prescribed under the FEMA Regulations, and hence it is a moot point whether the same would be permissible.

(To be
concluded)

shailesh.kwebmaker

CRYPTOCURRENCIES: TRAPPED IN A LEGAL LABYRINTH (Part – 3)

Over the last two months, this Feature has examined the legal background surrounding cryptocurrencies and FEMA provisions in relation to Virtual Currencies (VCs). In this, the concluding part, we take up the tax issues pertaining to this exciting new asset class

LEGALITY STILL IN DOUBT
The legality of VCs in India continues to be a question mark. As recently as on 10th August, 2021, the Minister of State for Finance gave a written reply in the Rajya Sabha stating that the Government does not consider cryptocurrencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system. The Government will also explore the use of blockchain technology proactively for ushering in a digital economy. He added that a high-level Inter-Ministerial Committee (IMC) constituted under the Chairmanship of the Secretary (Economic Affairs) to study the issues related to VCs and propose specific actions to be taken, had recommended in its report that all private cryptocurrencies, except any cryptocurrency issued by the State, be prohibited in India. The Government would take a decision on the recommendations of the IMC and the legislative proposal, if any, would be introduced in the Parliament.

Coupled with this is the action taken by the Enforcement Directorate against a crypto exchange in India on the grounds of money-laundering. The accusation was that the exchange was facilitating some Chinese betting apps which converted their Indian earnings into VCs and then transferred the same to digital wallets based in the Cayman Islands.

In spite of the above regulatory heat, the popularity of VCs and crypto exchanges is growing by the day and a crypto exchange has now even entered the Unicorn club!

However, in the midst of the regulatory hullabaloo and the hype over VCs, one must not lose sight of the fact that at the end of the day tax must be paid on all earnings from VCs. The Income-tax Act is not concerned with the legality of a trade. In CIT vs. S.C. Kothari [1972] 4 SCC 402 it was observed that: ‘…If the business is illegal, neither the profits earned nor the losses incurred would be enforceable in law. But that does not take the profits out of the taxing statute.’

Again, in CIT vs. K. Thangamani [2009] 309 ITR 15 (Mad), the Madras High Court held that the income-tax authorities are not concerned about the manner or means of acquiring income. The income might have been earned illegally or by resorting to unlawful means. But any illegality associated with the earning has no bearing on its taxability. The assessee, having acquired income by unethical means or by resorting to acts forbidden by law, cannot be heard to say that the State cannot be a party to such sharing of ill-gotten wealth. Allowing such income to escape the tax net would be nothing but a premium or reward to a person for doing an illegal trade. In the event of taxing the income of only those who had acquired the same in a legal manner, the tendency of those who acquire income by illegal means would increase. It is not possible for the Income-tax authorities to act like the police to prevent the commission of unlawful acts, but it is possible for the tax machinery to tax such income.

The Finance Ministry in reply to a question raised in the Rajya Sabha has stated that irrespective of the nature of business, the extant statutory provisions on the scope of total income for taxation as per section 5 of the Income-tax Act, 1961 envisage that total income shall include all income from whatever source derived, the legality of income thus being of no consequence. The gains arising from the transfer of cryptocurrencies / assets is liable to tax under a head of income, depending upon the nature of holding of the same. It further stated that no data is maintained on cryptocurrency earnings of Indians as there is no provision in the Income-tax return to capture data on earnings arising from cryptocurrencies / assets.

Accordingly, irrespective of whether a crypto trade is legal or illegal, we need to examine its taxability. Let us briefly analyse the same. At the outset, it may be noted that since this is an evolving subject, there is no settled view and hence an attempt has been made to present all the possible views.

TAXABILITY OF TRADERS IN VCs
Whether a particular asset is a capital asset or a stock-in-trade has been one of the burning issues under the Income-tax Act. Section 2(14) defines the term ‘capital asset’ to mean property of any kind held by an assessee, whether or not connected with his business or profession, but it does not include any stock-in-trade. Hence, a stock-in-trade of any nature, whether securities, land or VCs, would be outside the purview of a capital asset.

People who trade in VCs, i.e., frequently buy and sell cryptos, are as much traders in VCs as a person dealing in shares and securities. The usual tests laid down to distinguish a trader from an investor would apply even in the case of VCs. Hence, tests such as intention at the time of purchase, frequency of trades, quantum, regularity, accounting treatment, amount of stock held on hand, whether purchase and sale take place in quick succession, whether borrowed funds have been used for the purchase, etc., are all relevant tests to help determine whether a person is a dealer / trader in VCs or an investor. The ratio laid down by the Supreme Court in CIT vs. Associated Industrial Development Company (P) Ltd. 82 ITR 586 (SC) in the context of securities would be equally relevant even in the case of VCs. The Court held that whether a particular holding is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the asset and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment.

The CBDT Circular No. 4/2007, dated 15th June, 2007 and Circular No. 6/2016 dated 29th February, 2016, issued in the context of taxability of gains on sale of securities would assist in determining the issue even for VCs.

If a person is a trader in VCs, then any gain made by him would be taxable as business income. The purchase price of the VCs would be allowed as a deduction even if the Government / RBI takes a stand that trading in VCs is illegal.

One school of thought also suggests that since there is no actual delivery involved in the case of VCs, transactions in VCs should be treated as a speculative transaction u/s 43(5). But it would be incorrect to say that delivery is not given in case of VCs because they are credited to a digital wallet. Delivery need not always be physical and could even be constructive or symbolic and should be seen in the context of the goods in question. However, this could become a litigious issue. For example, shares in dematerialised format are credited to a demat account and not physically delivered. Similarly, mutual fund units only appear in a statement.

Section 43(5) states that any commodity in which a contract for the purchase / sale is settled otherwise than by an actual delivery or transfer of the commodity, would be treated as a speculative transaction. The decision of the Supreme Court in the case of Internet and Mobile Association of India vs. Reserve Bank of India, WP(C) No. 528/2018, order dated 4th March, 2020 (SC) has held that it was not possible to accept the contention that VCs were just goods / commodities and could never be regarded as real money! Thus, while the Court has not come to a definite conclusion, the fact that VCs are commodities has been upheld by the Apex Court. In such a scenario, could the trading in VCs be treated as a speculative business? If so, then the losses from this business can only be set off against speculative gains u/s 73 of the Act, and the losses to the extent not set off can be carried forward only for four assessment years. Yet another school of thought suggests that the profits from trading in VCs should be taxed as Income from Other Sources.

TAXABILITY OF INVESTORS IN VCs
For investors in VCs, the gains would be taxable as capital gains. Depending upon whether the VC in question has been held for a period of more than or less than three years, the VCs would be treated as long-term capital assets or short-term capital assets. Long-term capital gains would be eligible for indexation and would be taxed @ 20% + surcharge + cess. Short-term capital gains, on the other hand, would be taxed as per the regular slab rate applicable to the investor. It must be pointed out that the special concessional tax rates of 10% with grandfathering of the cost for long-term gains in case of listed shares and 15% in the case of short-term gains on listed shares, do not apply to gains on VCs. Any long-term capital gain made on the sale of VCs can be saved by an Individual / HUF by reinvesting the net sale consideration in the purchase / construction of a new house property u/s 54F.

Receiving VCs as payment for goods / services
If a business receives payment for the goods / services sold by it in the form of VCs, then it would be treated as a barter exchange and the fair market value of the VCs received would be treated as the consideration received for the sale / supply. The cost of goods sold / services rendered would be deducted from this consideration and the gains would be taxable as business income.

Payment for mining
One buzzword associated with VCs is ‘mining’. A ‘VC miner’ is like the miner in the coal / gold / ore mine who, through his arduous labour, comes up with a prized catch. A Bitcoin miner is one who solves complex, cryptic math puzzles on the Bitcoin network and makes the network secure by validating the transactions which take place on it. While it is difficult to explain this concept, suffice it to say that miners help in improving the transaction network of VCs. And a miner receives payment in the form of VCs! Now how would this transaction be taxed is the question.

A good way to look at this would be that the miner is actually providing a service by carrying out the mining. Hence, the income from the same should be taxed as his business income. The cost of power, depreciation on IT equipment, maintenance, etc., would all be deductible expenses incurred to earn this income. The fair market value of the VCs received by the miner would be treated as the consideration for the service and the difference would be taxed as his business income. The Central Board of Indirect Taxes and Customs is also considering levying GST on mining activities on the ground that these constitute a service. Alternatively, if it is not a business income, it may be taxed as Income from Other Sources.

A more aggressive view is that income from mining consists of capital gains arising from a self-generated asset. This could be used for amateurs who are into VC mining as opposed to miners who carry on the activity as an occupation. Here, applying the principle laid down by the Supreme Court in CIT vs. B.C. Srinivasa Shetty [1981] 128 ITR 294 (SC), a view is taken that since the cost of acquisition of such a self-generated capital asset cannot be determined and that since section 55(2) has not prescribed the cost of acquisition / improvement of the same to be Nil, the income cannot be taxed. It is likely that the Tax Department would contest this view.

Gift of VCs
What would be the tax treatment if a person gifts VCs to another person? A gift of specified property is taxable u/s 56(2)(x) in the hands of the recipient except in the exempt cases. However, the gift must be of property as defined in the Explanation to section 56(2)(x). Property is defined to mean any sum of money, immovable property, shares and securities, jewellery / bullion, art / sculptures and archaeological collections. The Government of India has constantly taken a stand (as explained above) that VCs are not money / legal currency in India. And that VCs are not shares and securities. Thus, VCs are not property as understood u/s 56(2)(x). Accordingly, it stands to reason that the provisions of section 56(2)(x) cannot apply in the hands of a donee who gets a gift of VCs.

Disclosure in Income-tax returns
Any individual / HUF who has annual total income exceeding Rs. 50 lakhs needs to file Schedule AL on Assets and Liabilities in his Income-tax return.

The assets required to be reported in this Schedule include immovable assets (land and building), financial assets, viz., bank deposits, shares and securities, insurance policies, loans and advances given, cash in hand, movable assets, viz., jewellery, bullion, vehicles, yachts, boats, aircraft, etc. Hence, it is an inclusive definition of the term assets. If a person owns VCs, it stands to reason that the same should also be included in the asset disclosures under Schedule AL. The cost price of the VC needs to be disclosed under this Schedule. For a resident who holds VCs credited to an overseas digital wallet / held with a foreign crypto exchange during the previous year, even if he has duly reported them in Schedule FA (foreign assets), he is required to report such foreign assets again in Schedule AL, if applicable.

However, for a non-resident or ‘resident but not ordinarily resident’, only the details of VCs located in India are to be mentioned. It would be interesting to note in the case of VCs how the situs of the asset would be determined.

Another Schedule to be considered is Schedule FA on foreign assets. A resident in India is required to furnish details of any foreign asset held by him in Schedule FA. This Schedule need not be filled up by a ‘not ordinarily resident’ or a ‘non-resident’. The details of all foreign assets or accounts in respect of which a resident is a beneficial owner, a beneficiary or the legal owner, is required to be mandatorily disclosed in the Schedule FA. Tables A1 to G of Schedule FA deal with the disclosures of various foreign assets and comprise of foreign depository accounts – foreign custodian accounts, foreign equity and debt interest, foreign cash value insurance contract or annuity contract, financial interest in any entity outside India, any immovable property outside India, any other capital assets outside India, any other account located outside India in which the resident is a signing authority, etc. The CBDT has not offered any guidance on how foreign VCs should be disclosed. However, in the absence of any clarity the same may be disclosed under either of the following two Tables of Schedule FA:

• Table D – Any other capital assets outside India
• Table E – Any other account located outside India in which the resident assessee is a signing authority (which is not reported in Tables A1 to D).

In Table D, the value of total investment at cost of any other capital asset held at any time during the accounting period and the nature and amount of income derived from the capital asset during the accounting period is required to be disclosed after converting the same into Indian currency. Further, the amount of income which is chargeable to tax in India, out of the foreign source income, should also be specified at column (9). The relevant Schedule of the ITR where income has been offered to tax should be mentioned at columns (10) and (11). The instructions state that for the purposes of disclosure in Table D, capital assets include any other financial asset which is not reported in Table B, but shall not include stock-in-trade and business assets which are included in the balance sheet. Hence, VCs held as stock-in-trade by traders would not be included in this Table.

In Table E, the value of peak balance or total investment at cost, in respect of the accounts in which the assessee has a signing authority, during the accounting period is required to be disclosed after converting the same into Indian currency. Only those foreign accounts which have not been reported in Table A1 to Table D of the Schedule should be reported in Table E.

One school of thought tends to suggest that in the absence of any specific guidance on disclosure under Schedule FA, VCs need not be disclosed. This would be playing with fire. The Black Money (Undisclosed Foreign Income and Assets) Act, 2015 levies a penalty of Rs. 10 lakhs for non- / improper disclosures in Schedule FA. Hence, it would be better to err on the safe side and disclose the foreign VCs held.

It should be remembered that even though there is a question mark under FEMA over whether the Liberalised Remittance Scheme can be used for buying foreign VCs, disclosures under Schedule FA should nevertheless be made. Income-tax disclosures and taxation are not dependent upon the permissibility or otherwise of a transaction!

CONCLUSION
The world of cryptocurrencies is of high reward but carries high regulatory risk. This is due to the fact that there are a lot of uncertainties and unknown factors coupled with the apparently hostile attitude of the RBI and the Government towards VCs. People transacting in them should do so with full knowledge of the underlying issues that could arise. The famous Latin maxim ‘Caveat Emptor’ or ‘Buyer Beware’ squarely applies to all transactions involving virtual currencies!

(Concluded)

shailesh.kwebmaker

CRYPTOCURRENCIES: TRAPPED IN THE LABYRINTH OF LEGAL CORRIDORS (Part – 1)

BACKGROUND OF CRYPTOS

All of us must have been reading about Cryptocurrencies / Virtual Currencies (VCs) of late. And I am sure many of us must be wondering what exactly is this strange animal which has taken the world by storm? Every day the business newspapers devote a great deal of space to news about VCs.

A cryptocurrency is basically a virtual currency which is very secure. It is based on a cryptic algorithm / code (hence, the name cryptocurrency) which makes counterfeiting very difficult. The most important part about a VC is that no Government has issued it and hence it is not Fiat Money. It is a privately-issued currency which is entirely digital in nature. There are no paper notes or coins. Everything about it is digital. Further, it is based on blockchain technology, meaning that it is stored over a network of servers. Hence, it becomes difficult to say where exactly it is located. This also makes it very complicated for any Government to regulate VCs. This has been one of the sore points for the Indian Government. The fear that VCs would lead to money-laundering and financing of illegal activities is one of the key concerns associated with cryptocurrencies.

Many people associate cryptos (as they are colloquially known) only with Bitcoins. Yes, Bitcoins were the first cryptos launched in 2009 and remain the most popular, but now there are several other VCs such as Tethers, Litecoins, Binance Coins, Bbqcoins, Dogecoins, Ethereum, etc. At last count, there were about 200 VCs! VCs are bought and sold on crypto exchanges. Several such virtual currency exchanges operate in India, for example, WazirX, CoinDCX. Tesla, the US-based electric vehicle manufacturer, announced that it had bought US $1.5 billion worth of Bitcoins and that it would accept Bitcoins as a means of payment. It is estimated that there are over ten million crypto users in India and over 200 million users worldwide. In spite of such a huge market, it is unfortunate that neither the Indian tax nor the Indian legal system has kept pace with such an important global development.

While dealing with VCs one should also know about Non-Fungible Tokens (NFTs). These are units of data stored on a blockchain ledger and certify a digital asset. NFTs are useful in establishing fractional ownership over assets such as digital art, fashion, movies, songs, photos, collectibles, gaming assets, etc. Each NFT has a unique identity which helps establish ownership over the asset. NFTs have even entered the contractual space. For example, in 2019 Spencer Dinwiddie, a basketball player in the US, tokenised his player’s contract with the National Basketball Association, so that several investors could invest in the same. These NFTs could then be traded on a virtual exchange. These tokens carry an interest coupon and the amount raised from the token is given to the person creating the token, e.g., the basketball player. At the end of the maturity period, the token would be redeemed and they may or may not carry a profit-sharing in the revenues earned by the token creator. The payments for buying these tokens can also be made by using cryptocurrencies.

Recently, El Salvador became the first country in the world to legalise cryptocurrencies as legal tender. Thus, residents of El Salvador can pay for goods, services, taxes, etc., using virtual currencies like Bitcoins.

Let us try to analyse cryptocurrencies and understand the fast-changing and confusing regulatory and tax environment surrounding them in India. Since there has been a great deal of flip-flop on this issue, this Feature would cover all the key developments on the subject to clear the fog. There is a great deal of misinformation and ignorance on this front and hence all key regulatory developments have been analysed below, even if they were proposals which never got formalised.

CHEQUERED LEGAL BACKGROUND

Let us start with an examination of the highly chequered background and problematic past which cryptocurrencies have encountered in India.

FM’s 2018 speech
The Finance Minister in his Speech for Budget 2018-19 said that the Government did not consider cryptocurrencies as legal tender or coins and that all measures to eliminate the use of these currencies in financing illegitimate activities or as part of the payment system will be taken by the Government. However, he also said that the Government will explore the use of blockchain technology proactively for ushering in a digital economy.

RBI’s 2018 ban
The RBI had been cautioning people against the use of ‘Decentralised Digital Currency’ or ‘Virtual Currencies’ right since 2013. Ultimately, in April 2018, by a Circular the RBI banned dealing in virtual currencies in view of the risks which the RBI felt were associated with them:

• VCs being in digital form were stored in electronic wallets. Therefore, VC holders were prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attacks, etc. Since VCs are not created by or traded through any authorised central registry or agency, the loss of the e-wallet could result in the permanent loss of the VCs held in them.
• Payments by VCs, such as Bitcoins, took place on a peer-to-peer basis without any authorised central agency which regulated such payments. As such, there was no established framework for recourse to customer problems / disputes / chargebacks, etc.
• There was no underlying or backing of any asset for VCs. As such, their value seemed to be a matter of speculation. Huge volatility in the value of VCs has been noticed in the recent past. Thus, the users are exposed to potential losses on account of such volatility in value.
• It was reported that VCs such as Bitcoins were being traded on exchange platforms set up in various jurisdictions whose legal status was also unclear. Hence, the traders of VCs on such platforms were exposed to legal as well as financial risks.
• The absence of information of counterparties in such peer-to-peer anonymous / pseudonymous systems could subject the users to unintentional breaches of anti-money-laundering and combating the financing of terrorism (AML / CFT) laws.

In view of the potential financial, operational, legal, customer protection and security-related risks associated with dealing in VCs, the RBI’s Circular stated that entities regulated by the Reserve Bank, e.g., banks, NBFCs, payment gateways, etc., should not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. Such services were defined as including, maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer / receipt of money in accounts relating to purchase / sale of VCs. This diktat from the RBI came as a body-blow to the fast-expanding cryptocurrency industry in India.

IMC’s 2019 criminalisation sword
In 2019, an Inter-Ministerial Committee (IMC) of the Government presented a Report to the Government recommending a ban on all VCs. It proposed that not only should VCs be banned but any activity connected with them, such as buying / selling / storing VCs should also be banned. Shockingly, the IMC proposed criminalisation of these activities and provided for a fine of up to Rs. 25 crores and / or imprisonment of up to ten years. It categorically held that a VC is not a currency. Fortunately, none of the recommendations of this IMC Report saw the light of day.

Supreme Court’s 2020 boon
This Circular of the RBI came up for challenge before the Apex Court in the case of Internet and Mobile Association of India vs. Reserve Bank of India, WP(C) No. 528/2018, order dated 4th March, 2020 (SC). The ban was challenged by the Internet and Mobile Association of India, an industry body which represented the interests of the online and digital services industry along with a few companies which ran online crypto assets exchange platforms. A three-Judge Bench in a very detailed judgment assayed the RBI Circular. The Court examined three crucial questions.

Question #1: Are VCs currency under Indian laws?
• The Court noted that the word ‘currency’ is defined in section 2(h) of the Foreign Exchange Management Act, 1999 to include ‘all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers’ cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments as may be notified by the RBI.’ The expression ‘currency notes’ was also defined in FEMA to mean and include cash in the form of coins and banknotes. Again, FEMA defined ‘Indian currency’ to mean currency which was expressed or drawn in Indian rupees. It also observed that the RBI had taken a stand that VCs did not fit into the definition of the expression ‘currency’ under section 2(h) of FEMA, despite the fact that the Financial Action Task Force (FATF) in its Report defined virtual currency to mean a ‘digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and / or (2) a unit of account; and / or (3) a store of value, but does not have legal tender status.’ According to this Report, legal tender status is acquired only when it is accepted as a valid and legal offer of payment when tendered to a creditor.

• Neither the Reserve Bank of India Act, 1934 nor the Banking Regulation Act, 1949, the Payment and Settlement Systems Act, 2007, or the Coinage Act, 2011 defined the words ‘currency’ or ‘money’.

• The Prize Chits and Money Circulation Schemes (Banning) Act, 1978 defined money to include a cheque, postal order, demand draft, telegraphic transfer or money order.

• Section 65B of the Finance Act, 1994, inserted by way of the Finance Act, 2012, defined ‘money’ to mean ‘legal tender, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, travellers’ cheque, money order, postal or electronic remittance or any other similar instrument, but shall not include any currency that is held for its numismatic value’. This definition was important, for it identified many instruments other than legal tender which could come within the definition of money.

• The Sale of Goods Act, 1930 did not define ‘money’ or ‘currency’ but excluded money from the definition of the word ‘goods’.

• The Central Goods and Services Tax Act, 2017 defined ‘money’ under section 2(75) to mean ‘the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, travellers’ cheque, money order, postal or electronic remittance or any other instrument recognised by RBI, when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value.’

The Supreme Court ultimately held that nothing prevented the RBI from adopting a short circuit by notifying VCs under the category of ‘other similar instruments’ indicated in section 2(h) of FEMA, 1999 which defined ‘currency’ to mean ‘all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers’ cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments as may be notified by the Reserve Bank.’ Promissory notes, cheques, bills of exchange, etc., were also not exactly currencies but operated as valid discharges (or the creation) of a debt only between two persons or peer-to-peer. Therefore, it held that it was not possible to accept the contention that VCs were just goods / commodities and could never be regarded as real money!

Question #2: Did RBI have power to regulate VCs?
The Apex Court observed that once it was accepted that some institutions accept virtual currencies as valid payments for the purchase of goods and services, there was no escape from the conclusion that the users and traders of virtual currencies carried on an activity that fell squarely within the purview of the Reserve Bank of India. The statutory obligations that the RBI had, as a central bank, were (i) to operate the currency and credit system, (ii) to regulate the financial system, and (iii) to ensure the payment system of the country to be on track, and would compel them naturally to address all issues that are perceived as potential risks to the monetary, currency, payment, credit and financial systems of the country. If an intangible property could act under certain circumstances as money then RBI could definitely take note of it and deal with it. Hence, it was not possible to accept the contention that cryptocurrency was an activity over which RBI had no power statutorily. Hence, the Apex Court held that the RBI has the requisite power to regulate or prohibit an activity of this nature. The contention that the RBI was conferred only with the power to regulate, but not to prohibit, did not appeal to the Court.

The Supreme Court further held that the RBI’s Circular did not impose a total prohibition on the use of or the trading in VCs. It merely directed the entities regulated by the RBI not to provide banking services to those engaged in the trading or facilitating of the trading in VCs. Section 36(1)(a) of the Banking Regulation Act, 1949 very clearly empowered the RBI to caution or prohibit banking companies against entering into certain types of transactions or class of transactions. The prohibition was not per se against the trading in VCs. It was against banks, with respect to a class of transactions. The fact that the functioning of VCEs automatically got paralysed or crippled because of the impugned Circular was no ground to hold that it was tantamount to a total prohibition.

It observed that so long as those trading in VCs did not wish to convert them into currency in India and so long as the VC enterprises did not seek to collect their service charges or commission in currency through banking channels, they will not be affected by this Circular. Peer-to-peer transactions were still taking place without the involvement of the banking channel. In fact, those actually buying and selling VCs without seeking to convert currency into VCs or vice versa, were not at all affected by the RBI’s Circular. It was only the online platforms which provided a space or medium for the traders to buy and sell VCs that were seriously affected by the Circular, since the commission that they earned by facilitating the trade was required to be converted into fiat currency.

Various regulatory events from 2013 to 2018 showed that RBI had been brooding over the issue for almost five years before taking the extreme step of issuing the Circular. Therefore, the RBI could not be held guilty of non-application of mind. The Apex Court held that if RBI took steps to prevent the gullible public from having an illusion as though VCs may constitute a valid legal tender, the steps so taken were actually taken in good faith. The repeated warnings through press releases from December, 2013 onwards indicated a genuine attempt on the part of the RBI to safeguard the interests of the public. Therefore, the impugned Circular was not vitiated by malice in law and was not a colourable exercise of power.

Thus, the RBI had the power to regulate and prohibit VCs.

Question #3: Was RBI’s Circular excessive and ultra vires?
The Supreme Court then held that citizens who were running online platforms and VC exchanges could certainly claim that the Circular violated Article 19(1)(g) of the Constitution which provides a Fundamental Right to practice any profession or to carry on any occupation, trade or business to all citizens subject to Article 19(6) which enumerated the nature of restriction that could be imposed by the State upon the above right of the citizens. It held that persons who engaged in buying and selling virtual currencies just as a matter of hobby could not take shelter under this Article since what was covered was profession / business. Even people who purchased and sold VCs as their occupation or trade had other ways such as e-Wallets to get around the Circular. It is the VC exchanges which, if disconnected from banking channels, would perish.

The Supreme Court held that the impugned Circular had almost wiped the VC exchanges out of the industrial map of the country, thereby infringing Article 19(1)(g). The position was that VCs were not banned, but the trading in VCs and the functioning of VC exchanges were rendered comatose by the impugned Circular by disconnecting their lifeline, namely, the interface with the regular banking sector. It further held that this had been done (i) despite the RBI not finding anything wrong about the way in which these exchanges functioned, and (ii) despite the fact that VCs were not banned. It was not the case of RBI that any of the entities regulated by it had suffered on account of the provision of banking services to the online platforms running VC exchanges.

Therefore, the Court concluded that the petitioners were entitled to succeed and the impugned RBI Circular was liable to be set aside on the ground of being ultra vires of the Constitution. One of the banks had frozen the account of a VC exchange. The Court gave specific directions to defreeze the account and release its funds. Accordingly, the Supreme Court came to the rescue of Indian VC exchanges.

Along with the above Supreme Court decision, another decision which merits mention is that of the Karnataka High Court in the case of B.V. Harish and Others vs. State of Karnataka (WP No. 18910/2019, order dated 8th February, 2021. In this case, based on the RBI’s Circular, the police had registered an FIR against the directors of a company for running a cryptocurrency exchange and a VC ATM. The Karnataka High Court relied upon the decision of the Supreme Court explained above and quashed the chargesheet and other criminal proceedings.

Recently, the RBI in a Circular to banks and NBFCs has stated that certain entities are yet cautioning their customers against dealing in virtual currencies by making a reference to the RBI Circular dated 6th April, 2018. The RBI has directed that such references to the abovementioned Circular were not in order since it had been set aside by the Supreme Court. However, the RBI has added that banks / entities may continue to carry out customer due diligence processes in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act (PMLA), 2002, in addition to ensuring compliance with relevant provisions under FEMA for overseas remittances.

Finance Minister’s interviews
In February / March, 2021 in reply to questions raised in the Rajya Sabha as to whether the Central Government was planning to issue strict guidelines on cryptocurrency trading and whether the Government was doing anything to curb clandestine trading of VCs, the Finance Minister stated that a high-level Inter-Ministerial Committee (IMC), constituted under the Chairmanship of the Secretary (Economic Affairs) to study the issues related to VCs and propose specific actions to be taken in the matter, had recommended in its report that all private cryptocurrencies, except any cryptocurrency issued by the State, be prohibited in India. The Government would take a decision on the recommendations of the IMC and the legislative proposal, if any, would be introduced in the Parliament following the due process.

Recently, in March, 2021, the Finance Minister has said that the Government was not closing its mind and that they were looking at ways in which experiments could happen in the digital world and cryptocurrencies. She has also stated that ‘From our side, we are very clear that we are not shutting all options. We will allow certain windows for people to do experiments on the blockchain, bitcoins or cryptocurrency… A lot of fintech companies have made a lot of progress on it. We have got several presentations. Much work at the state level is happening and we want to take it in a big way in IFSC or Gift City in Gandhinagar.’

MCA’s 2021 Rules for companies
In March, 2021 the Ministry of Corporate Affairs has mandated all companies to disclose certain additional information in their accounts from 1st April, 2022. One such important information pertains to details of cryptocurrency or virtual currency.

Where the company has traded or invested in cryptocurrency or virtual currency during the financial year, the following details have to be disclosed in its Balance Sheet:
(a) profit or loss on transactions involving the cryptocurrency or virtual currency, (b) amount of currency held as at the reporting date, (c) deposits or advances from any person for the purpose of trading or investing in cryptocurrency / virtual currency.

Similarly, the Profit & Loss Statement of such a company must carry the following additional details:
(i) profit or loss on transactions involving cryptocurrency or virtual currency, (ii) amount of currency held as at the reporting date, and (iii) deposits or advances from any person for the purpose of trading or investing in cryptocurrency or virtual currency.

CRYPTOCURRENCY BILL, 2021
The Government had proposed to table ‘The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’ during the January to March, 2021 session of the Lok Sabha. However, it was not introduced. The purport of this Bill states that it aims to create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India; however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses. It would be interesting to see the contours of this Bill when it is tabled. However, it seems quite clear that the Government is considering introducing its own digital currency to be issued by the RBI. One aspect which is worrying is that it seeks to prohibit all private VCs. Does this mean that the Government would get over the Supreme Court verdict by this law?

(To be continued)

shailesh.kwebmaker

SUPREMACY OF THE DOMESTIC VIOLENCE ACT

INTRODUCTION

The Protection of Women from Domestic Violence Act, 2005 (‘the DV Act’) is a beneficial Act and one which asserts the rights of women who are subject to domestic violence. Various Supreme Court and High Court judgments have upheld the supremacy of this Act over other laws and asserted from time to time that this is a law which cannot be defenestrated.

In the words of the Supreme Court (in Satish Chander Ahuja vs. Sneha Ahuja, CA No. 2483/2020), domestic violence in this country is rampant and several women encounter violence in some form or other or almost every day; however, it is the least reported form of cruel behaviour. The enactment of this Act of 2005 is a milestone for protection of women in the country. The purpose of its enactment, as explained in Kunapareddy Alias Nookala Shankar Balaji vs. Kunapareddy Swarna Kumari and Anr. (2016) 11 SCC 774 was to protect women against violence of any kind, especially that occurring within the family, as the civil law does not address this phenomenon in its entirety. In Manmohan Attavar vs. Neelam Manmohan Attavar (2017) 8 SCC 550, the Supreme Court noticed that the DV Act has been enacted to create an entitlement in favour of the woman of the right of residence. Considering the importance accorded to this law, let us understand its important facets.

WHO IS COVERED?

It is an Act to provide for more effective protection of the rights, guaranteed under the Constitution of India, of those women who are victims of violence of any kind occurring within the family.

It provides that if any act of domestic violence has been committed against a woman, then she can approach the designated Protection Officers to protect her. In V.D. Bhanot vs. Savita Bhanot (2012) 3 SCC 183, it was held that the Act applied even to cases of domestic violence which have taken place before the Act came into force. The same view has been expressed in Saraswathy vs. Babu (2014) 3 SCC 712.

Hence, it becomes essential to find out who can claim shelter under this Act. An aggrieved woman under the DV Act is one who is, or has been, in a domestic relationship with an adult male and who alleges having been subjected to any act of domestic violence by him. A domestic relationship means a relationship between two persons who live or have, at any point of time, lived together in a shared household, when they are related by marriage, or through a relationship in the nature of marriage, or are family members living together as a joint family.

WHAT IS DOMESTIC VIOLENCE?

The concept of domestic violence is very important and section 3 of the DV Act defines the same as an act committed against the woman which:
(a) harms or injures or endangers the health, safety, or well-being, whether mental or physical, of the woman and includes causing abuse of any nature, physical, verbal, economic abuse, etc.; or
(b) harasses or endangers the woman with a view to coerce her or any other person related to her to meet any unlawful demand for any dowry or other property or valuable security; or
(c) otherwise injures or causes harm, whether physical or mental, to the aggrieved person.

Thus, economic abuse is also considered to be an act of domestic violence under the DV Act. This term is defined in a wide manner and includes deprivation of all or any economic or financial resources to which a woman is entitled under any law or custom or which she requires out of necessity, including household necessities, stridhan property, etc.

SHARED HOUSEHOLD

Under the Act, the concept of a ‘shared household’ is very important and means a household where the aggrieved lives, or at any stage has lived, in a domestic relationship with the accused male and includes a household which may belong to the joint family of which the respondent is a member, irrespective of whether the respondent or the aggrieved person has any right, title or interest in the shared household. Section 17 of the DV Act provides that notwithstanding anything contained in any other law, every woman in a domestic relationship shall have the right to reside in the shared household, whether or not she has any right, title or beneficial interest in the same. Further, the Court can pass a relief order preventing her from being evicted from the shared household, against others entering / staying in it, against it being sold or alienated, etc. The Court can also pass a monetary relief order for maintenance of the aggrieved person and her children. This relief shall be adequate, fair and reasonable and consistent with her accustomed standard of living.

In S.R. Batra and Anr. vs. Taruna Batra (2007) 3 SCC 169 a two-Judge Bench of the Apex Court held that the wife is entitled only to claim a right u/s 17(1) to residence in a shared household and a shared household would only mean the house belonging to or taken on rent by the husband, or the house which belongs to the joint family of which the husband is a member.

Recently, a three-Judge Bench of the Supreme Court had an occasion to again consider this very issue in Satish Chander Ahuja vs. Sneha Ahuja, CA No. 2483/2020 and it overruled the above two-Judge decision. The Court had to decide whether a flat belonging to the father-in-law could be restrained from alienation under a plea filed by the daughter-in-law under the DV Act. The question posed for determination was whether a shared household has to be read to mean that household which is the household of a joint family / one in which the husband of the aggrieved woman has a share. It held that shared household is the shared household of the aggrieved person where she was living at the time when the application was filed or in the recent past had been excluded from its use, or she is temporarily absent. The words ‘lives or at any stage has lived in a domestic relationship’ had to be given its normal and purposeful meaning. The living of a woman in a household has to refer to a living which has some permanency. Mere fleeting or casual living at different places shall not make a shared household. The intention of the parties and the nature of living, including the nature of household, have to be looked into to find out as to whether the parties intended to treat the premises as a shared household or not. It held that the definition of shared household as noticed in section 2(s) did not indicate that a shared household shall be one which belongs to or (has been) taken on rent by the husband. If the shared household belongs to any relative of the husband with whom the woman has lived in a domestic relationship, then the conditions mentioned in the DV Act were satisfied and the said house will become a shared household.

The Supreme Court also noted with approval the decisions of the Delhi Court in Preeti Satija vs. Raj Kumari and Anr., 2014 SCC Online Del 188, which held that the mother-in-law (or a father-in-law, or for that matter ‘a relative of the husband’) can also be a respondent in the proceedings under the DV Act and remedies available under the same Act would necessarily need to be enforced against them; and in Navneet Arora vs. Surender Kaur and Ors., 2014 SCC Online Del 7617, which held that the broad and inclusive definition of the term ‘shared household’ in the DV Act was in consonance with the family patterns in India where married couples continued to live with their parents in homes owned by the parents. However, the Supreme Court also sounded a note of caution. It held that there was a need to observe that the right to residence u/s 19 of the DV Act was not an indefeasible right of residence in a shared household, especially when the daughter-in-law was pitted against an aged father-in-law and mother-in-law. Senior citizens in the evening of their lives were also entitled to live peacefully and not be haunted by marital discord between their sons and daughters-in-law. While granting relief the Court had to balance the rights of both the parties.

LIVE-IN RELATIONSHIPS

A live-in relationship is also considered as a domestic relationship. In D. Velusamy vs. D. Patchaiammal (2010) 10 SCC 469 it was held that in the DV Act Parliament has taken notice of a new social phenomenon which has emerged in India, known as live-in relationship. According to the Court, a relationship in the nature of marriage was akin to a common law marriage and must satisfy the following conditions:
(i)   The couple must hold themselves out to society as being akin to spouses;
(ii)    They must be of a legal age to marry;
(iii)   They must be otherwise qualified to enter into a legal marriage, including being unmarried;
(iv) They must have voluntarily cohabited and held themselves out to the world as being akin to spouses for a significant period of time; and
(v) The parties must have lived together in a ‘shared household’.

SEPARATED COUPLES

The Supreme Court had an interesting issue to consider in the case of Krishna Bhattacharjee vs. Sarathi Choudhury, Cr. Appeal No. 1545/2015 ~ whether once a decree of judicial separation has been issued, could the woman claim relief under the DV Act. The Supreme Court held after considering various earlier decisions in the cases of Jeet Singh vs. State of U.P. (1993) 1 SCC 325; Hirachand Srinivas Managaonkar vs. Sunanda (2001) 4 SCC 125; Bai Mani vs. Jayantilal Dahyabhai, AIR 1979 209; Soundarammal vs. Sundara Mahalinga Nadar, AIR 1980 Mad 294, that there was a distinction between a decree for divorce and a decree of judicial separation; in divorce there was a severance of the status and the parties did not remain as husband and wife, whereas in judicial separation the relationship between husband and wife continued and the legal relationship continued as it had not been snapped. Accordingly, the Supreme Court held that the decree of judicial separation did not act as a deterrent for the woman from claiming relief under the DV Act since the relationship of marriage was still subsisting.

SENIOR CITIZENS ACT

Just as the DV Act is a beneficial statute meant for protecting the rights of women, so also the ‘Maintenance and Welfare of Parents and Senior Citizens Act, 2007’ is a Central Act enacted to provide for more effective provisions for the maintenance and welfare of parents and senior citizens. More often than not, there arises a divergence between the DV Act and the Senior Citizens Act and hence it is essential to understand this law also.

The Senior Citizens Act provides for the setting up of a Maintenance Tribunal in every State which shall adjudicate all matters for their maintenance, including provision for food, clothing, residence and medical attendance and treatment. Section 22(2) of this Act mandates that the State Government shall prescribe a comprehensive action plan for providing protection of the life and property of senior citizens. To enable this, section 32 empowers it to frame Rules under the Act. Accordingly, the Maharashtra Government has notified the Maharashtra Maintenance and Welfare of Parents and Senior Citizens Rules, 2010. Rule 20, which has been framed in this regard, provides that the Police Commissioner of a city shall take all necessary steps for the protection of the life and property of senior citizens.

Section 23 covers a situation where property has been transferred by a senior citizen (by gift or otherwise) subject to the condition that the transferee must provide the basic amenities and physical needs to the transferor. In such cases, if the transferee fails to provide the maintenance and physical needs, the transfer of the property is deemed to have been vitiated by fraud, coercion or under undue influence and can be held to be voidable at the option of the transferor.

Eviction from house under Senior Citizens Act
One of the most contentious and interesting facets of the Act has been whether the senior citizen / parent can make an application to the Tribunal seeking eviction from his house of the relative who is harassing him. Can the senior citizen / parent get his son / relative evicted on the grounds that he has not been allowing him to live peacefully? Different High Courts have taken contrary views in this respect. The Kerala High Court in C.K. Vasu vs. The Circle Inspector of Police, WP(C) 20850/2011 has taken the view that the Tribunal can only pass a maintenance order and the Act does not empower the Tribunal to grant eviction reliefs. A single Judge of the Delhi High Court in Sanjay Walia vs. Sneha Walia, 204 (2013) DLT 618 has held that for an eviction application the appropriate forum would be a Court and not the Maintenance Tribunal.

However, another single Judge of the Delhi High Court in Nasir vs. Govt. of NCT of Delhi & Ors., 2015 (153) DRJ 259 has held that the object of the Act had to be kept in mind and which was to provide simple, inexpensive and speedy remedy to the parents and senior citizens who were in distress by a summary procedure. The provisions had to be liberally construed as the primary object was to give social justice to parents and senior citizens. Accordingly, it upheld the eviction order by the Tribunal. It held that directions to remove the children from the property were necessary in certain cases to ensure a normal life for the senior citizens. The direction of eviction was a necessary consequential relief or a corollary to which a senior citizen would be entitled and it accordingly directed the police station to evict the son.

A similar view was taken in Jayantram Vallabhdas Meswania vs. Vallabhdas Govindram Meswania, AIR 2013 Guj. 160. The Division Bench of the Punjab & Haryana High Court in J. Shanti Sarup Dewan vs. Union Territory, Chandigarh, LPA No. 1007/2013 held that there had to be an enforcement mechanism set in place, especially qua the protection of property as envisaged under the said Act, and that the son was thus required to move out of the premises of his parents to permit them to live in peace and civil proceedings could be only qua a claim thereafter if the son so chose to make one, but that, too, without any interim injunction.

Senior Citizens Act or D.V. Act – Which reigns supreme?

What happens when a woman claims a right under the DV Act to a shared household belonging to her in-laws in which she and her husband resided and at the same time the in-laws seek to evict her by resorting to the Senior Citizens Act? We have already seen that the Supreme Court in the case of Satish Chander (Supra) has categorically established that a shared household would even include a house owned by and belonging to the in-laws. In such a scenario, which Act would reign supreme? A three-Judge Bench of the Supreme Court had an occasion to consider this very singular issue in Smt. S. Vanitha vs. The Deputy Commissioner, Bengaluru Urban District & Ors., CA 3822/2020 Order dated 15th December, 2020. The facts were that the in-laws sought to evict their estranged daughter-in-law from their house by resorting to the Senior Citizens Act. The Tribunal issued an eviction order. The woman claimed that as the lawfully-wedded spouse she could not be evicted from her shared household in view of the protection offered by section 17 of the DV Act. By relying on the decision in Satish Chander (Supra) she claimed that the authorities constituted under the Senior Citizens Act had no jurisdiction to order her eviction.

J. Dr. Chandrachud, speaking on behalf of the Bench, observed that the Maintenance Tribunal under the Senior Citizens Act may have the authority to order an eviction, if it is necessary and expedient to ensure the maintenance and protection of the senior citizen or parent. Eviction, in other words, would be an incident of the enforcement of the right to maintenance and protection. However, this remedy could be granted only after adverting to the competing claims in the dispute.

The Bench observed that section 36 of the DV Act contained a non-obstante clause to ensure that the remedies provided were in addition to other remedies and did not displace them. The Senior Citizens Act was undoubtedly a later Act and also stipulated that its provisions would have effect, notwithstanding anything inconsistent contained in any other enactment. However, the Court held that the provisions of the Senior Citizens Act giving it overriding force and effect would not by themselves be conclusive of the intent to deprive a woman who claimed a right in a shared household under the DV Act. It held that the principles of statutory interpretation dictated that in the event of two special acts containing non-obstante clauses, the later law typically prevailed and here the Senior Citizens Act, 2007 was the later statute. However, interestingly, the Apex Court held that in the event of a conflict between two special acts, the dominant purpose of both statutes would have to be analysed to ascertain which one should prevail over the other. In this case, both pieces of legislation were intended to deal with salutary aspects of public welfare and interest.

It held that a significant object of the DV Act was to provide for and recognise the rights of women to secure housing and to recognise the right of a woman to reside in a matrimonial home or a shared household, whether or not she has any title or right in the shared household. Allowing the Senior Citizens Act to have an overriding force and effect in all situations, irrespective of competing entitlements of a woman to a right in a shared household within the meaning of the DV Act, 2005, would defeat the object and purpose which the Parliament sought to achieve in enacting the latter legislation. The law protecting the interest of senior citizens was intended to ensure that they are not left destitute, or at the mercy of their children or relatives. Equally, the purpose of the DV Act could not be ignored by a sleight of statutory interpretation. Both sets of legislations had to be harmoniously construed.

Hence, it laid down a very important principle, that the right of a woman to secure a residence order in respect of a shared household could not be defeated by the simple expedient of securing an order of eviction by adopting the summary procedure under the Senior Citizens Act! It accordingly directed that, in deference to the dominant purpose of both the legislations, it would be appropriate for a Maintenance Tribunal under the Senior Citizens Act to grant only such remedies of maintenance that do not result in obviating competing remedies under other special statutes such as the DV Act. The Senior Citizens Act could not be deployed to override and nullify other protections in law, particularly that of a woman’s right to a shared household u/s 17 of the DV Act.

CONCLUSION

It is evident that the DV Act is a very important enactment and a step towards women’s empowerment. Courts are not hesitant to uphold its superiority over other laws and under various scenarios.

shailesh.kwebmaker

ANCESTRAL OR SELF-ACQUIRED? THE FIRE CONTINUES TO RAGE…

INTRODUCTION

One of the favourite riddles of all time is ‘Which came first – the chicken or the egg?’ There is no clear answer to this question. Similarly, one of the favourite questions under Hindu law is ‘Whether a property is ancestral or self-acquired?’ This column has on multiple occasions examined the question in the light of decisions of the Supreme Court of India. However, every time there is a new decision on this point, it becomes necessary to re-examine this very important issue and consider the earlier case law on the subject.

Under the Hindu Law, the term ‘ancestral property’ as generally understood means any property inherited from any of the three generations above of male lineage, i.e., from the father, grandfather, great grandfather. In fact, two views were prevalent with regard to ancestral property: View-1: Ancestral property cannot be alienated. According to this, if the person inheriting it has sons, grandsons or great-grandsons, then it automatically becomes joint family property in his hands and his lineal descendants automatically become coparceners along with him. View-2: Ancestral property can be alienated since it becomes self-acquired property in the hands of the person inheriting it. Thus, he can alienate it by Will, gift, transfer, etc., or in any other manner he pleases.

EARLIER IMPORTANT DECISIONS

CWT, Kanpur and Others vs. Chander Sen and Others (1986) 3 SCC 567

In this case, the Supreme Court concluded that property inherited by a Hindu by way of intestate succession from his father under the Hindu Succession Act, 1956 would not be HUF (or ancestral) property in the son’s hands vis-à-vis his own sons. This position was also followed in Yudhishter vs. Ashok Kumar (1987) AIR SC 558.

Bhanwar Singh vs. Puran (2008) 3 SCC 87

Here, the Supreme Court followed the Chander Sen case (Supra) and various subsequent judgments and held that having regard to the Hindu Succession Act, 1956, property devolving upon the sons and daughters of an intestate Hindu father ceased to be joint family property and all the heirs and legal representatives of the father would succeed to his interest as tenants-in-common and not as joint tenants. In a case of this nature, the joint coparcenary did not continue.

Uttam vs. Saubhag Singh AIR (2016) SC 1169

This was a case where a Hindu died intestate in 1973 (after the commencement of the Hindu Succession Act). The Court held that on a conjoint reading of sections 4, 8 and 19 of the Hindu Succession Act, once the joint family property has been distributed in accordance with section 8 on principles of intestacy, the joint family property ceases to be joint family property in the hands of the various persons who have succeeded to it and they hold the property as tenants in common and not as joint tenants.

Arshnoor Singh vs. Harpal Kaul, AIR (2019) SC (0) 3098

A two-member Bench of the Supreme Court analysed various earlier decisions on the subject and held that after the Hindu Succession Act, 1956 came into force, the concept of ancestral property has undergone a change. Post-1956, if a person inherited a self-acquired property from his paternal ancestors, the said property became his self-acquired property and did not remain coparcenary property.

However, the Apex Court held that if the succession opened under the old Hindu law, i.e., prior to the commencement of the Hindu Succession Act, 1956, then the parties would be governed by Mitakshara law. In that event, the property inherited by a male Hindu from his paternal male ancestor would be coparcenary property in his hands vis-à-vis his male descendants up to three degrees below him. Accordingly, the nature of property remained coparcenary even after the commencement of the Hindu Succession Act, 1956. Incidentally, the comprehensive decision of the Delhi High Court in the case of Surender Kumar vs. Dhani Ram, AIR (2016) Delhi 120 had taken the very same view.

The Supreme Court further analysed that in the case on hand, the first owner (i.e., the great-grandfather of the appellant in that case) died intestate in 1951 and hence the succession opened in 1951. This was a time when the Hindu Succession Act was not in force. Hence, the nature of property inherited by the first owner’s son was coparcenary and thereafter, everyone claiming under him inherited the same as ancestral property. The Court distinguished its earlier ruling in the case of Uttam (Supra) since that dealt with a case where the succession was opened in 1973 (after the Hindu Succession Act, 1956 came into force) whereas the present case dealt with a situation where the succession was opened in 1951. The Supreme Court reiterated its earlier decision in the case of Valliammai Achi vs. Nagappa Chettiar AIR (1967) SC 1153 that once a person obtains a share in an ancestral property, then it is well settled that such share is ancestral property for his male children. They become owners by virtue of their birth. Accordingly, the Supreme Court did not allow the sale by the father to go through since it affected his son’s rights in the property. Thus, the only reason why the Supreme Court upheld the concept of ancestral property was because the succession had opened prior to 1956.

Doddamuniyappa (Dead) through LRsv Muniswamy (2019) (7) SCC 193

This decision of the Supreme Court also pertained to the very same issue. The Court held that it was well settled and held by in Smt. Dipo vs. Wassan Singh (1983) (3) SCC 376 that the property inherited from a father by his sons became joint family property in the hands of the sons. Based on this principle, the Court concluded that property inherited by a person from his grandfather would remain ancestral property and hence his father could not sell the same. In this case, neither did the Supreme Court refer to its earlier decisions cited above nor did it go into the issue of whether the succession had opened prior to 1956. It held as a matter of principle that all ancestral property inherited by a person would continue to be ancestral property for his heirs.

It is humbly submitted that in the light of the above decisions, this view would not be tenable after the enactment of the Hindu Succession Act, 1956. However, based on the facts of the present case one can ascertain that the first owner died sometime before 1950 and hence it can be concluded that the succession opened prior to 1956. If that be the case, as held in Arshnoor Singh vs. Harpal Kaul (Supra), the property continues to be ancestral in the hands of the heirs. Hence, while the principle of the decision in the Doddamuniyappa case seems untenable, the conclusion is correct!

LATEST DECISION

One more Supreme Court decision has been added to this roster of cases. The decision in the case of Govindbhai Chhotabhai Patel vs. Patel Ramanbhai Mathurbhai, AIR (2019) SC 4822 has given quite a definitive pronouncement. In this case, a property was purchased by the father of the Donor and it is by virtue of a Will executed by the father that the property came to be owned by the Donor in 1952-1953. Subsequently, the Donor executed a gift deed in favour of a person. Subsequent to the demise of the Donor, his sons objected to the gift on the ground that what their father received was ancestral property; moreover, since he got it by way of partition, hence it could not be gifted away. The sons relied upon an earlier Supreme Court decision in the case of Shyam Narayan Prasad vs. Krishna Prasad, (2018) 7 SCC 646 to contend that self-acquired property of a grandfather devolves upon his son as ancestral property.

The Supreme Court considered its earlier decision in the case of C.N. Arunachala Mudaliar vs. C.A. Muruganatha Mudaliar, AIR (1953) SC 495 where, while examining the question as to what kind of interest a son would take in the self-acquired property of his father which he receives by gift or testamentary bequest from him, it was held that a Mitakshara father has absolute right of disposition over his self-acquired property to which no exception can be taken by his male descendants. It was held that it was not possible to hold that such property bequeathed or gifted to a son must necessarily rank as ancestral property. It was further held that a property gifted by a father to his son could not become ancestral property in the hands of the Donee simply by reason of the fact that the Donee got it from his father or ancestor. It further held that a Mitakshara father is not only competent to sell his self-acquired immovable property to a stranger without the concurrence of his sons, but he can make a gift of such property to one of his own sons to the detriment of another. When the father obtained the grandfather’s property by way of gift, he received it not because he was a son or had any legal right to such property but because his father chose to bestow a favour on him which he could have bestowed on any other person as well.

To find out whether or not a property is ancestral in the hands of a particular person, not merely the relationship between the original and the present holder but the mode of transmission also must be looked into. The Court held that property could ordinarily be reckoned as ancestral only if the present holder had got it by virtue of his being a son or descendant of the original owner. The Court further held that on reading of the Will as a whole, the conclusion becomes clear that the testator intended the legatees to take the properties in absolute rights as their own self-acquired property without being fettered in any way by the rights of their sons and grandsons. In other words, he did not intend that the property should be taken by the sons as ancestral property. Thus, the intention arising from the document / transfer / transmission was held to be an important determining factor in that case.

The Court in Govindbhai’s case (Supra) also referred to its earlier decision in Pulavarthi Venkata Subba Rao & Ors. vs. Valluri Jagannadha Rao (deceased) by LRs, AIR (1967) SC 591. In that case, a life interest benefit was given by a father to his two sons. The Court concluded that the properties taken by the two sons under the Will were their separate properties and not ancestral since there was no such intention in the Will.

The Court in Govindbhai’s case (Supra) also examined the reliance placed on Shyam Narayan’s case (Supra) and held that in that case the Apex Court did not question the issue of whether the property was ancestral property. It only held that once ancestral property was partitioned it continued to be ancestral in the hands of the recipient sons and grandsons. Hence, that case was not applicable to the facts of the case on hand. In that case, the Trial Court and the High Court had held that property received on partition of an HUF in 1987 was ancestral property. The Supreme Court found no reason to disagree with this conclusion. While the facts emerging from the Supreme Court decision are not fully clear, it is humbly submitted that the conclusion reached in the Shyam Narayan case (Supra) requires reconsideration.

Ultimately, in the case on hand (Govindbhai), the Supreme Court held that since the grandfather purchased the property and he was competent to execute a Will in favour of any person, including his son, the recipient (i.e., his son) would get it as his self-acquired property. The burden to prove that the property was ancestral was on the plaintiffs alone. It was for them to prove that the Will of their grandfather intended to convey the property for the benefit of the family so as to be treated as ancestral property. In the absence of any such averment or proof, the property in the hands of Donor has to be treated as self-acquired property. Once the property in the hands of the Donor is held to be self-acquired property, he was competent to deal with his property in such a manner as he considered proper, including by executing a gift deed in favour of a stranger to the family. Accordingly, the gift deed was upheld.

CONCLUSION

A conjoined reading of the Hindu Succession Act, 1956 and the plethora of decisions of the Supreme Court shows that the customs and traditions of Hindu Law have been given a decent burial by the codified Act of 1956! To reiterate, the important principles laid down by various decisions are that:

(a) Inheritance of ancestral property after 1956 does not create an HUF property and inheritance of ancestral property after 1956 therefore does not result in creation of an HUF property;

(b) Ancestral property can become an HUF property only if inheritance / succession is before 1956 and such HUF property which came into existence before 1956 continues as ancestral property even after 1956;

(c) If a person dies after passing of the Hindu Succession Act, 1956 and there is no HUF existing at the time of his death, inheritance of a property of such a person by his heirs is as a self-acquired property in the hands of the legal heirs. They are free to deal with it in any manner they please.

(d) After passing of the Hindu Succession Act, 1956 if a person inherits a property from his paternal ancestors, the said property is not an HUF property in his hands and the property is to be taken as a self-acquired property of the person who inherits the same;

(e) Self-acquired property received by way of gift / Will / inheritance continues to remain self-acquired in the hands of the recipient and he is free to deal with it in any manner he pleases.

Considering that this issue regularly travels all the way to the Supreme Court time and again, is it not high time that the Parliament amends the Hindu Succession Act to deal with this burning issue? If the Income-tax Act can be amended every year, and now even the Companies Act is amended regularly, why cannot this all-important law be amended with regular frequency? This Act touches many more lives and properties as compared to several other corporate statutes but yet it was last amended in 2005 and that, too, suffered from a case of inadequate drafting! One wishes that there is a comprehensive overhaul of the Hindu Succession Law so that valuable time and money are not lost in litigation.

shailesh.kwebmaker

HINDU LAW – A MIXED BAG OF ISSUES

INTRODUCTION

Hindu Law has always been a
very fascinating subject. The fact that it is both codified in some respects
and uncodified in others makes it all the more interesting. The Supreme Court
in the case of M. Arumugam vs. Ammaniammal, CA No. 8642/2009 order dated
8^thJanuary, 2020 had occasion to consider a mixed bag of
issues under Hindu Law. Some of the observations made by the Court are very
interesting and have a profound impact on the interpretation of Hindu Law. Let
us understand this decision in more detail and also analyse its implications.

FACTUAL MATRIX

The facts of this case are
quite detailed but are relevant to better appreciate the decision. There was a
Hindu male, his wife, two sons and three daughters. He also had an HUF in which
he (the karta) and his two sons were coparceners. The HUF had certain
property. This was prior to the 2005 amendment to the Hindu Succession Act,
1956 (the Act) and hence the daughters were not coparceners. The karta
died intestate. Accordingly, by virtue of the Act, his share in the HUF was to
be succeeded to by his legal heirs in accordance with the Act, i.e., equally
amongst the six surviving family members. On his death, a Release Deed was
executed in respect of the HUF amongst the two sons, the mother and the
daughters in which the mother and the daughters relinquished all their rights
in the father’s HUF to the two sons. As one of the daughters (the respondent in
this case) was a minor, her mother executed the deed as her natural guardian
for and on her behalf. Similarly, as one of the sons was a minor, the elder son
(the appellant in this case) executed this deed as his guardian.

After
nine years, a Deed of HUF Partition was executed between the two sons in which
the husband of the respondent (who was now a major) acted as a witness.
Thereafter, the two sons were in possession of the erstwhile HUF property in
their own individual, independent capacities. When they sought to sell this
property, the respondent objected to the sale on the grounds that when the
release deed was executed she was a minor and her mother had no authority to
sign it on her behalf. She also contended that she was, in fact, not even aware
of the release deed. Hence, the same was void ab initio and all
subsequent transactions and agreements were also void. Accordingly, she
filed a suit to set aside the transactions.

The trial court dismissed
the suit holding that the mother acted as the natural guardian of the minor
daughter and no steps were taken by the respondent on attaining majority to get
the release deed set aside within the period of limitation of three years. She
then filed an appeal before the Madras High Court which came to the conclusion
that the property in the hands of the legal heirs of the father after his death
was Joint HUF property and the mother could not have acted as the guardian of
the minor. It held that the eldest son on demise of the father became the karta
of the HUF and also the guardian for the share of the minors within the family.
Hence, he could not have executed such a release deed in his favour. It was,
therefore, held that the release deed was void ab initio. Consequently,
the eldest son filed an appeal before the Supreme Court.

It is in the background of
these facts that we can understand the ratio of the Apex Court on
various issues.

WHO CAN BE THE NATURAL GUARDIAN?

The Hindu Minority and
Guardianship Act, 1956 lays down the law relating to minority and guardianship
of Hindus and the powers and duties of the guardians. It overrides any
uncodified Hindu custom, tradition or usage in respect of the minority and
guardianship of Hindus. Under this Act, a guardian means a person who has the
care of the minor or of his property, or both. Further, the term also includes
a natural guardian. The term ‘Natural Guardian’ is of great significance since
most of the provisions of this Act deal with the rights and duties of a natural
guardian and hence it becomes necessary to understand the meaning of this term.
If the minor is a boy or an unmarried girl, then the father and after him the
mother automatically becomes the natural guardian. The natural guardian of a
Hindu minor has the power to do all acts which are necessary or reasonable and
proper for the minor’s benefit or for the realisation, protection or the
benefit of the minor’s estate. The most important restriction placed by the Act
on the natural guardian relates to his immovable property. A natural guardian
cannot without the prior permission of a Court enter into any disposal /
mortgage / lease exceeding five years of his immovable property.

This Act also has a caveat.
It states that a guardian cannot be appointed for the minor’s undivided
interest in a joint HUF property if the property is under the management of an
adult member of the family. Since the interest in an HUF property is not
separate or divisible from the rest of the shares, it is not possible to
segregate the interest of one member from another. The Supreme Court set aside
this provision in Arumugam’s case (Supra) stating that in that
case they were dealing with a situation where all the family members decided to
dissolve the Hindu Undivided Family assuming there was one in existence. Hence,
the exemption had no application.

As regards the plea that
the mother cannot act as the natural guardian and the karta of the HUF
would play both roles, the Apex Court observed that a karta is the
manager of the joint family property. He was not the guardian of the minor
members of the joint family. What the Hindu Minority and Guardianship Act
provided was that the natural guardian of a minor Hindu shall be his guardian
for all intents and purposes except so far as the undivided interest of the
minor in the joint family property was concerned. This meant that the natural
guardian could not dispose of the share of the minor in the joint family
property. The reason for this was that the karta of the joint family
property was the manager of the property. However, this principle would not
apply when a family settlement was taking place between the members of the
joint family. When such a dissolution took place and some of the members
relinquished their share in favour of the karta, it was obvious that the
karta could not also act as the guardian of that minor whose share was
being relinquished in his own (i.e., the karta’s) favour. There would be
an apparent conflict of interest. In such an eventuality, it would be
the mother alone who would be the natural guardian. Accordingly, there was
nothing wrong in the mother acting as the natural guardian of the minor
daughter.

CHALLENGE BY MINOR ON ATTAINING MAJORITY

Section 8 of the Hindu
Minority and Guardianship Act further provides that any disposal and / or
alienation of a minor’s immovable property by her natural guardian in
contravention of the Act is voidable at the instance of the minor. The Supreme
Court held that this meant that the release deed at best became a voidable
document which in terms of section 8 of the Act should have been challenged
within three years of the daughter attaining majority. Since she had failed to
do so, she could not now challenge the same. Thus, the period of limitation of
three years to challenge the document had expired.

Whether
property is joint or self-acquired

The next issue to be
decided by the Supreme Court was that in respect of the interest in the
coparcenary property which was succeeded by the legal heirs, whether it
continued to be HUF property or did it become the self-acquired property of
each heir? The Supreme Court referred to several decisions such as Guruprasad
Khandappa Magdum vs. Hirabai Khandappa Magdum, (1978) 3 SCC 383; CWT vs.
Chander Sen (1986) 3 SCC 567; Appropriate Authority IT vs. M.
Arifulla (2002) 10 SCC 342, etc. to hold that property devolving upon
legal heirs under intestate succession from a Hindu male is the individual
property of the person who inherits the same. It is not HUF property in the
recipient’s hands.

The Court also considered
section 30 of the Hindu Succession Act which clearly lays down that any Hindu
can dispose of his share in an HUF by means of a Will. It held that the
Explanation to section 30 clearly provided that the interest of a male Hindu in
a Mitakshara coparcenary is property capable of being disposed of by him
by a Will. This meant that the law-makers intended that for all purposes the
interest of a male Hindu in Mitakshara coparcenary was to be virtually
like his self-acquired property.

Manner of
owning the property

In this case, on the death
of the father and execution of the subsequent release deed, the two sons ended
up owning the property jointly. The Court referred to section 19 of the Act
which provides that when two or more heirs succeed together to the property of
an intestate, they shall take the property per capita and as tenants in common
and not as joint tenants.

It may be useful to explain
the meaning of these two terms. Although both may appear similar, but in law
there is a vast difference between the two. Succession to property would be
determined depending upon how a property has been acquired. A Joint Tenancy has
certain distinguishing features, such as unity of title, interest and
possession. Each co-owner has an undefined right and interest in property
acquired as joint tenants. Thus, no co-owner can say what is his or her share.
One other important feature of a joint tenancy is that after the death of one
of the joint tenants, the property passes by survivorship to the other joint
tenant and not by succession to the heirs of the deceased co-owner. For
example, X, Y and Z own a building as joint tenants. Z dies. His undivided
share passes on to X and Y. Tenancy in common is the opposite of joint tenancy
since the shares are specified and each co-owner in a tenancy in common can
state what share he owns in a property. On the death of a co-owner, his share
passes by succession to his heirs / beneficiaries under the Will and not to the
surviving co-owners. If a Will bequeaths a property to two beneficiaries in the
ratio of 60:40, then they are treated as tenants in common.

The Supreme Court concluded
that section 19 clearly indicated that the property was not to be treated as a
joint family property though it may be held jointly by the legal heirs as
tenants in common till the property is divided, apportioned or dealt with in a
family settlement.

Notional
partition on demise of coparcener

The Supreme Court held that
under the Act, on the death of a coparcener a notional partition of the HUF
takes place. This proposition may be elaborated for the benefit of all that
when a coparcener dies, there would be a notional partition of his HUF just
before his death to determine his share in the HUF which is bequeathed by his
Will. Accordingly, on the date prior to the coparcener’s demise, one needs to
work out the number of coparceners and determine each one’s share on that date.
Thus, if there are ten coparceners just before his death, then each would have
a notional 1/10^th share.

CONCLUSION

The
Supreme Court overruled the decision of the Madras High Court and upheld the
validity of the release deed. It also held that a mother would be the natural
guardian of the minor. This decision has elaborated on various important issues
relating to Hindu Law. It is an extremely unfortunate situation where for every
key feature of Hindu Law the Supreme Court needs to intervene. Should not the
entire Hindu Law be overhauled and codified in greater detail till such time as
India has a Uniform Civil Code?

shailesh.kwebmaker

PENAL PROVISIONS OF FEMA AS ANALYSED BY COURTS

INTRODUCTION

The
Foreign Exchange Management Act, 1999 (FEMA) is a law dealing with foreign
exchange in India with the objective of promoting the orderly development and
maintenance of the country’s foreign exchange market. FEMA, a civil law,
replaced the erstwhile Foreign Exchange Regulation Act, 1973 which provided for
criminal prosecution. While this very important law celebrated its 20^th
anniversary this year, in the recent past several Court decisions have analysed
FEMA Regulations and laid down certain important propositions. Through this
article, an attempt has been made to look at some such important decisions and
the principles laid down by them when it comes to imposition of a penalty under
FEMA.

STATUTORY PROVISIONS FOR LEVY OF PENALTY

Section
13(1) of FEMA levies a penalty for offences. It states that when any person
contravenes the Act or any regulation, notification, direction or order issued
in exercise of the powers under this Act, or contravenes any condition subject
to which an authorisation is issued by the RBI, he shall, upon adjudication, be
liable to a penalty up to thrice the sum involved in such
contravention where such amount is
quantifiable, or up to Rs. 2 lakhs where the amount is not quantifiable. Where
such contravention is a continuing one, a further penalty may be levied which
may extend to Rs. 5,000 for every day after the first day during which the
contravention continues.

Section
14 further provides that if any person fails to make full payment of the
penalty imposed on him u/s 13 within a period of 90 days from the date on which
the notice for payment of such penalty is served on him, he shall be liable to
civil imprisonment under this section. If the penalty is above Rs. 1 crore, the
detention period can extend up to three years and in all other cases up to six
months.

JURISPRUDENCE ON THE SUBJECT

In the
case of Shailendra Swarup vs. ED, CA No. 2463/2014
(SC) dated 27^th July, 2020 a penalty was levied on the company and its directors for import
violations under the erstwhile Foreign Exchange Regulation Act, 1973 (FERA).
One of the directors contested this penalty stating that he was a professional
and a non-executive director on the Board who was not in charge of day-to-day
affairs. The Supreme Court upheld his contention and held that for any action
under FERA the person charged must be responsible for the affairs of the
company. Merely because a person is a director he does not automatically become
liable. While this decision was under the FERA regime, it would be equally
useful under the FEMA. Section 42(1) of FEMA in relation to contraventions by
companies also states that every person who is in charge of and responsible for
the conduct of the business of the company shall be deemed to be guilty. Hence,
a blanket penalty notice by the Enforcement Directorate to all and sundry,
including independent directors, should be avoided.

Similarly,
in M/s National Fertilisers Ltd. vs. ED, CRL.
M.C. 3003/2002 (Del.) dated 9^th March 2016, the Delhi High Court dealt with the issue (under the
erstwhile FERA) of a Government company making full advance payment for import
of certain chemicals without obtaining any prior permission of the Reserve Bank
of India. The Court held that to charge an officer for a default committed by a
company evidence must be brought on record to show that all the petitioners
were in charge and responsible for the day-to-day affairs of the company at the
time when the offence was committed. It held that the Memorandum and Articles
of Association of the company would have pinpointed as to who were the officers
in charge and responsible for the day-to-day affairs of the company at the time
of commission of the said offence. Only the Managing Director or the Executive
Director / Functional Directors are responsible for the conduct and management
of the business of the company. At best, persons having domain over funds or
those who instructed the authorised dealers could be construed to be guilty of
foreign exchange violations.

Again,
in Narendra Singh vs. ED [2019] 111 taxmann.com
360 (Delhi) it was held that while
as a broad proposition the Courts exercising jurisdiction under Article 226 of
the Constitution would not readily interfere with a show cause notice at the
stage of adjudication, this was not an inflexible rule, particularly in a case
where the foundational facts necessary for proceeding with such adjudication
were shown not to exist. In the case of each of the accused, it was shown that
they were only Non-Executive Directors of the accused company and, therefore,
not a person ‘in charge of and responsible for the conduct of its business’.
Hence, the adjudication proceedings under FEMA were quashed.

However,
in Suborno Bose vs. ED, CA No. 6267/2020 (SC)
dated 5^th March, 2020, the Supreme Court was faced with the issue of penalty on an M.D. for a
continuing offence by a company. In this case, a penalty was levied on a
company and its M.D. for an offence u/s 10(6) of the FEMA, i.e., not
surrendering foreign exchange to the authorised person / bank within the time
permissible under the Act. In this case, it was alleged that the import of
goods for which the foreign exchange was procured and remitted was not
completed as the Bill of Entry remained to be submitted and the goods were kept
in the bonded warehouse and the company took no steps to clear the same. As a
result, the Court held that section 10(6) of the FEMA was clearly attracted
being a case of not using the procured foreign exchange for completing the
import procedure. Further, the company should have taken steps to surrender the
foreign exchange within the time specified in Regulation 6 of the Foreign Exchange Management (Realisation,
Repatriation and Surrender of Foreign Exchange) Regulations, 2000. The Supreme Court concluded that an offence u/s 10(6) was
a continuing offence as long as the imported goods remained uncleared and the
obligation provided under the Regulations was not discharged. Thus, the
contravention would continue to operate until corrective steps were taken.
Accordingly, the person in charge of managing the affairs of the company would
be liable to corrective steps.

The
observations made by the Bombay High Court in Shashank Vyankatesh Manohar vs. Union of India, 2014 (1)
Mh. L.J 838 are also very relevant.
Here, it was held that due caution and care must be taken before adjudicating a
penalty under FEMA, otherwise the noticee on failure to pay the penalty would
be presented with dire penal consequences of being imprisoned for six months,
apart from other liabilities and adverse consequences. Merely because the
imprisonment would be in a civil prison and not in a criminal prison would be
no consolation to the person who was not responsible for contravention of FEMA.
The Court held that since the provisions of section 42 of the Act were in pari materia with the provisions of section 141 of the Negotiable Instruments Act,
1881, the principles laid down by the Supreme Court in S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla
and another (2005) 8 SCC 89, were
required to be applied to FEMA cases also. That is why even in the case of a
person holding the position of M.D., he was not liable if he had no knowledge
of the contravention when the contravention took place, or if he had exercised
all due diligence to prevent the contravention of the Act. The liability was
thus cast on those persons who had something to do with the transactions
complained of. The conclusion was inevitable that the liability arises on
account of conduct, act or omission on the part of a person and not merely on
account of holding an office or a position in a company.

An
interesting penalty matter was considered by the Appellate Tribunal for SAFEMA,
FEMA, NDPS, PMLA and PBPT Act in the case of M/s Jaipur IPL Cricket Pvt. Ltd. vs. Special Director, ED,
FPA-FE-9/Mum./2013 (AT-PMLA), dated 11^th July, 2019. In this case, the Enforcement Directorate had levied a
penalty u/s 13 of Rs. 98 crores (being thrice the sum involved of Rs. 33
crores) for violation of various FEMA Regulations in relation to Foreign Direct
Investment in the Rajasthan Royals IPL Franchisee.

The
Appellate Tribunal (AT) held that it was a settled principle of law that even
though proceedings initiated u/s 13 of FEMA did not result in criminal
conviction or sentence, the consequences were equally penal and disastrous.
Further, section 14 clearly provided that in case the penalty imposed was not
paid within the time period provided, it would result in civil imprisonment. It
held that a bare perusal of FEMA established that its provisions were onerous
in nature and wide in scope and statutes which imposed onerous obligations,
were wide in scope and ambit and envisaged penal consequences must be construed
strictly. It also considered section 42 of FEMA which governs the imposition of
penalty upon persons in charge of, and responsible to, the company for the
conduct of the business of the company. In order to invoke the said provision,
two conditions were required to be satisfied cumulatively; firstly, it must be
established that the company has violated FEMA, and secondly, it must be
established that the person sought to be made liable to penalty was in charge
of, and responsible to, the company for the conduct of the business of the
company at the time the contravention was committed and not conducted its
diligence in relation to the transaction. The burden of proof to establish and
substantiate both the above requirements for imposition of penalty u/s 42(1) of
FEMA was upon the Enforcement Directorate in the first instant. Thereafter, it
shifted to the private party who was liable to discharge the same.

The
proceedings under FEMA in which a penalty was sought to be imposed for
contravention of a statutory obligation were ‘quasi criminal
proceedings’. Section 13 of FEMA was couched in discretionary terms and vested
the regulatory authorities with discretion to impose a penalty up to three
times the sum involved in the contravention. It noted that the imposition of penalty in quasi criminal proceedings must be guided by the well-established principles of proportionality. Imposition of a penalty of Rs. 98.35 crores as against
the total value of remittances of Rs. 33.22 crores in respect of alleged
contraventions which could at best be treated as technical and venial was untenable
and unsustainable. The factors which weighed with the AT in imposition of
penalty were that ~ no loss has been caused to the exchequer; the remittances
had come into India and continued to remain in India; this was not a case where
foreign exchange has gone out of India; the remittances were utilised for the
purposes for which they were intended; no allegation of misutilisation of the
monies for extraneous purposes; entities which made the said remittances had
not gained any benefit whatsoever and instead had suffered considerable
financial detriment as shares having beneficial interest were not issued
against the inward remittances to the foreign investors for 11 years; the
country has not lost any revenue. Hence, considering all factors, the AT held
that imposition of an exorbitant penalty of Rs. 98.35 crores should be reduced
to Rs. 15 crores.

Conversely,
in Tips Industries Ltd. vs. Special Director, ED
[2020] 113 taxmann.com 318 [(PMLA-AT), New Delhi] the AT was faced with the issue of penalty on the M.D. of
a company for FEMA violations in relation to overseas direct investment in
foreign subsidiaries. It was the argument of the accused M.D. that he was not
responsible for the day-to-day affairs of the company and that the adjudicating
authority had not been able to substantiate why he should be penalised. The AT
observed that Form ODA (seeking approval of the RBI for the overseas direct
investment) had been filed before the RBI along with a declaration and the same
was signed by the accused as Managing Director of the foreign company and the
Indian investing company. This was held to be evidence that he was indeed
responsible for the activities of the appellant company. Besides, neither the
company nor the MD was able to show any other document to prove that somebody
else was the person responsible for the day-to-day affairs of the company.

The AT also dealt with the
issue of pre-deposit of the penalty amount in the case of Google India (P) Ltd. vs. Special Director, ED [2020] 116
taxmann.com 622 (ATFFE – New Delhi). In this
case, Google India entered into an agreement with Google Ireland and Google USA
under which, for a distributor fee, Google Ireland granted a right to it to
distribute / sell online advertisement space under the ‘Ad Words Program’ to
advertisers in India. The dues to Google Ireland and Google USA were
outstanding beyond a period of six months and hence permission of the AD Bank
was sought explaining the reasons for delay. The AD Bank, out of abundant
caution, sought permission of RBI for allowing the remittances in question. The
RBI permitted the AD Bank to allow the remittances. The said permissions were
granted from ‘the foreign exchange angle under the provisions of FEMA’.

The ED
held that this was tantamount to borrowing by the Indian company and it levied
a penalty of Rs. 5 crores on the Indian company and Rs. 20 lakhs on each of its
foreign directors. It opposed the delay and stated that RBI could not condone
it and the appellant would be guilty of breach of provisions of FEMA as the
same were not paid within the prescribed period of time.

It was
contended on behalf of the appellant that there were no FEMA violations as the
permissions were granted by the RBI only after considering the following
aspects ~ expressly requiring the AD Bank to verify the genuineness of the
reasons for delay and whether there was any pecuniary gain to the appellant; a
specific confirmation by the appellant that there was no pecuniary gain to it
and a confirmation by the appellant that the amounts to be paid were not
utilised for any other purpose and that there was no interest paid on the same.
It was further submitted that the RBI has not treated the two transactions as
ECB / deferred payment arrangements. It is also submitted that nothing contrary
has been discovered by the respondent after independent investigation. Thus,
the decision taken by the RBI was as per law and the question of violations of
any provisions does not arise.

The AT
relying on LIC vs. Escorts Ltd.
[1986] 1 SCC 264 held that it
is a settled law that FEMA being a special act no authority has the
jurisdiction to reinterpret and / or restrict the permissions granted by the
RBI in exercise of its jurisdiction u/s 3 read with section 11 of FEMA.
Further, the ED had no jurisdiction to reinterpret the terms of the agreement
between Google Ireland and Google India. It was settled law that the Court
should proceed on the basis that the apparent tenor of the agreement reflects
the real state of affairs – UOI
vs. Mahindra & Mahindra Ltd. [1995] 76 ELT 481 (SC). Its prima
facie view was that once the permission has been
granted by the RBI, the delay stood regularised and there were no violations of
the provisions of FEMA. The presumption was in favour of the appellant that RBI
must have been satisfied while condoning the delay. It held that the contention
by the ED that amounts due for more than six months automatically makes the
same a deferred payment arrangement / ECB was incorrect. A stringent law could
only be applied in the Master Circular on Imports where there was no such
condition mandated. Further, the circular expressly provided for settlement of
dues by the AD banks beyond a period of six months.

Hence,
it held that the appellants had prima
facie demonstrated that there was no violation of
the provisions of the FEMA / the Master Circular on Imports. Even if there was
a violation, then the RBI had regularised the same by granting the permissions
to settle the dues specifically from a ‘FEMA angle’. The RBI permission expressly
stated that the permission was issued from a foreign exchange angle under FEMA.
The limitation of the permission was only in respect of any other applicable
laws other than FEMA. The ED was not seeking to impose a penalty for violation
of any other laws. It concluded that in the light of the prima facie case made out by the appellant, it would suffer hardship if asked to
deposit the penalty amount. The AT was of the opinion that the chances of
success of the appeal were more than of the failure of the appeal. Accordingly,
it stayed the payment of the penalty.

CONCLUSION

In
spite of being a 20-year-old law, FEMA is an evolving law since the
jurisprudence on it is taking shape only now. One reason for this is that often
cases under FEMA drag on, reaching finality after a long duration. It is
heartening to note that the judiciary has been taking a very balanced approach
towards cases under FEMA.

You may have a fresh start any moment you choose, for
this thing that we call ‘failure’ is not the falling down, but the staying down

— Mary Pickford

A man can only attain knowledge with the help of those
who possess it. This must be understood from the very beginning. One must learn
from him who knows

— George
Gurdjieff

shailesh.kwebmaker

LAW OF EVIDENCE RELATING TO WITNESSES TO A WILL

INTRODUCTION

One of the most crucial ingredients for a valid Will is the fact of it
being witnessed by two attesting witnesses. Many a Will has been found wanting
for the fact of improper attestation. However, what would be the state of a
Will where both the attesting witnesses are also dead and when it is being
proved in Court (say in a probate petition)? Would the Will suffer for want of
attestation or could it yet be considered valid? The Supreme Court was faced
with this interesting issue in the case of V. Kalyanaswamy (D) by LRs vs.
L. Bakthavatsalam (D) by LRs, Civil Appeal Nos. 1021-1026/2013, order dated 17^th
July, 2020. Let us analyse this case and other related judgments on
this issue.

FACTS AND THE ISSUE

In the Kalyanaswamy case (Supra) in the Supreme Court, both
the attesting witnesses to the Will were not alive. One of them was an
Income-tax practitioner and the other a doctor. The questions framed by the
Supreme Court for its consideration were as follows:

(a) When both the attesting witnesses are dead, is it required that the
attestation has to be proved by the two witnesses? Or

(b) Is it sufficient to prove that the attestation of at least one of the
attesting witnesses is in his handwriting and proving the testator’s signature?

Before we analyse the Court’s findings it would be worthwhile to understand
the requirements of witnessing a Will and the manner of proving the same.

WITNESSING A WILL

The mode of making a Will in India is provided in section 63 of the Indian
Succession Act, 1925. This Act applies to Wills by all persons other than
Muslims. For a Will to be valid under this Act, its execution by a testator
must be attested by at least two witnesses. The manner of witnessing a Will is
as is provided in section 63 of the Indian Succession Act which requires that
it is attested by two or more witnesses, each of whom has:

(a) seen the testator sign the Will; or

(b) received from the testator a
personal acknowledgement of his signature.

It is trite that the witnesses need not know the contents of the Will. All
that they need to see is the testator and each other signing the Will ~ nothing
more and nothing less!

MANNER OF EVIDENCE

Section 68 of the Indian Evidence Act, 1872 (‘the
Evidence Act’) explains how a document that is required to be attested must be
proved to be executed. In the case of a Will, if the attesting witness is alive
and capable of giving evidence, then the Will can be proved only if one of the
attesting witnesses is called for proving its execution. Thus, in the case of a
Will, the witness must be examined in Court and he must confirm that he indeed
attested the execution of that Will.

WHAT IF WITNESSES CANNOT BE FOUND?

However, section 69 of the Act provides that if no such attesting witness
can be found, it must be proved that the attestation by at least one of the
witnesses is in his own handwriting and that the signature of the person
executing the document is in the handwriting of that person. Thus, evidence
needs to be produced which can confirm the signature of at least one of the
attesting witnesses to the Will as well as that of the testator of the Will.

The Madras High Court in N. Durga Bai vs. Mrs. C.S. Pandari Bai,
Testamentary Original Suit No. 22 of 2010, order dated 27^th
February, 2017, has explained that u/s 69 of the Evidence Act, two
conditions are required to be proved for valid proof of the Will, i.e., the
person who has acquaintance with the signature of one of the attesting
witnesses and also the person executing the document should identify both such
signatures before the court. In that case, a person had identified the
signature of the testator. However, his evidence clearly showed that he was not
acquainted with the signature of both the attesting witnesses. Therefore, the
High Court held there was no compliance of section 69.

The Supreme Court in Kalyanaswamy (Supra)
explained that the attesting witness not being found refers to a variety of
situations ~ it would cover a case of an incapacity on account of any physical
illness; a case where the attesting witnesses are dead; the attesting witness
could be mentally incapable / insane. Thus, the word ‘found’ is capable of
comprehending a situation as one where the attesting witness, though physically
available, is incapable of performing the task of proving the attestation and,
therefore, it becomes a situation where he is not found.

In Master Chankaya vs. State and others, Testamentary Case No.
40/1999, order dated 12^th September, 2019 the Delhi High
Court explained that it was not the case of the petitioner that the attesting
witnesses could not be found. In fact, the petitioner had throughout contended
that he was aware of their whereabouts and assured the Court that he would
produce them before the Court. Later, he dropped the said witnesses on the
ground that their whereabouts were not known and he was therefore unable to
produce them. The Court held that the petitioner did not exhaust all the
remedies for producing the witnesses before it. The petitioner could have
resorted to issuance of a summons to the witnesses under Order 16 Rule 10 of
the Civil Procedure Code, 1908 for the purpose of seeking their appearance. No
such assistance was taken from the Court and hence section 69 could not
automatically be invoked. Thus, all possible remedies must be exhausted before
resorting to this section.

The Calcutta High Court in Amal Sankar Sen vs. The Dacca Co-operative
Housing Society Ltd. (in liquidation), AIR 1945 Cal 350, observed:

‘…In order that Section 69, Evidence Act, may be applied, mere taking out
of the summons or the service of summons upon an attesting witness or the mere
taking out of warrant against him is not sufficient. It is only when the
witness does not appear even after all the processes under Order 16 Rule 10,
which the Court considered to be fit and proper had been exhausted, that the
foundation will be laid for the application of Section 69, Evidence Act………In
order that S.69, Evidence Act, may be applied ………….the plaintiff must move the
Court for process under Order 16 Rule 10 Civil P.C., when a witness summoned by
him has failed to obey the summons…’

Further, in Hare Krishna Panigrahi vs. Jogneswar Panda & Ors.,
AIR 1939 Cal 688, the Calcutta High Court observed that the section
required that the witness was actually produced before the court and then if he
denied execution or his memory failed or if he refused to prove or turned
hostile, other evidence could be admitted to prove execution. If, however, the
witness was not before the court at all and the question of denying or failing
to recollect the execution of the document did at all arise… the plaintiff
simply took out a summons against the witness and nothing further was done
later on. The court held that in all such cases it was the duty of the
plaintiff to exhaust all the processes of the court in order to compel the
attendance of any one of the attesting witnesses, and when the production of
such witnesses was not possible either legally or physically, the plaintiff
could avail of the provisions of section 69 of the Evidence Act.

In this respect, the Supreme Court in Babu Singh and others vs. Ram
Sahai alias Ram Singh (2008) 14 SCC 754 has explained that section 69
of the Evidence Act would apply where the witness is either dead or out of the
jurisdiction of the court, or kept out of the way by the adverse party, or
cannot be traced despite diligent search. Only in that event the Will may be
proved in the manner indicated in section 69, i.e., by examining witnesses who
were able to prove the handwriting of the testator. The burden of proof then
may be shifted to others. The Court further propounded that while in ordinary
circumstances a Will must be proved keeping in view the provisions of section
63 of the Indian Succession Act and section 68 of the Evidence Act, in the
extraneous circumstances laid down in section 69 of the Evidence Act, the
strict proof of execution and attestation stands relaxed. However, in this case
the signature and handwriting, as contemplated in section 69, must be proved.

FINDINGS OF THE COURT

The Supreme Court in the Kalyanaswamy
case (Supra) considered the question whether (despite the fact
that both the attesting witnesses were dead), the matter to be proved u/s 69 of
the Evidence Act was the same as a matter to be proved u/s 68 of the same Act?
In other words, section 68 of the Act mandatorily requires that in the case of
a Will at least one of the attesting witnesses must not only be examined to
prove attestation by him, but he must also prove the attestation by the other
attesting witness. The court held that while it was open to prove the Will and
the attestation by examining a single attesting witness, it was incumbent upon
him to prove attestation not only by himself but also the attestation by the
other attesting witness.

The Apex Court agreed with the principle that section 69 of the Evidence
Act manifests a departure from the requirement embodied in section 68. In the
case of a Will, when an attesting witness is available, the Will is to be
proved by examining him. He must not only prove that the attestation was done
by him, but he must also prove the attestation by the other attesting witness.
This is subject to the situation which is contemplated in section 71 of the Evidence
Act which allows other evidence to be adduced in proof of the Will among other
documents where the attesting witness denies or does not recollect the
execution of the Will.

Section 71 of the Evidence Act states that if the
attesting witness to a document denies or does not recollect the execution of
that document, its execution may be proved by other evidence. The Apex Court
held that the fate of the transferee or a legatee under a document (which is
required by law to be attested), is not placed at the mercy of the attesting
witness and the law enables corroborative evidence to be effected for the
document despite denial of the execution of the document by the attesting
witness.

One of the important rules laid down by the Supreme Court is that in a case
covered u/s 69 of the Evidence Act, the requirement pertinent to section 68 of
the same Act (that the attestation by both the witnesses is to be proved by
examining at least one attesting witness), is dispensed with. In a case covered
u/s 69 what was to be proved as far as the attesting witness was concerned was
that the attestation of one of the attesting witness was in his handwriting.
The language of the section was clear and unambiguous. Section 68 of the
Evidence Act contemplated attestation of both attesting witnesses to be proved
but that was not the requirement in section 69.

The Court also dealt with another aspect about section 69 of the Evidence
Act. Section 69 spoke about proving the Will in the manner provided therein.
The word ‘proved’ was defined in section 3 of the Evidence Act as follows:

‘Proved. – A fact is said to be proved when, after considering the matters
before it, the Court either believes it to exist, or considers its existence so
probable that a prudent man ought, under the circumstances of the particular
case, to act upon the supposition that it exists.’

According to the Supreme Court, the question to be asked was whether having
regard to the evidence before it, the Court could believe the fact as proved.
The Court held that in a case where there was evidence which appeared to
conform to the requirement u/s 69, the Court was not relieved of its burden to
apply its mind to the evidence and it had to find whether the requirements of
section 69 were proved. In other words, the reliability of the evidence or the
credibility of the witnesses was a matter for the Court to still ponder over.
In this case, one of the witnesses was an Income-tax practitioner and the other
was a doctor. Both of them were respectable professionals who were well known
to the testator and there was no reason to doubt their credibility. Applying
these principles, the Supreme Court found that based on external evidence
before it, the signature of one of the attesting witnesses and the testator
were proved.

The Court also considered the physical and mental
capacity of the testator to make a valid Will. It held that as far as his
health was concerned, it was well settled that the requirement of sound
disposing capacity was not to be confused with physical well-being. A person
who has had a physical ailment may not automatically be robbed of his sound
disposing capacity. The fact that a person was afflicted with a physical
illness or that he was in excruciating pain would not deprive him of his
capacity to make a Will. What was important was whether he was conscious of
what he was doing and whether the Will reflected what he had chosen to decide.
In this case, the testator was suffering from cancer of the throat but there
was nothing to indicate in the evidence that he was incapable of making up his
own mind in the matter of leaving a Will behind. The fact that he was being fed
by a tube could hardly have deprived him of his capacity to make a Will.

Accordingly, the Court opined that the requirements of section 69 were
fulfilled and, hence, the Will was a valid Will.

CONCLUSION

A Will is a very important, if not the most
important, document which a person may execute. Selecting an appropriate
witness to the Will is equally important. Some suggestions in this respect are
selecting a relatively younger witness. Further, one should consider having
respectable professionals, businessmen, etc., as witnesses so that their
credibility is not doubted. As far as possible, have people who know the
testator well enough. In the event that both the witnesses predecease the
testator, he must make a new Will with new witnesses. Always remember, that all
precautions should be taken to ensure that a Will should live longer than the
testator!

shailesh.kwebmaker

COPARCENARY RIGHT OF A DAUGHTER IN FATHER’S HUF: FINAL TWIST IN THE TALE?

INTRODUCTION

The Hindu Succession
(Amendment) Act, 2005 (‘2005 Amendment Act’) which was made operative from 9^th
September, 2005, was a path-breaking Act which placed Hindu daughters on an
equal footing with Hindu sons in their father’s Hindu Undivided Family by
amending the age-old Hindu Succession Act, 1956 (‘the Act’). However, while it
ushered in great reforms it also left several unanswered questions and
ambiguities. Key amongst them was to which class of daughters did the 2005
Amendment Act apply? The Supreme Court by two important decisions had answered
some of these questions and helped clear a great deal of confusion. However,
just when one thought that things had been settled, a larger bench of the Apex
Court has turned the decision on its head and come out with a more liberal
interpretation of the law. Let us analyse the Amendment and the old and the new
decisions to understand the situation in greater detail.

THE 2005 AMENDMENT ACT

First, let us understand
the Amendment to put the issue in perspective. The Hindu Succession (Amendment)
Act, 2005 amended the Hindu Succession Act, 1956 which is one of the few
codified statutes under Hindu Law. It applies to all cases of intestate succession
by Hindus. The Act applies to Hindus, Jains, Sikhs, Buddhists and to any person
who is not a Muslim, a Christian, a Parsi or a Jew. Any person who becomes a
Hindu by conversion is also covered by the Act. The Act overrides all Hindu
customs, traditions and usages and specifies the heirs entitled to such
property and the order or preference among them. The Act also deals with some
important aspects pertaining to an HUF.

By the 2005 Amendment Act,
Parliament amended section 6 of the Hindu Succession Act, 1956 and the amended
section was made operative from 9^th September, 2005. Section 6 of
the Hindu Succession Act, 1956 was totally revamped. The relevant portion of
the amended section 6 is as follows:

‘6. Devolution of interest
in coparcenary property.?(1) On and from the commencement of the Hindu
Succession (Amendment) Act, 2005 (39 of 2005), in a Joint Hindu family governed
by the Mitakshara law, the daughter of a coparcener shall,?

(a) by birth become a
coparcener in her own right in the same manner as the son;

(b) have the same rights
in the coparcenary property as she would have had if she had been a son;

(c) be subject to the same
liabilities in respect of the said coparcenary property as that of a son, and
any reference to a Hindu Mitakshara coparcener shall be deemed to include a
reference to a daughter of a coparcener:

Provided that nothing
contained in this sub-section shall affect or invalidate any disposition or
alienation including any partition or testamentary disposition of property
which had taken place before the 20^th day of December, 2004.’

Thus, the amended section
provides that a daughter of a coparcener shall become by birth a coparcener in
her own right in the same manner as the son and, further, she shall have the
same rights in the coparcenary property as she would have had if she had been a
son. It also provides that she shall be subject to the same liabilities in
respect of the coparcenary property as a son. Accordingly, the amendment
equated all daughters with sons and they would now become coparceners in their
father’s HUF by virtue of being born in that family. She has all rights and
obligations in respect of the coparcenary property, including testamentary
disposition. Not only would she become a coparcener in her father’s HUF, but
she could also make a will for the same.

One issue which remained
unresolved was whether the application of the amended section 6 was prospective
or retrospective?

Section 1(2) of the Hindu
Succession (Amendment) Act, 2005, stated that it came into force from the date
it was notified by the Government in the Gazette, i.e., 9^th
September, 2005. Thus, the amended section 6 was operative from that date.
However, did this mean that the amended section applied to:

(a) daughters born after
that date,

(b) daughters married
after that date, or

There was no clarity under
the Act on this point.

PROSPECTIVE APPLICATION UPHELD

The Supreme Court, albeit
in a different context, clarified that the 2005 Amendment Act did not seek to
reopen vesting of a right where succession has already taken place. According
to the Supreme Court, ‘the operation of the Statute is no doubt prospective
in nature… the 2005 Act is not retrospective, its application is prospective” –
G. Sekar vs. Geetha (2009) 6 SCC 99.

The Supreme Court has held
in Sheela Devi vs. Lal Chand, (2007) 1 MLJ 797 (SC) that if the
succession was opened prior to the Hindu Succession (Amendment) Act, 2005, the
provisions of the 2005 Amendment Act would have no application.

FATHER-DAUGHTER COMBINATION IS A MUST

Finally, the matter was
settled by a two-Judge Bench of the Apex Court in its decision in the case of Prakash
vs. Phulavati, (2016) 2 SCC 36. The Supreme Court examined the issue in
detail and held that the amendment was prospective and not retrospective. It
further held that the rights under the Hindu Succession Act Amendment were
applicable to living daughters of living coparceners (fathers) as on 9^th
September, 2005 irrespective of when such daughters were born. It further held
that any disposition or alienation including a partition of the HUF which may
have taken place before 20^th December, 2004 (the cut-off date
provided under the 2005 Amendment Act) as per law applicable prior to the said
date, would remain unaffected. Thus, as per the above Supreme Court decision,
in order to claim benefit what was required was that the daughter should be
alive and her father should also be alive on the date of the amendment, i.e., 9^th
September, 2005. Once this condition was met, it was immaterial whether the
daughter was married or unmarried. The Court had also clarified that it was
immaterial when the daughter was born.

DAUGHTER BORN BEFORE THE ACT

In Danamma @ Suman
Surpur & Anr. vs. Amar & Ors., (2018) 3 SCC 343, another
two-Judge Bench of the Supreme Court took off from the Prakash case
(Supra) and agreed with it. It held that the Amendment used the words ‘in
the same manner as the son’. It was therefore apparent that both the sons
and the daughters of a coparcener had been conferred the right of becoming
coparceners by birth. It was the very factum of birth in a coparcenary that
created the coparcenary, therefore the sons and daughters of a coparcener
became coparceners by virtue of birth. The net effect of the amendment
according to the Court was that it applied to living daughters of living
coparceners as on 9^th September, 2005. It did not matter whether the
daughters were married or unmarried. It did not matter when the daughters were
born. They might be born even prior to the enactment of the 1956 Act, i.e., 17^th
June, 1956.

THREE-JUDGE VERDICT LAYS DOWN A NEW LAW

A three-Judge Bench of the
Supreme Court in the case of Vineeta Sharma vs. Rakesh Sharma, CA 32601
/2018, Order dated 11^th August, 2020 considered a bunch of
SLPs before it on the issue of the 2005 Amendment Act. The Court by a very
detailed verdict considered the entire genesis of the HUF Law. It held that in
the Mitakshara School of Hindu law (applicable to most parts of India), in a coparcenary
there is unobstructed heritage, i.e., right is created by birth. When right is
created by birth it is called unobstructed heritage. At the same time, the
birthright is acquired in the property of the father, grandfather, or great
grandfather. In case a coparcener dies without leaving a son, right is acquired
not by birth, but by virtue of there being no male issue and is called
obstructed heritage. It is called obstructed because the accrual of right to it
is obstructed by the owner’s existence. It is only on his death that obstructed
heritage takes place. It held that property inherited by a Hindu from his
father, father’s father, or father’s grandfather (but not from his maternal
grandfather) is unobstructed heritage as regards his own male issues, i.e., his
son, grandson, and great-grandson. His male issues acquire an interest in it
from the moment of their birth. Their right to it arises from the mere fact of
their birth in the family, and they become coparceners with their paternal
ancestor in such property immediately on their birth, and in such cases
ancestral property is unobstructed heritage.

Further, any property, the
right to which accrues not by birth but on the death of the last owner without
leaving a male issue, is called obstructed heritage. It is called obstructed
because the accrual of right to it is obstructed by the existence of the owner.
Consequently, property which devolves on parents, brothers, nephews, uncles,
etc. upon the death of the last owner is obstructed heritage. These relations
do not have a vested interest in the property by birth. Their right to it
arises for the first time on the death of the owner. Until then, they have a
mere spes successionis, or a bare chance of succession to the property,
contingent upon their surviving the owner. Accordingly, the Apex Court held
that unobstructed heritage took place by birth and obstructed heritage took
place after the death of the owner.

The Apex Court laid down a
very vital principle that coparcenary right, under section 6 (including
after Amendment), is given by birth which is called unobstructed heritage.
It is not a case of obstructed heritage depending upon the owner’s death. Thus,
the Supreme Court concluded that a coparcener’s father need not be alive
on 9^th September, 2005, i.e., the date of the Amendment.

The Court observed that
the Amendment was a gender bender inasmuch as it sought to achieve removing ‘gender
discrimination to a daughter who always remains a loving daughter’. It
further held that though the rights could be claimed, w.e.f. 9^th
September, 2005, the provisions were of a retroactive application, i.e., they
conferred benefits based on the antecedent event and the Mitakshara coparcenary
law should be deemed to include a reference to a daughter as a coparcener.
Under the amended section 6, since the right was given by birth, i.e., an
antecedent event, the provisions concerning claiming rights operated on and
from the date of the Amendment Act. Thus, it is not at all necessary that the
father of the daughter should be living as on the date of the Amendment, as she
has not been conferred the rights of a coparcener by obstructed heritage. The
effect of the amendment is that a daughter is made coparcener with effect from
the date of the amendment and she can claim partition also, which is a
necessary concomitant of the coparcenary. Section 6(1) recognises a joint Hindu
family governed by Mitakshara Law. The coparcenary must exist on 9^th
September, 2005 to enable the daughter of a coparcener to enjoy rights
conferred on her. As the right is by birth and not by dint of inheritance, it
is irrelevant whether a coparcener whose daughter is conferred with the rights
is alive or not. Conferral is not based on the death of a father or other
coparcener.

The Court also held that
the daughter should be living on 9^th September, 2005. In the
substituted section 6, the expression ‘daughter of a living coparcener’ has not
been used. One corollary to this explanation would mean that if the daughter
has died before this date, then her children cannot become coparceners in their
maternal grandfather’s HUF. However, if she dies on or after this date, then
her children can become coparceners in their maternal grandfather’s HUF.

The Court explained one of
the implications of becoming a coparcener was that a daughter has now become
entitled to claim partition of coparcenary w.e.f. 9^th September,
2005, which was a vital change brought about by the statute. Accordingly, the
Supreme Court in Vineeta Sharma vs. Rakesh Sharma, CA 32601/2018, Order
dated 11^th August, 2020 expressly overturned its earlier
verdict in Prakash vs. Phulavati, (2016) 2 SCC 36 and those
portions of Danamma @ Suman Surpur & Anr. vs. Amar & Ors., (2018)
3 SCC 343 which approved of the decision in Prakash vs. Phulavati.

EXCEPTION TO THE RULE

Section 6(5) of the Act
provides that the Amendment will not apply to an HUF whose partition has been
effected before 20^th December, 2004. For this purpose, the partition
should be by way of a registered partition deed / a partition brought out by a
Court Decree. In the Amendment Bill even oral partitions, supported by
documentary evidence, were allowed. However, this was dropped at the final
stage since the intention was to avoid any sham or bogus transactions in order
to defeat the rights of coparcener conferred upon daughters by the 2005
Amendment Act.

It was argued before the
Court that the requirement of a registered deed was only directory and not
mandatory. But the Court negated this argument. It held that the intent of the
provisions was not to jeopardise the interest of the daughter but to take care
of sham or frivolous transactions set up in defence unjustly to deprive the
daughter of her right as coparcener. In view of the clear provisions of section
6(5), the intent of the Legislature was clear and a plea of oral partition was
not to be readily accepted. However, in exceptional cases where the plea of
oral partition was supported by public documents and partition was finally
evinced in the same manner as if it had been effected by a decree of a court,
it may be accepted. A plea of partition based on oral evidence alone could not
be accepted and had to be rejected outright.

CONCLUSION

The conclusion arrived at
by the Supreme Court in Vineeta Sharma’s case (Supra) undoubtedly
appears to be correct as compared to the earlier decisions on the point. A
beneficial Amendment was sought to be made restrictive and the same has now
been set right. However, consider the turmoil and the legal complications which
this decision would now create. Several disputes in HUFs were created by the
2005 Amendment and those raging fires were settled by the decision in Prakash
vs. Phulavati (Supra). It has been almost five years since this
decision was rendered. Now comes a decision which overrules the settled law.
One can expect a great deal of litigation on this issue now that the
restrictive parameters set down have been removed. In respect of cases pending
before different High Courts and subordinate courts, the Supreme Court in Vineeta
Sharma’s case (Supra) has held that daughters cannot be deprived of
their equal right and hence it requested that all the pending matters be
decided, as far as possible, within six months. However, what happens to cases
where matters are settled? Would they be reignited again?

One wonders
how Parliament can enact such a path-breaking enactment and not pay heed to a
simple matter of its date of applicability. Could this issue not have been
envisaged at the drafting stage? This is a classic case of a very advantageous
and laudable Amendment suffering from inadequate drafting! Is it not strange
that while the language of some of our pre-Independence Acts (such as the
Contract Act 1872, Transfer of Property Act 1882, Indian Succession Act 1925,
etc.) have stood strong for over a century, some of our recent statutes have
suffered on the drafting front. Ultimately, matters have to travel to the
Supreme Court leading to a lot of wastage of time and money. One can only hope
that this issue of the coparcenary right of a daughter in her father’s
HUF is settled once and for all. Or are there going to be some more
twists in this tale?

If you disrupt yourself, you
will be able to manage and even thrive through disruption.

—
Whitney Johnson, Executive Coach and Author

shailesh.kwebmaker

LIMITATION ON FILING A PROBATE PETITION

INTRODUCTION

A probate means a copy of a Will
certified by the seal of a Court. A probate of a Will establishes the
authenticity and finality of that Will and validates all the acts of the
executors. It conclusively proves the validity of the Will; after a probate has
been granted, no claim can be raised about the genuineness or otherwise of the
Will.

One of the important questions
that often arises in relation to a probate is till when can a probate petition
be lodged? Is there a maximum time limit after the death of the testator within
which the executors must lodge the petition before the Courts? The Bombay High
Court had an occasion to consider this question in the case of Suresh
Manilal Mehta vs. Varsha Bhadresh Joshi, 2017 (1) AIR Bom R 487. Let us
examine this issue.

NECESSITY
FOR A PROBATE

The Indian Succession Act,
1925 deals with the law relating to Wills. According to this Act, no
right as an executor or a legatee can be established in any Court unless a
Court has granted a probate of the Will under which the right is claimed. This
provision applies to all Christians. In the case of any Hindu, Buddhist, Sikh
or Jain, it applies to:

(a) any Will made within the local limits of the ordinary original civil
jurisdiction of the High Courts of Madras or of Bombay, or within the
territories which were subject to the Lieutenant-Governor of Bengal;

(b) to all such Wills made outside those territories and limits so
far as it relates to immovable property situated within those territories or
limits.

Thus, for Hindus, Sikhs, Jains
and Buddhists, who are / whose immovable properties are situate outside the
territories of West Bengal or the Presidency Towns of Madras and Bombay, a
probate is not required. Similarly, where a Will is made outside Mumbai (say,
in Ahmedabad) and it makes no disposition of any immovable property in Mumbai
or other designated town, then such a Will would not require a probate.

An executor of such a Will may
need to do so only on the occurrence of a certain event, for instance, on a
suit being filed challenging that Will. However, a Will made in Mumbai or
pertaining to property in Mumbai needs to be compulsorily probated,
irrespective of whether or not there is an actual need for it.

DOES
THE LAW OF LIMITATION APPLY?

Coming back to the issue at hand,
the question which arises is whether the filing of a probate petition is barred
by any law of limitation, i.e., is there an outer time limit for filing the
petition? In this respect, one may consider the provisions of the Limitation
Act, 1963 which provides for periods of limitations for various suits.
Article 137 of the schedule to this Act states that in respect of any other
application for which no specific period of limitation is provided elsewhere in
that Act, the period of limitation is three years from when the right to apply
accrues. Further, Rule 382 of the Bombay High Court (Original Side) Rules
provides that in any case where an application for probate is made for the
first time after the lapse of three years from the death of the deceased, the
reason for the delay shall be explained in the petition. If the explanation is
unsatisfactory, the Prothonotary and Senior Master may require such further
proof of the alleged cause of delay as he may deem fit.

In Vasudev Daulatram
Sadarangani vs. Sajni Prem Lalwani, AIR 1983 Bom 268, the Court dealt
with the issue of whether Article 137 was applicable to applications for
probate, letters of administration or succession certificate. The Court held
that there was no warrant for the assumption that this right to apply accrued
on the date of death of the deceased. It held that the right to apply
may therefore accrue not necessarily within three years from the date of the
deceased’s death but when it becomes necessary to apply, which may be any time
after the death of the deceased, be it after several years. However,
reasons for delay must be satisfactorily explained to the Court. Further, such
an application was for the Court’s permission to perform a legal duty created
by a Will or for recognition as a testamentary trustee and was a continuous
right which could be exercised any time after the death of the deceased, as
long as the right to do so survived.

This view of the High Court was
approved by the Supreme Court in Kunvarjeet Singh Khandpur vs. Kirandeep
Kaur & Ors (2008) 8 SCC 463. However, the Supreme Court also held
that the application for grant of a probate or letters of administration was
covered by Article 137 of the Limitation Act. In Krishna Kumar Sharma vs.
Rajesh Kumar Sharma (2009) 11 SCC 537 the Supreme Court once again reiterated
this view and also held that the right to apply for a probate was a continuous
right.

WHAT
IS THE MAXIMUM TIME LIMIT?

In Suresh Manilal Mehta
(Supra) a daughter opposed her father’s probate petition. Here, the
probate petition was filed 33 years after the testator died. She argued that
such a long delay in seeking the probate was itself a sufficiently suspicious
circumstance to warrant the dismissal of the suit, especially if there was no
explanation for the delay. The explanation for this delay was that under the
husband’s Will, a majority of his estate devolved upon his wife and some
portion on his son. Further, his daughter was to take in the residuary estate
only if both her parents and her brother were no more and if her brother died
before turning 21 years of age. Since that was not the case the daughter did
not get the residuary estate. When the mother got the father’s estate under his
Will, no dispute was raised. However, when she died and her Will was sought to
be probated, her daughter argued that first the father’s Will must be probated
since the mother derived her entire estate from the father. Thus, the act of
probating the father’s Will was a good 33 years after his death.

The High Court held that the view
that Article 137 would have no application at all in any case to any
application for probate was incorrect. However, neither of the aforesaid two
Supreme Court decisions had held that the date of death of the deceased would
invariably provide the starting point of limitation. On the contrary, both the
decisions confirmed that the right to apply for a probate was a continuing
right so long as the right to do so survived.

Giving the analogy of two Wills,
one made in Mumbai and the other outside Mumbai, the High Court explained that
it could not be that the three-year limitation from the testator’s death would
apply to one of those two Wills, the one made in Mumbai, and not to the other
Will, i.e., the one made outside Mumbai. The date of death of the deceased
could not, therefore, be the starting point for the limitation in two otherwise
identical situations separated only by geographies, or else there would be
different starting points of limitation!

Accordingly, the Court held that
the only consistent view was that the right to apply for a probate was a
continuing right and the application must be made within three years of
the time when the right to apply accrued. An executor named in the Will could
apply for probate at any time so long as the right to do so survived.

CONCLUSION

This
is an extremely essential judgment which would help ease the process of
obtaining probates. There are numerous cases where probates have not been
obtained and this has led to the properties / assets getting stuck. In all such
cases it should be verified whether a probate petition could now be launched,
even if it is many years after the testator’s death.

shailesh.kwebmaker

TRANSMISSION OF TENANCY

INTRODUCTION

One of the biggest
questions that invariably crops up when preparing a Will is, ‘Can I bequeath my
tenanted property?’ This is especially true in a city like Mumbai where
tenanted properties are very valuable. Tenanted property could be in the form
of residential flats or commercial properties. A person can make a Will for any
and every asset that he owns. Hence, the issue which arises is, can a person
bequeath a property of which he is only a tenant? In the State of Maharashtra,
the provisions of the Maharashtra Rent Control Act, 1999 (the Act) are also
relevant. Let us analyse this important issue in more detail.

RENT ACT
PROVISIONS

Section 7(15) of the Act defines the
term ‘tenant’ as any person by whom rent is payable for any premises. Further,
when the tenant dies, the term includes:

(a) in the case of residential tenanted
premises, any member of his family who is residing with the tenant at the time
of his death; or

(b) in the case of a tenanted premises
which is used for educational, business, trade or storage purposes, any member
of his family who, at the time of the tenant’s death, is using the premises for
such purpose.

Moreover, in the absence of any family
member of the tenant, any heir of the tenant as may be decided by the Court in
the absence of any agreement will be the tenant. These provisions are
applicable to transmission of tenancy by the original tenant as well as by any
subsequent tenants.

The term family has not been defined
under the Act and, hence, the general definition of the term would have to be
taken. It is a term which is open to very wide interpretation and is quite
elastic. The Bombay High Court in Ramubai vs. Jiyaram Sharma, AIR 1964
Bom 96, has held that the term family would mean all those who are
connected by blood relationship or marriage, married / unmarried / widowed
daughters, widows of predeceased heirs, etc. The Black’s Law Dictionary
defines the term as those who live in the same household subject to general
management and control of the head. Another definition is a group of blood
relatives and all the relations who descend from a common ancestor, or who
spring from a common root, i.e., a group of kindred persons. Hence, it is a
very generic term.

From the above definition of the term
tenant under the Act, it is very clear that only those family members of the
tenant who are residing with him would be entitled to his tenancy after his
demise. It is also relevant to note that the family members need not
necessarily be legal heirs of the tenant and the legal heirs would get the
tenancy only in the absence of any family members and that, too, on
determination by a competent Court. Residing with the tenant means that the
family members must stay, eat and sleep in the same house as the tenant. This
is a question of fact as to whether or not a family member can be said to be
residing with the deceased tenant.

However, in the case of non-residential
premises, the family members must be using the property along with the tenant.
Thus, in case of such premises it is not necessary that they reside with the
tenant but they must use the premises for the purposes for which the tenant was
using the same. In the case of Pushpa Rani and Ors. vs. Bhagwanti Devi,
AIR 1994 SC 774, the Supreme Court held that when a tenant dies, it is
the person who continued in occupation of and carried on business in the
business premises alone with whom the landlord should deal and other heirs must
be held to have surrendered their right of tenancy.

The Supreme Court in the case of Vasant
Pratap Pandit vs. Dr. Anant Trimbak Sabnis, 1994 SCC (3) 481 has held
that the legislative prescription of this provision of the Act is first to give
protection to the members of the family of the tenant residing with him at the
time of his death. The basis for this is that when a tenant is in occupation of
premises, the tenancy is taken by him not only for his own benefit but also for
the benefit of the members of the family residing with him. Therefore, when the
tenant dies, protection should be extended to the members of the family who
were participants in the benefit of the tenancy and for whose needs as well the
tenancy was originally taken by the tenant. It is for this object that the
legislature has, irrespective of the fact whether such members are ‘heirs’ in
the strict sense of the term or not, given them the first priority to be
treated as tenants. All the heirs are liable to be excluded if any other member
of the family was staying with the tenant at the time of his death.

The Bombay High Court was faced with an
interesting question in the case of Vasant Sadashiv Joshi vs. Yeshwant
Shankar Barve, WP 2371/1997. Here, the tenant resided in a premises
along with his brother. The tenant and his brother were part of an HUF. After
the tenant’s death, the brother’s son contended that since the family members
were recognised as tenants, the joint family itself should also be recognised
as a tenant. The High Court negated this plea and held that the term only
included a single person as a tenant and it was not possible that every member
of the HUF would become a tenant. It held that when a landlord grants a tenancy
it is a contract of tenancy as entered into with a specific person (tenant).
The landlord expects fulfilment of legal obligations from the tenant. The law,
therefore, does not envisage that the landlord would be required to deal with
all members of the joint family.

Similarly, in Vimalabai Keshav
Gokhale vs. Avinash Krishnaji Binjewale, 2004 (1) Bom CR 839, the High
Court rejected the contention that the Bombay Rent Act would enable each and
every member of the tenant’s family to claim an independent right in respect of
the tenancy and held that any member would mean ‘any one member.’

The Bombay High Court in Urmi
Deepak Kadia vs. State of Maharashtra, 2015(6) Bom CR 354 considered
whether the Maharashtra Rent Control Act was contrary to the Hindu Succession
Act, 1956 since it provided protection only to those heirs of the deceased who
at the time of his demise were staying with him and not to others. It held that
the field covered by two laws was not the same but entirely different. The Rent
Act sought to prevent exploitation of tenants and ensured a reasonable return
for investment in properties by landlords. In some contingencies u/s 7(15) of
the Rent Act, certain heirs were unable to succeed to a statutory tenancy. To
this extent, a departure was made from the general law. In such circumstances,
the observations of the Apex Court in Vasant Pratap’s case (Supra)
were decisive. Hence, it concluded that the Rent Act did not interfere with the
Hindu Succession Act.

HEIRS OF
TENANT SUCCEED IN ABSENCE OF FAMILY MEMBERS

The Act further provides that in the
absence of family members, it is the heirs of the tenant who would succeed to
the tenanted premises. The term heirs has not been defined under the Act and
hence one needs to have recourse to the usually understood meaning. The Supreme
Court in the case of Vasant Pratap (Supra) has dealt with the
definition of the term heirs. It means the persons who are appointed by law to
succeed to the estate in case of intestacy. It means a person who succeeds,
under law, to an estate in lands, tenements, or hereditaments, upon the death
of his ancestor, by descent and right of relationship. The term is used to
designate a successor to property either by Will or by law. The Court further
held that a deceased person’s ‘heirs at law’ are those who succeed to his
estate by inheritance under law, in the absence of a Will.

The Supreme Court in the case of Ganesh
Trivedi vs. Sundar Devi (2002) 2 SCC 329 had held that the brother of a
male tenant would be his heir. However, an interesting question arose in Durga
Prasad vs. Narayan Ram Chandaani (D) Thr. Lr. CA 1305/2017 (SC) as to
whether the brother of a married female tenant could be treated as her legal
heir and thus become the tenant after her demise? In this case before the
Supreme Court, a person had taken a residential property on rent. After his
demise his son became the tenant and after his son’s demise, his
daughter-in-law became the tenant. The question arose as to who would become
the tenant on her demise as she did not have any children. Her brother claimed
that he was a part of the deceased tenant’s family and hence he should inherit
the property. This was a property located in UP, so the Apex Court considered
the provisions of the U.P. Rent Act. Under that Act, the heirs of a tenant residing
with him succeed to the premises on the tenant’s death.

The Supreme Court held that the
question falling for consideration was whether the brother of the tenant was an
heir under the U.P. Rent Act. Since the term heir was not defined under the
Act, it held that heir was a person who inherited by law. Section 3(1)(f) of
the Hindu Succession Act, 1956 defined an heir to mean any person, male or
female, who was entitled to succeed to the property of an intestate under the
Act. The word heir had to be given the same meaning as would be applicable to
the general law of succession. The deceased tenant being a Hindu female, the
devolution of tenancy would be determined u/s 15 of the Hindu Succession Act.
Sub-section (2) of section 15 carved out an exception to the general scheme and
order of succession of a Hindu female dying intestate without leaving any
children. If such a woman has inherited property from her husband /
father-in-law, then the property devolved upon her husband’s heirs. The Apex Court
held that since she did not have any children and the tenancy in question had
come from the tenant’s father-in-law to her husband and from her husband to the
tenant, the exception contained in section 15(2) of the Hindu Succession Act
would apply. Accordingly, since her brother was not an heir of her husband, he
was not entitled to succeed to the tenancy in question.

CAN THE TENANT
MAKE A WILL?

This brings us to the important
question of whether a tenant can will away his tenanted premises? In the case
of Gian Devi Anand vs. Jeevan Kumar, (1985) 2 SCC 683, a
Constitution Bench of the Supreme Court held that the rule of heritability
(capable of being inherited) extends to statutory tenancy of commercial as well
as residential premises in States where there is no explicit provision to the
contrary under the Rent Act and tenancy rights are to devolve according to the
ordinary law of succession, unless otherwise provided in the statute. In Bhavarlal
Labhchand Shah vs. Kanaiyalal Nathalal Intawala, referring to the
Bombay Rent Control Act, 1974, it was held that a tenant of a non-residential
premises cannot bequeath under a Will his right to such tenancy in favour of a
person who is a stranger, not being a member of the family, carrying on
business. In State of West Bengal vs. Kailash Chandra Kapur, (1997) 2 SCC
387, it was held that in the absence of any contrary covenants in the
lease deed or the law, a Will in respect of leasehold rights in a land can be
executed by a lessee in favour of a stranger.

Hence, if the Rent Control laws of a
State so provide, then a tenant cannot make a Will for his tenanted premises.
In that event, the tenancy would pass on only in accordance with the Rent
Control Act. This proposition is also supported by the Supreme Court’s decision
in the case of Vasant Pratap (Supra). In that case, the tenant
made a Will of her property in favour of her nephew. This was opposed by her
sister’s grandson who was staying with the tenant at the time of her death. The
Apex Court held that normally speaking, tenancy right would be heritable but if
the right to inherit had been restricted by legislation, then the same would
apply. It held that if the word ‘heir’ in the Rent Act was to be interpreted to
include a ‘legatee under a Will’, then even a stranger may have to be inducted
as a tenant for there is no embargo upon a stranger being a legatee under a
Will. This obviously was not the intention of the legislature. Accordingly, it
was held that a bequest could not be made in respect of a tenanted property.

The Supreme Court’s decision in the
case of Gaiv Dinshaw Irani vs. Tehmtan Irani, (2014) 8 SCC 294
succinctly sums up the position after considering all previous decisions on
this issue:

‘…in general
tenancies are to be regulated by the governing legislation, which favour that
tenancy be transferred only to family members of the deceased original tenant.
However, in light of the majority decision of the Constitution Bench in Gian
Devi vs. Jeevan Kumar (Supra), the position which emerges
is that in absence of any specific provisions, general laws of succession to
apply, this position is further cemented by the decision of this Court in State
of West Bengal vs. Kailash Chandra Kapur (Supra) which has allowed
the disposal of tenancy rights of Government owned land in favour of a stranger
by means of a Will in the absence of any specific clause or provisions.’

CONCLUSION

The law as it stands in the State of
Maharashtra is very clear. A tenancy cannot be bequeathed by way of a Will. It
would pass only in accordance with the Rent Act. However, the position in other
States needs to be seen under the respective Rent Acts, if any.

shailesh.kwebmaker

RELIGIOUS CONVERSION & SUCCESSION

INTRODUCTION

Inter-community / inter-faith marriages are increasing in India. It is
becoming common to see a Hindu woman marrying a person professing Islam or Christianity.
Subsequently, she converts to Islam or to Christianity.

In all such cases, a question often arises: whether the Hindu woman who has
converted to another religion would be entitled to succeed to the property of
her parents? Would she be a member of her father’s HUF? Further, what would be
the position of her children – would they be entitled to succeed to the
property of their maternal grandfather? Let us examine these tricky issues in
some detail.

SUCCESSION TO PARENTS’ PROPERTY

Let us first
consider what would be the position of a Hindu woman who has converted to Islam
/ Christianity in relation to her parents’ property. If the parent has made a
Will, then she can definitely be a beneficiary. This is because a Will can be
made in favour of any person, even a stranger. Hence, the mere fact that the
daughter is no longer a Hindu would not bar her from being a beneficiary under
the Will.

However,
what is the situation if the father dies intestate, i.e., without making a
Will? In such a case, the Hindu Succession Act, 1956 would apply. The Class I
heirs of the father would be entitled to succeed to the property of the Hindu
male dying intestate. The daughter of a Hindu male is a Class I heir under the
Hindu Succession Act. Now the question that would arise is whether the
subsequent religious conversion of such a Class I heir would disentitle her
from succeeding to her father’s estate.

The Gujarat
High Court had occasion to grapple with this interesting problem in the case of
Nayanaben Firozkhan Pathan vs. Patel Shantaben Bhikhabhai, Spl. Civil
Appln. 15825/2017, order dated 26^th September, 2017. In this
case, the child of a Hindu wanted to get her name entered in the Record of
Rights of an ancestral land held in the name of her deceased father. The
Collector allowed the mutation in favour of all children except one daughter
who had converted to Islam. It was held that her conversion disentitled her
from succeeding to her father’s estate. The matter reached the Gujarat High
Court. The Court observed that section 2 of the Hindu Succession Act provides
that the Act applies only to Hindus and to persons who were not Muslims,
Christians, Parsis, Jews or of any other religion. However, this section only
provides a class of persons whose properties will devolve according to the Act.
It is only the property of those persons mentioned in section 2 that will be
governed according to the provisions of the Act. Section 2 has nothing to do
with the heirs. This section does not lay down as to who are the disqualified
heirs.

The Court
further analysed the provisions of section 4 which envisages that any other law
in force immediately before the commencement of the Act shall cease to apply to
Hindus insofar as it is inconsistent with any of the provisions contained in
the Act. While a number of Central Acts were repealed as a consequence of this
section, one Act which has not been repealed is the Caste Disabilities
Removal Act, 1850. This is a pre-Independence Act which consists of one
section which states that:

‘So much of
any law or usage which is in force within India as inflicts on any person
forfeiture of rights or property, or may be held in any way to impair or affect
any right of inheritance, by reason of his or her renouncing, or having been
excluded from the communion of, any religion, or being deprived of caste, shall
cease to be enforced as law in any Court.’

The Gujarat
High Court held that a change of religion and loss of caste was at one time
considered as grounds for forfeiture of property and exclusion of inheritance.
However, this has ceased to be the case after the passing of the Caste
Disabilities Removal Act, 1850. The Caste Disabilities Removal Act provides
that if any law or (customary) usage in force in India would cause a person to
forfeit his / her rights on property or may in any way impair or affect a
person’s right to inherit any property, by reason of such person having
renounced his / her religion or having been ex-communicated from his / her
religion, or having been deprived of his / her caste, then such law or
(customary) usage would not be enforceable in any court of law. Thus, the Caste
Disabilities Removal Act intends to protect the person who renounces his / her
religion.

Further, the
Division Bench of the Madras High Court in the case of E. Ramesh vs. P.
Rajini (2002) 1 MLJ 216 has also taken the same view. It held that the
Hindu Succession Act makes it clear that if the parents are Hindus, then the
child is also governed by the Hindu Law or is a Hindu. It held that the
Legislature might have thought fit to treat the children of the Hindus as
Hindus without foregoing the right of inheritance by virtue of conversion.

Accordingly,
the Gujarat High Court concluded that all that needs to be seen is whether the
daughter was a Class I heir? If yes, then her religion had no locus standi
to her succession to her father’s property.

POSITION OF CONVERT’S CHILDREN

The position
of a person who has converted to Islam is quite clear. Section 26 of the Hindu
Succession Act clearly provides that the descendants of the convert who are born
after such conversion are disqualified from inheriting the property of any of
their Hindu relatives. Thus, the children of a Hindu daughter who converts to
Islam would be disqualified from inheriting the property of their maternal
grandfather.

This section
was explained by the Calcutta High Court in Asoke Naidu vs. Raymond S.
Mulu, AIR 1976 Cal 272. It explained that this section therefore does
not disqualify a convert. The present Act discards almost all the grounds which
imposed exclusion from inheritance and lays down that no person shall be
disqualified from succeeding to any property on the ground of any disease,
defect or deformity. It also rules out disqualification on any ground
whatsoever except those expressly recognised by any provisions of the Act. The
exceptions are very few and confined to the case of remarriage of certain
widows. Another disqualification stated in the Act relates to a murderer who is
excluded on the principles of justice and public policy. Change of religion and
loss of caste have long ceased to be grounds of forfeiture of property. The
only disqualification to inheritance is found in section 26 which disqualifies
the heirs of a converted Hindu from succeeding to the property of their Hindu
relatives. However, the disqualification does not affect the convert himself or
herself.

POSITION OF CONVERT IN FATHER’S HUF

On the
marriage of a Hindu who has converted to Islam or Christianity, his continuity
in an HUF needs to be considered if his marriage is solemnised under the Special
Marriage Act, 1954. In such a case the normal succession laws get
disturbed. This would be so irrespective of whether or not the Hindu converts.
All that is required is that the marriage must be registered under this Act.
Section 19 of this Act prescribes that any member of a Hindu Undivided Family
who gets married to a non-Hindu under this Act automatically severs his ties
with the HUF. Thus, if a Hindu, Buddhist, Sikh or Jain gets married to a
non-Hindu under the Special Marriage Act, he ceases to be a member of his HUF.
He need not go in for a partition since the marriage itself severs his
relationship with his family. He cannot even subsequently raise a plea for
partitioning the joint family property since by getting married under the Act
he automatically gets separated from the HUF. Taking the example of the
daughter who converted to Islam, even though she can now be a member of her
father’s HUF by virtue of the Hindu Succession Amendment Act, she would cease
to be a member due to her marriage being registered under the Special Marriage
Act.

SUCCESSION TO THE CONVERT’S PROPERTY

The last
question to be examined is which succession law would apply to such a convert’s
own property? If she dies intestate, would her heirs succeed under the Hindu
Succession Law (since she was once a Hindu) or the Muslim Shariya Law (since
she died a Muslim)? Section 21 of the Special Marriage Act is by far the most
important provision. It changes the normal succession pattern laid down by law
in case of any person whose marriage is registered under the Act. It states
that the succession to property of any person whose marriage is solemnised
under the Act and to the property of any child of such marriage shall be
regulated by the Indian Succession Act, 1925.

Section 21
makes the Indian Succession Act, 1925 applicable not only for the couple
married under the Act but also for the children born out of such wedlock. Thus,
for such a convert whose marriage is registered under the Special Marriage Act,
the succession law would neither be the Hindu Succession Law nor the Muslim Law
but the Indian Succession Act. The same would be the position for her children.
Of course, if she were to make a valid Will, then the Will would prevail over
the intestate succession provisions of the Indian Succession Act.

CONCLUSION

Till such
time as India has a Uniform Civil Code, succession laws are bound to throw up
such challenges. It would be desirable that the succession laws are updated to
bring them up to speed with such modern developments and issues so that legal
heirs do not waste precious time and money in litigation.

Those who always adhere to truth do
not make false promises.

Keeping one’s promises is,
surely, the mark of one’s greatness.
— (Valmiki
Raamaayan 6.101.52)

shailesh.kwebmaker

FOREIGN INVESTMENT REGIME: NEW RULES

INTRODUCTION

The Foreign Exchange Management Act, 1999 (the FEMA) governs the law relating to foreign exchange in India. The Reserve Bank of India is the nodal authority for all matters concerning foreign exchange. Under section 6(2) of the FEMA, the RBI was the authority empowered to notify Regulations pertaining to capital account transactions. Pursuant to the same, the RBI had notified the Foreign Exchange Management (Transfer or Issue of any Security to a Person Resident Outside India) Regulations, 2017 (TISPRO Regulations) for foreign investment in Indian securities and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018 (Property Regulations) for foreign investment in Indian immovable property.

However, the Finance Act, 2015 amended FEMA to provide that the RBI would only be empowered to notify Regulations pertaining to Debt Instruments, whereas the Central Government would notify Rules pertaining to the limit and conditions for transactions involving Non-Debt Instruments. While moving the Finance Bill, 2015 the Finance Minister explained the rationale for the same. He stated that capital account controls were more a policy matter rather than a regulatory issue. Accordingly, the power to control capital flows on equity was transferred from the RBI to the Central Government. Hence, a distinction was drawn between Debt Instruments and Non-Debt Instruments. The power to determine what is debt and what is non-debt has also been given to the Central Government.

While this enabling amendment was made in 2015, the actual Rules for the same were only notified on 16^thOctober, 2019 and, thus, the transfer of power took place only recently. Let us analyse some key features of these new Rules.

DISTINCTION

The Department of Economic Affairs, Ministry of Finance is the authority within the Central Government which has been given the above responsibility. The Finance Ministry has, on 16^th October, 2019, determined certain instruments as Debt Instruments and certain others as Non-Debt Instruments as given in Table 1 below:

Debt Instruments	Non-Debt Instruments
Government bonds	Investments in equity in all types of companies
Corporate bonds	Capital participation in LLPs
Securitisation structure other than equity tranches	Investment instruments recognised in the Consolidated FDI Policy, i.e., compulsorily convertible preference shares, compulsorily convertible debentures, warrants, etc.
Loans taken by Indian firms	Investments in units of Investment Vehicles such as Real Estate Investment Trusts (REITs); Alternative Investment Funds (AIFs); Infrastructure Investment Trusts (InVITs)
Depository receipts backed by underlying debt securities	Investment in units of Mutual Funds which invest more than 50% in equity shares
	Junior-most layer of securitisation structure
	Acquisition, sale or dealing directly in immovable property
	Contribution to trusts
	Depository receipts backed by equity instruments, e.g., ADRs / GDRs

Table 1: Classification of Debt vs. Non-Debt Instruments

NOTIFICATION OF RULES AND REGULATIONS

Pursuant to this determination, the Finance Ministry on 17^th October, 2019 notified the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (the NDI Rules) and, correspondingly, the RBI has notified the Foreign Exchange Management (Debt Instruments) Regulations, 2019 (the Debt Regulations). The NDI Rules have superseded the erstwhile TISPRO Regulations and the Property Regulations which were issued by the RBI. While there are no changes in the NDI Rules as compared with the erstwhile Property Regulations, there are several changes in the NDI Rules as compared with the erstwhile TISPRO Regulations which are explained below. The RBI had also notified the Master Direction No. 11/2017-18 on Foreign Investment in India. This was issued pursuant to the TISPRO Regulations. However, section 47(3) of the FEMA states that all Regulations made by the RBI before 15^th October, 2019 shall continue to be valid until rescinded by the Central Government. Now that the TISPRO Regulations have been superseded by the NDI Rules, it stands to reason that this particular Master Direction would also no longer be valid. However, unlike the TISPRO Regulations, this Master Direction has not been expressly rescinded.

The TISPRO Regulations permitted an Indian entity to receive any foreign investment which was not in accordance with the Regulations provided that the RBI gave specific permission for the same. The NDI Rules also contain a similar provision for the RBI to give specific permission but it must do so after consultation with the Central Government. The powers of the RBI to specific pricing guidelines for transfer of shares between residents and persons resident outside India continue under the NDI Rules but they must be made in consultation with the Central Government.

Debt vs. Non-Debt definition: As compared to the TISPRO Regulations, the NDI Rules contain certain changes. Some of the key features of these Rules are explained here. One of the important definitions is the term ‘Non-Debt Instruments’ which has been defined in an exhaustive manner to mean the instruments listed in Table 1 above. Consequently, the term ‘Debt Instruments’ has been defined to mean all instruments other than Non-Debt Instruments.

Equity instruments: The term ‘capital instruments’ has been replaced with the term ‘equity instruments’. It means equity shares, compulsorily convertible debentures (CCDs), compulsorily convertible preference shares (CCPS) and warrants.

FDI: The distinction between foreign direct investment (FDI) and foreign portfolio investment has been continued from the TISPRO Regulations. Accordingly, any foreign investment through equity instruments of less than 10% of the post-issue paid-up capital of a listed company would always be foreign portfolio investment, whereas if it is 10% or more it would always be FDI. Any amount of foreign investment through equity instruments in an unlisted company would always be FDI.

Listed Indian company: The definition of the term ‘listed Indian company’ has undergone a sea change as compared to the TISPRO Regulations. Earlier, it was defined as an Indian company which had its capital instruments listed on a stock exchange in India and, thus, it was restricted only to equity shares which were listed.

The NDI Rules amended this definition to read as an Indian company which has its equity or Debt Instruments listed on a stock exchange in India. This amendment has created several unresolved issues. For example, under the SEBI (Issue and Listing of Debt Security) Regulations, 2008 a private limited company can also list its non-convertible debentures on a recognised stock exchange in India. Now, as per the amended definition under the NDI Rules, such a private company would also have to be treated as a listed Indian company. Accordingly, any foreign investment in such a private company, through equity instruments of less than 10% of the share capital, would now be treated as foreign portfolio investment. Secondly, Rule 21 specifies the pricing guidelines and states that the price of equity instruments issued by a listed Indian company to a person resident outside India would be as per the SEBI Guidelines. Thirdly, in case of a transfer of shares in such a company from a resident to a person resident outside India would have to be as per the SEBI Guidelines. There are no SEBI Guidelines for pricing of unlisted equity shares in case of a company whose debentures are listed. Hence, the Rules require adherence to SEBI pricing Guidelines when, in fact, there are none for private companies whose debt alone is listed! It is submitted that the NDI Rules should be amended to revert to the original position.

Rule 19 of the NDI Rules provides that in case of the merger / demerger of two or more Indian companies, where any of them is a company listed on a stock exchange, the scheme shall be in compliance with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Here Rule 19 does not use the defined phrase of ‘listed Indian company’. Further, while the aforesaid SEBI Regulations apply both to listed equity shares and listed debt, the provisions in Regulation 37 relating to scheme of arrangement apply only to companies which have listed their equity shares. Hence, it stands to reason that this particular provision of Rule 19 only covers companies whose equity shares are listed on a stock exchange.

Separate schedules: Similar to the TISPRO Regulations, the NDI Rules classify the different types of foreign investment which an Indian entity can receive into different schedules. Schedule I deals with FDI in an Indian company; schedule II deals with investment by a Foreign Portfolio Investor; schedule III deals with repatriable investment by NRIs; schedule IV deals with non-repatriable investment by NRIs and other related entities; schedule V deals with investment by other non-resident investors, such as sovereign wealth funds, pension funds, etc.; schedule VI deals with investment in an LLP; schedule VII deals with investment by a Foreign Venture Capital investor; schedule VIII deals with investment in an investment vehicle; schedule IX deals with investment in Foreign Depository Receipts; and schedule X deals with investment in Indian Depository Receipts.

Mutual funds > 50% in equity: One major amendment introduced by the NDI Rules was to classify a mutual fund which invested more than 50% in equity as an investment vehicle along with an REIT, AIF and an InVIT. The implication of this seemingly small amendment is drastic. It would mean that any mutual fund which is owned and / or controlled by non-residents and if it has invested more than 50% in equity, then any investment made by such a fund would be treated as indirect FDI. Thus, any investment by such a fund (even though it is not a strategic investment but a mere portfolio investment) would have to comply with pricing guidelines, reporting, sectoral caps and conditions, etc., specified for indirect FDI. Further, several sectors would be out of bounds for such a fund which are currently off limits for FDI. This move created turmoil within the mutual fund industry since several funds are owned and / or controlled by foreign companies. It also led to a bias against such funds and in favour of purely domestic funds. The SEBI took up this issue with the Finance Ministry and, accordingly, the NDI Rules have been amended on 5^th December, 2019 with retrospective effect to drop such mutual funds which invest more than 50% in equity from the definition of investment vehicle. Accordingly, any investment by such mutual funds would no longer be classified as indirect FDI.

Sectoral caps: The NDI Rules amended the definition of sectoral caps to provide the maximum repatriable investment in equity and Debt Instruments by a person resident outside India. Thus, compared to the TISPRO Regulations, Debt Instruments were also added in the definition of sectoral caps. This definition again created an ambiguity since it was not possible to consider debt investment while reckoning the sectoral caps. Accordingly, the NDI Rules have been amended on 5^th December, 2019 with retrospective effect to drop Debt Instruments from the definition of sectoral caps and revert to the earlier definition.

Pricing of convertible instruments: Unlike the TISPRO Regulations, the NDI Rules did not provide flexibility in determining the issue price of CCDs and CCPS. Now, the NDI Rules have been amended on 5^th December, 2019 with retrospective effect to provide that the price of such convertibles can either be determined upfront or a conversion formula should be determined at the time of their issue. The conversion price should be ≥ the fair market value as at the date of issue of the convertible instruments.

FPI: The NDI Rules have substantially amended the provisions relating to investments by SEBI Registered Foreign Portfolio Investors or FPIs:

(a) Under the TISPRO Regulations, maximum aggregate FPI investment was 24%. This limit could be increased to the sectoral caps by passing a special resolution. Thus, a company in the software sector which has no sectoral caps could increase the FPI limit to 100%.

(b) The NDI Rules now provide that with effect from 1st April, 2020 the FPI limit for all companies shall be the sectoral caps applicable to a company irrespective of whether or not it has increased the limit by passing a special resolution. The only exception is a company operating in a sector where FDI is prohibited – in which case the FPI limit would be capped @ 24%. This is a new feature which was not found in the TISPRO regime. Thus, in the case of a listed company operating in the casino / gambling sector (where FDI is taboo) the FPI limits would be 24%! This is a unique provision since FDI and FPI are and always were separate ways of investing in a company. Now, FPI would be limited in a company simply because it is ineligible to receive FDI.

(c) In case the Indian company desires to reduce the FPI limit then it can peg it to 24% or 49% or 74% provided that it passes a special resolution to this effect before 31^st March, 2020. Thus, if an Indian company is wary of a hostile takeover through the FPI route, then it may reduce the FPI limit. Such a company which has reduced its FPI limit may once again increase it to 49% or 74% or sectoral cap by passing another special resolution. However, once a company increases its FPI limit after first reducing it, then it cannot once again reduce the same.

(d) If an FPI were to inadvertently breach the limit applicable to a company, then it has five trading days to divest the excess shares, failing which its entire shareholding in that company would be classified as FDI.

(e) The Rules originally provided that FPIs could sell / gift shares only to certain non-residents. This provision has been amended with retrospective effect to provide that FPIs can sell in accordance with the terms and conditions provided by the SEBI Regulations. Thus, the original position prevalent under the TISPRO Regulations has been restored.

FVCI: Under the TISPRO Regulations, a SEBI registered Foreign Venture Capital Investor could invest in the securities of a start-up without any sectoral restrictions. As compared to the TISPRO Regulations, instead of the term ‘securities’, the NDI Rules provide a more detailed description permitting investment in the equity or equity-linked instruments or debt instruments issued by a start-up. However, if the investments are in equity instruments then the sectoral caps, entry routes and other conditions would apply.

Sectoral conditions: The NDI Rules have made certain changes in the sectoral conditions for certain sectors which are as follows:

(i) Coal and lignite: 100% FDI through the automatic route is now allowed in sale of coal and coal mining activities, including associated processing infrastructure, subject to the provisions of the Mines and Minerals (Development and Regulation) Act, 1957 and the Coal Mines (Special Provisions) Act, 2015. This includes coal washery, crushing, coal handling and separation (magnetic and non-magnetic).

(ii) Manufacturing: The 100% automatic route FDI is permissible in manufacturing. The definition of the term manufacturing has been amended to include contract manufacturing in India through a legally tenable contract, whether on principal-to-principal or principal-to-agent basis. In this respect, the Commerce Ministry has clarified that the principal entity which has outsourced manufacturing to a contractor would be eligible to sell its products so manufactured through wholesale, retail or e-commerce on the same footing as a self-manufacturer. Further, the onus of compliance with the conditions for FDI would remain with the manufacturing entity.

(iii) Broadcasting: A new entry has been added permitting FDI up to 26% on the Government approval route in uploading / streaming of news and current affairs through digital media.

(iv) E-commerce: Under the TISPRO Regulations, an e-commerce entity was defined to mean an Indian company or a foreign company covered under the Companies Act, 2013 or an office, branch or agency which is owned or controlled by a person resident outside India and which is conducting e-commerce activities. The NDI Rules have truncated the definition to only cover a company incorporated under the Companies Act, 1956 / 2013. Hence, going forward, branches of foreign companies would not be treated as an eligible e-commerce entity. Further, a new condition has been included that an e-commerce marketplace with FDI must obtain and maintain a report from its statutory auditor by the 30^thday of September every year for the preceding financial year confirming compliance with the FDI Guidelines.

(v) Single Brand Product Retail Trading (SBRT): The original NDI Rules contained some variations compared to the TISPRO Regulations which have now been rectified. However, even though 100% automatic route FDI continues to be allowed in SBRT, there are yet some changes compared to the TISPRO Regulations:

(1) SBRT FDI > 51% requires that at least 30% of the value of the goods procured shall be locally sourced from India. The entity can set off this 30% requirement by sourcing goods from India for global operations. For this purpose, the phrase ‘sourcing of goods from India for global operations’ has been defined to mean the value of goods sourced from India for global operations for that single brand (in rupee terms) in a particular financial year directly by the entity undertaking SBRT or its group companies (whether resident or non-resident), or indirectly by them through a third party under a legally tenable agreement.

(2) As before, an SBRT entity operating through brick and mortar stores can also undertake retail trading through e-commerce. However, it is now also possible to undertake retail trading through e-commerce prior to the opening of brick and mortar stores, provided that the entity opens brick and mortar stores within two years from the date of starting the online retail.

The power to govern the mode of payment and reporting of the non-debt instruments still vests with the RBI and, thus, the RBI has also notified the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019. These lay down the forms to be filed on receipt of various types of foreign investment, the manner of making payment by the foreign investors and the manner of remittance of the sale / maturity proceeds on sale of these foreign investments. These Regulations contain provisions which are the same as those contained in the earlier TISPRO Regulations.

DEBT REGULATIONS

Consequent to the notification of the Debt Rules, the RBI has notified the Foreign Exchange Management (Debt Instruments) Regulations, 2019. These regulate debt investment by a person resident outside India. For instance, the investment by FPIs in corporate bonds / non-convertible debentures is governed by these Regulations. One change in the debt regulations as compared to the TISPRO Regulations is that NRIs are no longer allowed to invest in money market mutual funds on a non-repatriation basis.

CONCLUSION

The FEMA Regulations have been totally revamped in the field of capital instruments. It remains to see whether the Government would amend more FEMA Regulations to transfer power from the RBI to itself. One only wishes that whichever authority is in charge, there is clarity and simplicity in the FEMA Regulations which would lead to a conducive investment climate.

shailesh.kwebmaker

MAKING A WILL WHEN UNDER LOCKDOWN

INTRODUCTION

We are currently living in times
of uncertainty due to Covid-19. Hopefully, by the time this issue reaches you
India’s lockdown would have eased. However, it could also be extended or
re-enforced at any time. It is in times such as these that we realise that life
is so fragile and fleeting. This lockdown has also forced several of us to
consider making a Will. During these past 30 days, the author has drafted
several Wills for people who are concerned about what would happen if they
contracted the virus. Through this month’s feature, let us look at the unique
issues and challenges which one faces when drafting a Will during a lockdown.

DECODING
THE JARGON

Wills are usually associated with
a whole lot of jargon which make them appear very complex to the man on the
street. However, most of these legal words are used by legal professionals and
a person making a Will can avoid using them. However, it is beneficial to
understand the meaning of these words in order to understand various other
things. All or some of the following terms are normally involved in a Will:

(a) Testator / testatrix: A person who makes the Will. He
/ she is the person whose property is to be disposed of after his / her death
in accordance with the directions in the Will.

(b) Beneficiary / legatee: The person to whom the
property will pass under the Will. He is the person to whom the property of the
testator would be bequeathed under the Will.

(c) Estate: The property of the testator remaining after his
death. It consists of the sum total of such assets as are existing on the date
of the testator’s death. The estate may also increase or decrease after the
testator’s death due to the actions carried out by the executors. For example,
the executors may carry on the business previously run by the deceased in the
name of the estate.

(d) Executor / executrix: The person who would
administer the estate of the testator after his death in accordance with the
provisions of the Will. The executor is normally named in the Will itself. An
individual, limited company, partnership firm, etc., may be appointed as an
executor. In many cases, a bank is appointed as the executor of a Will. For all
legal and practical purposes, the executor acts as the legal representative of
the estate of the deceased. On the death of the testator, the property cannot
remain in a vacuum and hence the property immediately vests in the executor
till the time the directions contained in the Will are carried out and the
property is distributed to the beneficiaries.

(e) Bequest: The property / benefits which flow under the
Will from the testator’s estate to the beneficiary.

(f) Bequeath: The act of making a bequest.

(g) Witnesses: The persons who witnesses the signing
of the Will by the testator.

BACK
TO BASICS

First things first, making a Will
involves certain basics which one needs to remember. Any adult, owning some
sort of property or assets can and should make a Will. If a Will is not made,
then the personal succession law as applicable would take over. For instance, Hindus
would be governed by the Hindu Succession Act, 1956. Only adults of sane mind
can make a Will. Thus, anyone who is insane or is a lunatic, or has lost
control over his mental faculties cannot make a Will.

A Will is a document which
contains the last wishes of a person as regards the manner and mode of
disposition of his property. A person expresses his will as regards the
disposition of his property. The Indian Succession Act, 1925 (which governs the
making of Wills in India) defines a Will to mean ‘the legal declaration
of the intention of the testator with respect to his property which he desires
to be carried into effect after his death’. However, the intention manifests
only after the testator’s death, i.e., posthumous disposition of his property.
Till the testator is alive, the Will has no validity. He can dispose of all his
properties in a manner contrary to that stated in the Will and such action
would be totally valid.

For example, ‘A’ makes a lockdown
Will bequeathing all his properties to his brother. However, post the lockdown
he, during his lifetime itself, transfers all his properties to his son with
the effect that at the time of his death he is left with no assets. Such action
of the testator cannot be challenged by his brother on the ground that ‘A’ was
bound to follow the Will since the Will would take effect only after the death
of the testator. In this case, as the property bequeathed would not be in
existence, the bequest would fail. The Will can be revoked at any time by the
testator in his lifetime. Hence, it is advisable to at least make a basic Will.
It can always be revised once things improve.

The testamentary capacity of the
testator is paramount in case of a Will. If it is proved that he was of unsound
mind, then the Will would be treated as invalid. What is a ‘sound mind’ is a
question of fact and needs to be ascertained in each case. Hence, if a person
has been so impacted by the Covid-19 that his mental faculties are arrested,
then he cannot make a valid Will.

The most important element of a
Will is its date! The last Will of a deceased survives and hence the date
should be clearly mentioned on the Will.

LOCKDOWN
ISSUES

Let us now consider the singular
situations which arise in making a Will during a lockdown. People making a Will
may experience some or all of these in these testing times:

(a) Format: There is no particular format for making a Will.
Several persons have expressed apprehension that during the lockdown they are
unable to obtain a stamp paper, unable to print a document or unable to get
ledger paper, etc. A Will can be handwritten (provided it is legible
handwriting); it could be on a plain paper and it need not be on a stamp paper.
Thus, there should not be any problems from a format perspective.

(b) Witness: Section 63 of the Indian
Succession Act, 1925 requires that the Will should be attested by two or more
witnesses, each of whom has:

(i) seen the testator sign the Will or affix his mark; or

(ii) received from the testator a personal acknowledgement of his
signature or of the signature of such other person.

Each of the witnesses must sign
the Will in the presence of the testator. No particular form of attestation is
prescribed. It is important to note that the attesting witnesses need not
know the contents of the Will. All that they attest is the testator’s signature
and nothing more.

A problem which many people could
face is getting two Witnesses to witness the Will. Neighbours may be requested
to help out. However, what if the neighbours are reluctant to do so due to
social distancing issues, or in the case of persons living in bungalows? In
such cases, one’s domestic servants, maids, watchmen may be asked to act as
witnesses. They must, as witnesses, either write their name or at least affix
their thumb impression – left thumb for males and right thumb for females.

However, what can people do if
there are no servants also? In such a case, the adult family members of the
testator may be approached. However, a question which arises is that if such
members are beneficiaries under the Will, can they act as witnesses, too?
Generally speaking, No. The Indian Succession Act states that any bequest
(gift) to a witness of a Will is void. Thus, he who certifies the signing of
the Will should not be getting a bequest from the testator. However, there is a
twist to the above provision. This provision does not apply to Wills made by
Hindus, Sikhs, Jains and Buddhists and, hence, bequests made under their Wills
to attesting witnesses would be valid. Wills by Muslims are governed by their
Shariyat Law. Thus, the prohibition on gifts to witnesses applies only to Wills
made by Christians, Parsis, Jews, etc. Accordingly, any Will by a Hindu can
have a witness as a beneficiary.

A related question would be, can
an executor be a witness under the Will? Thus, if a person names his wife as
the executor, can she also be an attesting witness? The answer is, Yes. An
executor is the person who sets the Will in motion. It is the executor through
whom the deceased’s Will works. There is no bar for a person to be both an
executor of a Will and a witness of the very same Will. In fact, the Indian
Succession Act, 1925 expressly provides for the same. Accordingly, people of
all religions can have the executor as the witness.

To sum up, in the case of Hindus,
Sikhs, Jains and Buddhists, the witness can be a beneficiary and an executor.
However, in the case of Wills made by Christians, Parsis, Jews, etc., the
witness can be an executor but not a beneficiary.

Can witnesses practice social
distancing and yet witness the signing of the Will? Some English cases throw
some light on this issue. In Casson vs. Dade (1781) 28 ER 1010 a
testatrix signed her Will in her lawyer’s office and went to sit in her horse
carriage before the witnesses signed it. Since she could, through the
carriage’s window and the office’s window, see the witnesses signing, it was
held that the Will was valid.

This case is an example of where
the circumstances were enough to meet the witnessing requirements. This case
was followed by the UK Court of Protection in Re Clarke in
September, 2011 when a lasting power of attorney in the UK was held to
have been validly executed where the donor was in one room and the witnesses in
another, separated by a glass door. Even though the witness was sitting in the
adjacent room, there were clear glass doors with ‘Georgian bars’ between the
two rooms and it was held that the witness had a clear line of sight through
those glass doors. It was held that the donor would also have been able to see
the witness by means of the same line of sight through the glass doors.

As the Indian law stands today, a
witness cannot witness the execution of a will by Zoom or Skype. Scotland is
one of the places where this is possible. To deal with the witness issue, the
Law Society of Scotland has amended its guidance on witnessing the signing of a
Will. It allows the lawyer to arrange a video link with the client. If this can
be done, the solicitor can witness the client signing each page. The lawyer
should assess the capacity of the client and using his professional judgement,
consider whether any undue influence is being exerted on the client.

The signed Will can then be
returned to the solicitor by post. The lawyer can then sign as witness on the
receipt of the signed Will. This is a truly revolutionary step!

(c) Doctor’s Certificate: Quite
often, a doctor’s certificate as to the mental fitness of the deceased is
attached to a Will. This is especially so in the case of very old persons so as
to show that the Will is valid. The doctor would certify that the testator is a
person who is alert and able to understand what he is doing. A question which
now arises is how to obtain a doctor’s certificate if the testator cannot visit
the doctor? One option to consider if the doctor is being regularly consulted
is that a video conference could be arranged and if the doctor can issue the
certificate on that basis, then that would suffice. Of course, the doctor’s
certificate may not physically reach the testator but the same could be
collected once the lockdown eases and attached to the Will. It is advisable in
the case of very old / feeble persons that the certificate is obtained from a
neurophysician or a psychiatrist.

An alternative to this would be
to obtain a video recording of the Will execution process with the testator
reading out the entire Will. This helps show that he understands what he is
doing and is useful for very old persons who cannot obtain a medical
certificate.

(d) Enumerating all assets: It is generally preferable
that the Will be specific and enumerate all assets of the testator along with
account numbers, etc. so that it would help the beneficiaries in identifying
the assets. However, in a lockdown it may happen that such details are in the
office or in a bank locker and the testator is unable to access them and write
the details in the Will. In such a case, as many details as possible may be
given, or the Will may make a general bequest of the entire estate of the
testator as on the date of his death. On a separate note, it is always a good
idea to keep a complete inventory of assets along with details of nominations,
account numbers, addresses, etc., both at office and at home.

While bequests can be general or
specific, they cannot be so generic that the meaning itself is unascertainable.
For instance, a Will may state ‘I leave all my money to my wife’. This is a
generic bequest which is valid since it is possible to quantify what is
bequeathed. However, if the same Will states ‘I leave money to my wife’ then it
is not possible to ascertain how much money is bequeathed. In such an event,
the entire Will is void.

The Will must also create a
repertoire of digital assets which should enumerate all important passwords,
online accounts, e.g., emails, social media accounts, bank accounts, etc.

(e) Registration: Registration of
Wills is out of the question in a lockdown. However, registration is not
compulsory. Again, a video Will can act as an alternative.

(f) Bequest to minors : In the
case of nuclear families, there is a tendency to leave everything to one’s
spouse and in case of death of the spouse before the death of the testator, to
the children. However, in the case of minor children it is not advisable to
bequeath assets directly to them. In such situations, a trust is advisable. In
times such as these setting up a trust is not possible since it would not be
feasible to obtain a PAN, open a bank account / demat account, etc. What, then,
can one do? A trust under a Will may be considered, in which case the trust
comes into effect only when the Will is executed and no trust is set up at the
time of making the Will. Thus, the act of settling the assets into the trust is
pushed till when the Will is executed. This trust could own all the assets to
be bequeathed to the minors.

If at all assets are to be bequeathed
directly to minors, then a guardian should be appointed under the Will. In this
case, the Hindu Minority and Guardianship Act, 1956 lays down the
law relating to guardianship of Hindus and the powers and duties of the
guardians. A Hindu father who can act as the natural guardian of his legitimate
children can appoint a guardian by his Will. Such a guardian could be for the
minor and / or for his property. Such an appointment would be invalid if the
father dies before the mother, because in such a case the mother would take
over as the natural guardian. However, once the mother dies, and if she dies
without appointing a person as the guardian under her Will, then the father’s
testamentary guardian would be revived. The testamentary guardian is subjected to
a dual set of restrictions. Firstly, those specified in the Will appointing
him, and secondly, those contained in this Act which apply to natural
guardians. Thus, the testamentary guardian is subjected to the restrictions on
sale of immovable property just as a natural guardian would be. The rights of
the testamentary guardian would be the same as those of a natural guardian. In
case the minor is a girl, then the rights of the testamentary guardian would
end on her marriage.

(g) Living Will: A living Will is not recognised
in India. However, as per the Supreme Court’s decision in Common Cause
vs. UOI, WP (Civil) 215/2005 (SC), an Advanced Medical Directive is
possible. This can state as to when medical treatment may be withdrawn, or if
specific medical treatment that will have the effect of delaying the process of
death should be given. However, one of the stringent requirements of such a
document is the requirement of two independent witnesses and the directive
should be countersigned by a Jurisdictional Judicial Magistrate, First Class
(JMFC), so designated by the district judge concerned. This requirement would
not be possible in the case of a lockdown and hence, having an Advanced Medical
Directive is not possible till such time as normalcy returns.

(h) Hospital bed Wills: What happens in case a
person is unfortunate to contract the virus and is placed in a hospital
quarantine? Can such a person make a Will? The above peculiar issues would
apply to him also. As always, the biggest challenge would be getting two
witnesses. He could request the doctors / nurses treating him to help out. That
is the only way out for a patient in the isolation ward.

CONCLUSION

It is evident that a Will under
lockdown would throw up several unique issues. However, as explained above, a
solution exists for even the strangest of problems. An overarching question is,
should one adopt a DIY (Do It Yourself) approach or consult a professional for
preparing the Will? At the risk of sounding biased, I would always suggest consulting
a professional, especially when the Will is being executed during a lockdown.

While
legal planning does not prevent a healthcare crisis, it can and would ensure
that you control who makes decisions. It also prevents your loved ones from
being left with a stressful legal situation to fix in a short time. Getting
one’s legal affairs in order today would give you the peace of mind that you
have taken tangible steps to truly be prepared for an uncertain future. Till
then, stay safe and don’t forgot to wash your hands!

shailesh.kwebmaker

THE DOCTRINE OF ‘FORCE MAJEURE’

INTRODUCTION

Force majeure is a French
term which, at some point or other, we have all come across when reading a
contract. It is a small, solitary clause lurking somewhere at the end which has
the effect of discharging all the parties from their obligations under the
contract! What does this clause actually mean and how does one interpret it in
the light of the present pandemic? Would a contract hit by non-performance due
to Covid-19 fall under the force majeure scenario? Let us
try and answer some of these questions.

MEANING

The Black’s
Law Dictionary, 6^th edition, defines the term force majeure
as ‘An event or effect that can be neither anticipated nor controlled.’ The
events of force majeure could be acts of God such as earthquakes,
floods, famine, other natural disasters and manmade occurrences such as wars,
bandhs, blackouts, sabotage, fire, arson, riots, strikes, theft, etc. Even
major changes in government regulations could be a part of this clause. In
short, any act that was outside the realm of contemplation at the time when the
contract was executed but which now has manifested and has had a major impact
on the contract. It is necessary that such acts should not be committed
voluntarily by either party, i.e., they are out of the control of the parties
which are rendered mere spectators to the consequences. For example, a sample force
majeure clause found in a real estate development contract could be as
follows:

‘The
obligations undertaken by the parties hereto under this Agreement shall be
subject to the force majeure conditions, i.e., (i) non-availability of
steel, cement and other building material (which may be under Government
Control), water and electric supply, (ii) war, civil commotion, strike, civil
unrest, riots, arson, acts of God such as earthquake, tsunami, storm, floods,
cyclone, fire, etc., (iii) any notice, order, rule, notification of the
Government and / or other public or competent authority, (iv) any other
condition / reason beyond the control of the Developer.’

INDIAN CONTRACT LAW

The Indian Contract Act, 1872
governs the law relating to contracts in India. The edifice of almost all
contracts and agreements lies in this Contract Law. In the event that a
contract does not explicitly provide for a force majeure clause, then
section 56 of the Act steps in. This section deals with the frustration
of contracts. The consequences of a force majeure event
are provided for u/s 56 of the Act which states that on the occurrence of an
event which renders the performance impossible, the contract becomes void
thereafter. A contract to do an act which, after the contract is made, becomes
impossible or, by reason of some event which the promisor could not prevent,
becomes unlawful is treated as void when the act becomes impossible or
unlawful. Thus, if the parties or one of the parties to the contract is
prevented from carrying out his obligation under the contract, then the
contract is said to be frustrated.

When the act
contracted for becomes impossible, then u/s 56 the parties are exempted from
further performance and the contract becomes void. The Supreme Court in Satyabrata
Ghose vs. Mugneeram Bangur & Co., AIR 1954 SC 44 has held that a
change in event or circumstance which is so fundamental as to strike at the
very root of the contract as a whole, would be regarded as frustrating the
contract. It held:

‘In deciding
cases in India the only doctrine that we have to go by is that of supervening
impossibility or illegality as laid down in section 56 of the Contract Act,
taking the word “impossible” in its practical and not literal sense. It must be
borne in mind, however, that section 56 lays down a rule of positive law and
does not leave the matter to be determined according to the intention of the
parties.’

The Supreme
Court went on to hold that if and when there is frustration, the dissolution of
the contract occurs automatically. It does not depend on the choice or election
of either party. What happens generally in such cases is that one party claims
that the contract has been frustrated while the other party denies it. The
issue has got to be decided by the courts on the actual facts and circumstances
of the case.

The Supreme Court has, in South East Asia Marine Engineering and
Constructions Ltd. (SEAMEC Ltd.) vs. Oil India Ltd., CA No. 673/2012, order
dated 11^thMay, 2020, clarified that the parties may instead
choose the consequences that would flow on the occurrence of an uncertain
future event u/s 32 of the Contract Act. This section provides that contingent
contracts to do or not to do anything if an uncertain future event occurs,
cannot be enforced by law unless and until that event has occurred. If the
event becomes impossible, such contracts become void.

The English
Common Law has also dealt with several such cases. The consequence of such
frustration had fallen on the party that sustained a loss before the
frustrating event. For example, in Chandler vs. Webster, [1904] 1 KB 493,
one Mr. Chandler rented space from a Mr. Webster for viewing the coronation
procession of King Edward VII. Mr. Chandler had paid part consideration for the
same. However, due to the King falling ill, the coronation was postponed. Mr.
Webster insisted on payment of his consideration. The Court of Appeals rejected
the claims of both Mr. Chandler as well as Mr. Webster. The essence of the
ruling was that once frustration of a contract took place, there could not
be any enforcement and the loss fell on the person who sustained it before the force
majeure event occurred.

The above
Common Law doctrine has been modified in India. The Supreme Court in the SEAMEC
case (Supra) has held that in India the Contract Act had already
recognised the harsh consequences of such frustration to some extent and had
provided for a limited mechanism to improve the same u/s 65 of the Contract
Act. Section 65 provides for the obligation of any person who has received
advantage under a void agreement or a contract that becomes void. It states
that when a contract becomes void, any person who has received any advantage
under such agreement or contract is bound to restore it, or to make
compensation for it to the person from whom he received it. Under Indian
contract law, the effect of the doctrine of frustration is that it discharges
all the parties from future obligations.

For example,
a convention was scheduled to be held in a banquet hall. The city goes into
lockdown due to Covid and all movement of people comes to a halt and the
convention has to be cancelled. Any advance paid to the banquet hall for this
purpose would have to be refunded by the hall owners. In this respect, the
Supreme Court in Satyabratha’s case has held that if the parties
to a contract do contemplate the possibility of an intervening circumstance
which might affect the performance of the contract but expressly stipulate that
the contract would stand despite such circumstances, then there can be no case
of frustration because the basis of the contract being to demand performance
despite the occurrence of a particular event, performance cannot disappear when
that event takes place.

COVID-19 AS A ‘FORCE MAJEURE’

Is Covid-19
an Act of God; is a typical force majeure clause wide enough to
include a lockdown as a result of Covid-19? These are some of the questions
which our courts would grapple with in the months to come. However, some Indian
companies have started invoking Covid and the related lockdown as a force
majeure clause. For example, Adani Ports and SEZ Ltd., in
a notice to the trade dated 24^th March, 2020, has stated that in
view of the Covid-19 pandemic the Mundra Port has notified a ‘force
majeure event’. Accordingly, it will not be responsible for any claims,
damages, charges, etc., whatsoever arising out of and / or connected to the
above force majeure event, either directly or indirectly. This
would include vessel demurrage due, inter alia, to pre-berthing or any
other delays of whatsoever nature and, accordingly, the discharge rate
guaranteed under the agreement shall also not be applicable for all vessels to
be handled at the port for any delay or disturbance in the port services during
the force majeure period.

CONCLUSION

Indian businesses would have to take a deep look at their contracts and
determine whether there is a force majeure clause and, if yes,
what are its ramifications. In cases where there is no such clause, they should
consider taking shelter u/s 56 of the Indian Contract Act. This is one area
where they could renegotiate and, if required, even litigate or go in for arbitration.
It would be very interesting to see how Indian Courts interpret the issue of
Covid acting as a force majeure clause. However, it must be
remembered that force majeure cannot be invoked at the mere drop
of a hat. The facts and circumstances must actually prove that it was
impossible to carry out the contract. What steps did the parties take to meet
this uncertain event would also carry heft with the Courts in deciding whether
or not to excuse performance of the contract.

shailesh.kwebmaker

CAN AGRICULTURAL LAND BE WILLED TO A NON-AGRICULTURIST?

INTRODUCTION

A person can
make a Will for any asset that he owns, subject to statutory restrictions, if
any. For instance, in the State of Maharashtra a person cannot make a Will for
any premises of which he is a tenant. A similar question that arises is, ‘Can
a person make a Will in respect of his agricultural land?’ A
Three-Judge Bench of the Supreme Court had an occasion to decide this very
important issue in the case of Vinodchandra Sakarlal Kapadia vs. State of
Gujarat, CA No. 2573/2000, order dated 15^thJune, 2020.

APPLICABLE LAW

It may be noted that Indian
land laws are a specie in themselves. Even within land laws, laws relating to
agricultural land can be classified as a separate class. Agricultural land in
Maharashtra is governed by several Acts, the prominent amongst them being the
Maharashtra Land Revenue Code, 1966; the Maharashtra Tenancy and Agricultural
Lands Act, 1948; the Maharashtra Agricultural Lands (Ceiling on Holdings) Act,
1961; etc.

The Maharashtra Tenancy and
Agricultural Lands Act, 1948 (‘the Act’), which was earlier known as the Bombay
Tenancy and Agricultural Lands Act, 1948, lays down the situations under which
agricultural land can be transferred to a non-agriculturist. The Act is
applicable to the Bombay area of the State of Maharashtra. The Bombay
Reorganisation Act, 1960 divided the State of Bombay into two parts, namely,
Maharashtra and Gujarat. The Act is in force in most of Maharashtra and the
whole of Gujarat.

PROHIBITIONS UNDER THE ACT

Under section 63 of the Act,
any transfer, i.e., sale, gift, exchange, lease, mortgage, with possession of
agricultural land in favour of any non-agriculturist shall not be valid unless
it is in accordance with the provisions of the Act. The terms sale, gift,
exchange and mortgage are not defined in this Act, and hence the definitions
given under the Transfer of Property Act, 1882 would apply.

This section could be
regarded as one of the most vital provisions of this Act since it regulates
transactions of agricultural land involving non-agriculturists. Even if a
person is an agriculturist of another state, say Punjab, and he wants to buy
agricultural land in Maharashtra, then section 63 would apply. The above
transfers can be done with the prior permission of the Collector subject to
such conditions as he deems fit.

If land is transferred in
violation of section 63, then u/s 84C the transfer becomes invalid on an order
so made by the Mamlatdar. If the parties give an undertaking that they
would restore the land to its original position within three months, then the
transfer does not become invalid. Once an order is so made by the Mamlatdar,
the land vests in the State Government. The amount received by the transferor
for selling the land shall be deemed to be forfeited in favour of the State.

Further, section 43 of the
Act states that any land or any interest therein purchased by a tenant cannot
be transferred by way of sale or assignment without the Collector’s
permission. However, such a permission is not needed if the partition of the
land is among the members of the family who have direct blood relations, or
among the legal heirs of the tenant.

Sections 43 and 63 may be
considered to be the most important provisions of the Act. In this background,
let us consider a case decided by the Supreme Court recently.

FACTS OF THE CASE

The
facts in the case before the Supreme Court were very straight forward. An
agriculturist executed a Will for the agricultural land that he owned in
Gujarat in favour of a non-agriculturist. On the demise of the testator, the
beneficiary applied for transferring the land records in his favour. The
Revenue authorities, however, found that he was not an agriculturist and
accordingly proceedings u/s 84C of the Act were registered and notice was
issued to the appellant.

Ultimately, the Mamlatdar passed
an order that disposal by way of a Will in favour of the appellant was invalid
and contrary to the principles of section 63 of the Act and therefore declared
that the said land vested in the State without any encumbrances. A Single Judge
of the Gujarat High Court in Ghanshyambhai Nabheram vs. State of Gujarat
[1999 (2) GLR 1061] took the view that section 63 of the Act cannot
deprive a non-agriculturist of his inheritance, a legatee under a Will can also
be a non-agriculturist. Accordingly, the matter reached the Division Bench of
the Gujarat High Court which upheld the order of the Mamlatdar and held:

‘….Act has
not authorised parting of agricultural land to a non-agriculturist without the
permission of the authorised officer, therefore, if it is permitted through a
testamentary disposition, it will be defeating the very soul of the
legislation, which cannot be permitted. We wonder when testator statutorily
debarred from transferring the agricultural lands to a non-agriculturist during
his life time, then how can he be permitted to make a declaration of his
intention to transfer agricultural land to a non-agriculturist to be operative
after his death. Such attempt of testator, in our view, is clearly against the
public policy and would defeat the object and purpose of the Tenancy Act…
Obvious purpose of Section 63 is to prevent indiscriminate conversion of
agricultural lands for non-agricultural purpose and that provision strengthens
the presumption that agricultural land is not to be used as per the holders
caprice or sweet-will (sic)’.

The same view was taken by
the High Court in a host of cases.

ISSUE IN QUESTION

The issue reached the Supreme
Court and the question to be considered by it was whether sections 63 and 43 of
the Act debarred an agriculturist from transmitting his agricultural land to a
non-agriculturist through a ‘Will’ and whether the Act restricted the transfer
/ assignment of any land by a tenant through a Will?

DECISION OF THE APEX COURT

The Supreme Court in the case
of Vinod (Supra) observed that a two-member Bench (of the Apex
Court) in Mahadeo (Dead through LR) vs. Shakuntalabai (2017) 13 SCC 756
had dealt with section 57 of the Bombay Tenancy and Agricultural Lands Act,
1958 as applicable to the Vidarbha region of the State of Maharashtra. In that
case, it was held that there was no prohibition insofar as the transfer of land
by way of a Will is concerned. It held that a transfer is normally between two
living persons during their lifetime. A Will takes effect after the demise of the
testator and transfer in that perspective becomes incongruous. However, the
Court in Vinod (Supra) observed that its earlier decision in Mahadeo
(Supra) was rendered per incuriam since other, earlier contrary
decisions of the Supreme Court were not brought to the notice of the Bench and
hence not considered.

It held that a tenancy
governed by a statute which prohibits assignment cannot be willed away to a
total stranger. A transfer inter vivo would normally be for
consideration where the transferor gets value for the land but the legislation
requires previous sanction of the Collector so that the transferee can step
into the shoes of the transferor. Thus, the screening whether a transferee is
eligible or not can be undertaken even before the actual transfer is effected.
The Court observed that as against this, if a Will (which does not have the
element of consideration) is permitted without permission, then the land can be
bequeathed to a total stranger and a non-agriculturist who may not cultivate
the land himself; which in turn may then lead to engagement of somebody as a
tenant on the land. The legislative intent to do away with absentee landlordism
and to protect the cultivating tenants, and to establish direct relationship
between the cultivator and the land, would then be rendered otiose.

Accordingly, the Court held
that the restriction on ‘assignment’ without permission in the Act must include
testamentary disposition as well. By adopting such a construction, the statute
would succeed in attaining the object sought to be achieved.

It also cautioned against the
repercussions of adopting a contrary view. If it was held that a Will would not
be covered by the Act, then a gullible person could be made to execute a Will
in favour of a person who may not fulfil the requirements and may not be
eligible to be a transferee under the Act. This may not only render the natural
heirs of the tenant without any support or sustenance, but may also have a
serious impact on agricultural operations. It held that agriculture was the
main source of livelihood in India and hence the restrictions under the Act
cannot be given the go-by by such a devise.

Another connected question
considered was whether any prohibition in State enactments which were
inconsistent with a Central legislation, such as, the Indian Succession Act,
1925 must be held to be void? The Court held that the power of the State
Legislature to make a law with respect to transfer and alienation of
agricultural land stemmed from Entry 18 in List II of the Constitution of
India. This power carried with it the power to make a law placing restrictions
on transfers and alienations of such lands, including a prohibition thereof. It
invoked the doctrine of pith and substance to decipher the true object of the
Act. Accordingly, the Supreme Court observed that the primary concern of the
Act was to grant protection to persons from disadvantaged categories and confer
the right of purchase upon them, and thereby ensure direct relationship of a
tiller with the land. The provisions of the Act, though not fully consistent
with the principles of the Indian Succession Act, were principally designed to
attain and sub-serve the purpose of protecting the holdings in the hands of
disadvantaged categories. The prohibition against transfers of holdings without
the sanction of the Collector was to be seen in that light as furthering the
cause of legislation. Hence, the Apex Court concluded that in pith and
substance, the legislation was completely within the competence of the State Legislature
and by placing the construction upon the expression ‘assignment’ to include
testamentary disposition, no transgression ensued.

CONCLUSION

Persons owning agricultural
land should be very careful in drafting their Wills. They must take care that
the beneficiary of such land is also an agriculturist or due permission of the
Collector has been obtained in case of a bequest to a non-agriculturist. It is
always better to exercise caution and obtain proper advice rather than leaving
behind a bitter experience for the beneficiaries.

shailesh.kwebmaker

STAMP DUTY ON CHAIN OF DOCUMENTS

Introduction

Go to register a document
for a flat/office and chances are that the Sub-registrar of Assurances would
point out that the antecedent title documents have not been stamped properly
and hence, the current instrument cannot be registered. The Authority would first
ask that stamp duty with penalty be paid on all the earlier chain of documents
and only then would the current instrument get stamped and registered. This
creates several hurdles for property buyers and they are unnecessarily
penalised for past lapses in the property documents. One wonders till what
extent can the current buyer be asked to go to pay stamp duty on the past
documents?

In this respect, the Bombay
High Court has given a path breaking decision which would ease the property
buying process.

The Case

The decision was rendered
in the case of Lajawanti G.
Godhwani vs. Shyam R. Godhwani and Vijay Jindal, Suit No. 3394/2008,
decision rendered on 13^thDecember, 2018.This case
pertained to a flat purchased in an auction conducted by the Court Receiver.
The last time the flat was sold was in 1979 and that document was stamped only
with a duty of Rs. 10. The old agreement was not even registered. When the
purchaser went to register the instrument of transfer, the Sub-registrar of
Assurances demanded stamp duty on the entire chain of title documents since the
same was not paid. The duty alone on the old agreement at the Stamp Duty
Reckoner Rates amounted to Rs. 2 crore. As the purchaser had bought the flat
through a Court Receiver’s auction, he approached the High Court to get
directives that the seller should bear the previous stamp duty and penalty.
While one of the original owners agreed, the other former co-owners refused.
Accordingly, the High Court was hearing their dispute.

Basics of Stamp Law

Before understanding what
the Court held, it would be useful to appreciate certain basics of stamp duty.
Stamp duty is both a subject of the Central and the State Government. Under the
Constitution of India, the power to levy stamp duty is divided between the
Union and the State. The Parliament has the power to levy stamp duty on the
instruments specified in Article 246 read with Schedule VII, List I, Entry 91
and the State Legislature has the power to levy stamp duty on instruments
falling under Article 246 read with Schedule VII, List II, Entry 63. Often a
question arises, which Act applies – the Indian Stamp Act, 1899 or the
Maharashtra Stamp Act, 1958. For most of the instruments, the State Act would
apply. However, for the nine instruments provided in the Union List of the
Constitution of India, the rates are mentioned in the Schedule to the Indian
Stamp Act, 1899.

In Hindustan Steel
Ltd. vs. Dalip Construction Company, 1969 SCR (3) 796, the Supreme
Court held that the Stamp Act is a fiscal measure enacted to secure revenue for
the State on certain classes of instruments.

Stamp Duty is leviable on
an instrument (and not a transaction) mentioned in Schedule I to the Maharashtra
Stamp Act, 1958 at rates mentioned in that Schedule – LIC vs. Dinannath
Mahade Tembhekar AIR 1976 Bom 395. An Instrument is defined under the
Maharashtra Stamp Act to include every document by which any right or liability
is created, transferred, limited, extended, extinguished or recorded. However, it does not include a bill of
exchange, cheque, promissory note, bill of lading, letter of credit, policy of
insurance, transfer of share, debenture, proxy and receipt. This is because
these nine instruments are within the purview of the Indian Stamp Act, 1899.
All instruments chargeable with duty and executed in Maharashtra should be
stamped before or at the time of execution or immediately thereafter or on the
next working day following the date of execution.

One of the biggest myths
surrounding stamp duty is that it is levied on a transaction. It is only levied
on an instrument and that too provided the Schedule mentions rates for it. If
there is no instrument then there is no duty is the golden rule one must always
keep in mind. An English decision in the case of The Commissioner of Inland Revenue vs.
G. Anous & Co. (1891) Vol. XXIII Queen’s Bench Division 579 has
held that held that the thing, which is made liable to stamp duty is the
“instrument”. It is the “instrument” whereby
any property upon the sale thereof is legally or equitably transferred and the
taxation is confined only to the instrument whereby the property is
transferred. If a contract of purchase or sale or a conveyance by way of purchase
and sale, can be, or is, carried out without an instrument, the case would not
fall within the section and no tax can be imposed. Taxation is confined to the
instrument by which the property is transferred legally and equitably
transferred. This decision was cited by the Supreme Court in the case of Hindustan
Lever Ltd vs. State of Maharashtra, (2004) 9 SCC 438.

On 9^th December,
1985, the Maharashtra Stamp Act was amended which mandated that stamp duty had
to be paid at the rates prescribed in the Ready Reckoner published every year.
Following this, the Stamp Office started demanding stamp duty even on resale
agreements of old properties for which a nominal duty had been paid on the
agreements when they were originally executed. Consequently, the issue arose as
to whether the amendments made in 1985 were applicable even to documents which
were registered earlier than 1985. Two Single Judge decisions of the Bombay
High Court, Padma Nair vs. The Deputy Collector, Valuation, AIR 1994 Bom
160 / ITC Limited and Anr. vs The State and a Division Bench decision in the
case of Nirmala Manherlal Shah vs State, 2005 (5) BomCR 206 are
relevant in this respect. The Courts in these cases were considering whether
stamp duty was payable on the agreement to sell entered into before 9^th
December, 1985. The Courts took a view that only in respect of those Agreements
to Sell entered into with effect from 9^th December, 1985 and not
earlier were to be stamped in terms of the definition ‘conveyance’ read with
Explanation under article of Schedule I. Inspite of these verdicts the Stamp
Office demands stamp duty on old agreements that had been executed prior to
1985.

Bombay High Court’s verdict

The verdict in the instant
case was delivered by J. Gautam Patel. The Court held that as regards the
question of stamp duty on antecedent documents there was no clear or well
considered response from the Stamp Office. Neither the Officer from the Stamp
Office nor the Assistant Government Pleader was able to show the Court as to
under what provision of the Stamp Act, old documents prior to the amendments to
the Stamp Act could be legitimately or lawfully said to be “unstamped” or even
insufficiently stamped if, according to the law as it stood at that historical point
in time, the document itself was not liable to stamp in the first place. The
Counsel for the Government agreed that any such assessment would have to be on
the basis of the Stamp Act as it stood at that time of the older transactions
and not at the current rates.

The High Court held that
the entire approach of seeking duty on past agreements seemed prima facie
entirely incorrect. The Court considered a very simple example to substantiate
its stand—a flat in a cooperative housing society was held by A, who was the
original allottee of the flat. In 1970, he sold the flat to B. It is not shown
that the 1970 sale attracted stamp duty. B held the flat until 2018, when he
sold it to C. Now when C submitted his transfer instrument of 2018 (from B to C) for adjudication, was it even
open to the Stamp Authorities to contend that the parent 1970 transfer from A
to B was bad or invalid or inoperative for want of stamp since, had it been
done today, it would have attracted stamp, notwithstanding that it did not attract
duty at the date of that transfer in 1970? The Court did not think so and held
that the Authority should remember that what was submitted to it was the
current instrument of 2018, not the instrument of 1970; the latter was only an
accompaniment to trace a history of the title of the property, not to
effectuate a transfer. Stamp duty was attracted by the instrument, not the
underlying transaction, and not by any historical narrative in the instrument.
If the Authority’s view of levying duty on past instruments was to be accepted,
then it had no answer to the inevitable consequences, for its view necessarily
meant that no title ever passed to B, and A would have to be held to continue
to be the owner of the flat, which was clearly absurd and was nobody’s case. It
was also unclear just how far back the Authority could travel by applying the
current taxing regime on old concluded transactions. Moreover, when such
transactions were in every sense complete and not being effectuated currently.

Accordingly, the Court concluded that there
was no question of either the auction purchaser or anyone else being liable to
pay stamp duty on the older documents, copies of which were tendered along with
the auction purchaser’s instrument of transfer. The Bombay High Court also laid
down very vital principle—since the auction purchaser’s instrument of transfer
had been stamped, no question could arise of reopening an issue of sufficiency
of stamps on the antecedent documents. That claim was deemed to have been given
up by the Authority by its act of accepting the stamp duty paid on the auction
purchaser’s transfer instrument.

CONCLUSION

Registration offices should no longer demand
payment of stamp duty on antecedent documents of title at current rates before
accepting registration of the current instrument of transfer. This decision
have very rightly held that a purchaser only seeks to register and pay duty on
the current instrument of transfer and he cannot be held responsible for
non-payment of past owners. One hopes that the offices of the Registrar would
take this decision in the right spirit and act accordingly. A circular from the
Stamp Office toeing the line of this decision would really help smoothen the
property buying process and may ultimately even act as an impetus to the house
buying process.

shailesh.kwebmaker

RELATIVE IS RELATIVE TO THE ACT IN QUESTION

Introduction

Who is a relative? This question
may appear very mundane at first blush, but when viewed in the legal context it
becomes very significant. India is a land of laws and each one of them is an
island in itself. Many of the Acts have defined the term ‘relative’ and each
has done so in its own independent manner, thereby creating multiple
definitions. Hence, the term ‘relative’ is relative to the Act in question,
i.e., it depends on the Act which is being examined.

The generic definition of the term
‘relative’ as contained in the Concise Oxford English Dictionary is a person
connected by blood or marriage. In State of Punjab vs. Gurmit Singh, 2014
(9) SCC 632, the Supreme Court held that in Ramanatha Aiyar’s, Advance
Law Lexicon (Vol. 4, 3rd Ed.), the word ‘relative’ means any person related by
blood, marriage or adoption. Again, in the case of U. Suvetha vs. State
by Inspector of Police, (2009) 6 SCC 787 it held that in the absence of
any statutory definition, the term must be assigned a meaning as is commonly
understood. Ordinarily, it would include the father, mother, husband or wife,
son, daughter, brother, sister, nephew or niece, grandson or granddaughter of
an individual. The meaning of the word ‘relative’ would depend upon the nature
of the statute. It principally includes a person related by blood, marriage or
adoption. The expression ‘relative of the husband’ came up for consideration in
the case of Vijeta Gajra vs. State of NCT of Delhi (2010)11 SCC 618
where it was held that the word relative would be limited only to the blood
relations or the relations by marriage.

Interestingly, the succession laws
such as the Hindu Succession Act, 1956 do not use the term ‘relative’. Instead,
they use the word ‘heir’ which has a different connotation altogether. An heir
is a relative who comes into being only on the death of a person, whereas a
person would have relatives even when he is alive.

Let us analyse the definitions
under a few crucial Acts and try and bring out the similarities and the
dissimilarities between the different meanings.

Income-tax
Act, 1961

The Big Daddy of all laws has the
biggest list of relatives, no pun intended! The notorious section 56(2)(x) of
the Act taxes certain receipts of property in the hands of the recipient.
However, any receipt of property from a relative is exempt from tax. Hence, it
becomes very essential that the list of relatives is long. This section provides
an exhaustive definition under which the following persons would be treated as
a relative of the donee / recipient:

(i) spouse
of the individual;

(ii) brother or sister of the individual;

(iii) brother or sister of the spouse of the individual;

(iv) brother or sister of either of the parents of the individual;

(v) any lineal ascendant or descendant of the individual;

(vi) any lineal ascendant or descendant of the spouse of the individual;

(vii) spouse of the person referred to in clauses (ii) to (vi).

The term lineal ascendant or
descendant is also an often-used term but never defined in various Indian laws.
It means a straight line of relationship either upwards or downwards. For
instance, a son, his father and grandfather would constitute a lineal
ascendancy. One prevalent myth is that it only refers to male relations. A
daughter, her mother and her grandmother or a son, his mother and his
grandmother would also constitute a lineal relationship. All that is required
is that the relatives should be in a direct straight line. Parallel /
horizontal relations, such as cousins and uncles, would not constitute a lineal
line. One of the most interesting facets of the above definition is that an
uncle / aunt is a relative for a nephew / niece but the converse is not true.
So a nephew can receive a gift from his uncle but the very same uncle cannot
receive a gift from his nephew without paying tax on the same. Strange are the
ways of the taxman, but then law and logic never went hand-in-hand! In this
connection there have been conflicting decisions of the courts as to whether a
gift received by a person from his sibling but made from the bank account of
his sibling’s son would attract the rigours of this section – PCIT vs.
Gulam Farooq Ansari, ITA 230/2017, Raj HC order dated 22^ndNovember,
2017 and Ramesh Garg vs. ACIT, [2017] 88 taxmann.com 347 (Chandigarh – Trib.)

Again, a cousin (e.g., the
recipient’s mother’s sister’s son) does not constitute a relative under this
section – ACIT vs. Masanam Veerakumar, [2013] 34 taxmann.com 267 (Chennai
– Trib.) An interesting decision was delivered by the Mumbai ITAT that
a relative of a father did not become the relative of a minor recipient just
because the minor’s income was clubbed with his father. Since the minor received
the gift, the relationship of the donor should be with reference to the minor
who was to be treated as ‘the individual’ – ACIT vs. Lucky Pamnani [2011]
129 ITD 489 (Mumbai). The Act also defines a child in relation to an
individual to include a step-child and an adopted child. Interestingly, this
Act is the only one where one’s in-laws are included in the list of relatives.

This section has become a hindrance
to the untangling of several jointly owned family businesses on account of
certain relatives not being included in the list of exemptions.

Companies
Act, 2013

The new avatar of the
Companies Act has also seen a new meaning to the term ‘relative’. Several old
relations have been severed and the new list in the Companies Act, 2013 is
quite a pruned one compared to the lengthy list contained in the Companies Act,
1956. Given below is a comparison of the definition under the two Acts:

HOW TWO ACTS DEFINE A ‘RELATIVE’

Companies Act, 2013	Companies Act, 1956
Members of an HUF	Members of an HUF
Spouse	Spouse
Father, including step-father	Father, not including step-father
Mother, including step-mother	Mother, including step-mother
Son, including step-son	Son, including step-son
Son’s wife	Son’s wife
Daughter. Notably not including a step-daughter, whereas she was included under the 1956 Act!	Daughter including a step-daughter
Daughter’s husband	Daughter’s husband
Brother, including step-brother	Brother, including step-brother
Sister, including step-sister	Sister, including step-sister
—	Father’s father
—	Father’s mother
—	Mother’s mother
—	Mother’s father
—	Son’s son
—	Son’s son’s wife
—	Son’s daughter
—	Son’s daughter’s husband
—	Daughter’s son
—	Daughter’s son’s wife
—	Daughter’s daughter
—	Daughter’s daughter’s husband
—	Brother’s wife
—	Sister’s husband

Companies Act, 2013

Companies Act, 1956

Members of an HUF

Spouse

Father, including step-father

Father, not including step-father

Mother, including step-mother

Son, including step-son

Son’s wife

Daughter. Notably not including a step-daughter, whereas she was
included under the 1956 Act!

Daughter including a step-daughter

Daughter’s husband

Brother, including step-brother

Sister, including step-sister

—

Father’s father

—

Father’s mother

—

Mother’s mother

—

Mother’s father

—

Son’s son

—

Son’s son’s wife

—

Son’s daughter

—

Son’s daughter’s husband

—

Daughter’s son

—

Daughter’s son’s wife

—

Daughter’s daughter

—

Daughter’s daughter’s husband

—

Brother’s wife

—

Sister’s husband

The definition under the Companies
Act is relevant not just under that law but even under other statutes which
rely on the definition contained therein. Some of the important places where
the term relative is used in the Companies Act include the ‘related party’
definition; the ‘interested director’ definition; disqualification from being
appointed as an auditor if his relative is an interested party / employee;
disqualification from being appointed as an independent director if his
relative has a pecuniary relationship / is a key managerial personnel; loan by
a company to its director or his relative, etc.

Maharashtra
Stamp Act, 1958

Gifts between relatives carry a
concessional stamp duty as opposed to gifts to non-relatives. Gifts to defined
relatives carry a stamp duty @ 3% + 1% on the market value / ready reckoner
value of the property. The defined relatives for this purpose are spouse,
sibling, lineal ascendants or descendants of the donor. Thus, the list is quite
small as compared to the list u/s 56(2)(x) of the Income-tax Act. Hence, it is
essential to note that what may be exempt from income-tax may not also carry a
concessional stamp duty rate.

In addition to the above, for two
types of properties and six relatives the stamp duty is only Rs. 200 + 1% of
the market value of the property and a registration fee of just Rs. 200. This
concession is available only for residential or agricultural property and only
for the husband, wife, son, daughter, grandson, granddaughter of the donor. Any
other relative not covered within the above six relations would attract the 4%
duty, provided the relation is covered within the above larger list. For
instance, a gift of property to one’s brother would attract 4% duty on the gift
deed. Similarly, even for gift to the six relations if it is a gift of
commercial property / non-agricultural land, then the duty would be 4%, e.g.,
gift of an office to one’s son would attract 4% duty. Unlike section 56(2)(x),
the relatives need to be viewed in relation to the donor and not in relation to
the recipient. Hence, if a son gifts a residential house to his father, then
the gift deed would not attract a concessional duty of Rs. 200 + 1% but would
be covered by the 4% duty!

SEBI
Laws

SEBI Regulations have various ways
of dealing with relatives. The SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009 which prescribe the requirements for
making an offer document for public issues, rights issues, etc., define who
constitutes a promoter group of a company making an issue. It includes the
promoter and his immediate relatives, i.e., any spouse or any parent, brother,
sister or child of the promoter or of the spouse. Thus, step-children have also
been covered.

The SEBI (Substantial
Acquisition of Shares and Takeover) Regulations, 2011 exempts any
transfer of listed shares inter se immediate relatives from the
requirements of making an open offer. The definition is the same as given
above.

On the other hand, the SEBI
(Prohibition of Insider Trading) Regulations, 2015 treats the immediate
relative of an insider as a connected person and it is defined to mean the
spouse of a person, and includes parent, sibling, and child of such person or
of the spouse, any of whom is either dependent financially on such person, or
consults such person in taking decisions relating to trading in securities.

The SEBI (Listing Obligations
and Disclosure Requirements) Regulations, 2015 prescribe the meaning of
an independent director for a listed company. For this purpose, a person whose
relative has a pecuniary relationship with / is a KMP of the listed company,
etc., cannot be appointed. Again, beginning 1^st April, 2020, the
Chairmen of certain listed companies cannot be related to the MD / CEO. The
definition of relative for these purposes is the same as contained in the
Companies Act, 2013. Thus, different SEBI Regulations have dual definitions
with the term immediate relative being much smaller in ambit than a relative.

FEMA
Regulations

The FEMA Regulations notified by
the RBI under the FEMA Act, 1999 use the concept of relative at various places:

a) A
gift of shares from a resident to a non-resident requires the RBI approval and
is allowed only for gift to relatives;

b) Individuals
resident in India are permitted to include a non-resident Indian close relative
as a joint holder in all types of resident bank accounts on ‘either or survivor’”
basis;

c) Resident
relatives can be added as joint account holders along with the primary holder
in Resident Foreign Currency (RFC) Accounts and Non-Resident (External) / NRE
Accounts;

d) NRIs/
PIOs can remit up to USD 1 million per financial year in respect of assets
acquired under a deed of settlement made by his / her relatives provided the
settlement takes effect on the death of the settler;

e) An
NRI or an OCI can acquire by way of gift any immovable property (other than
agricultural land / plantation property / farm house) in India from a person
resident in India or from an NRI or an OCI who is a relative;

f) An
NRI or an OCI may gift any immovable property (other than agricultural land or
plantation property or farm house) to an NRI or an OCI who should be a relative
of the donor;

g) Under
the Liberalised Remittance Scheme of USD 250,000, a resident can meet the
medical expenses in respect of an NRI close relative when the NRI is on a visit
to India; maintain close relatives abroad;

h) Under
the LRS, residents can extend interest-free loans in Indian rupees to NRI / PIO
relatives.

The definition of relatives under
the Companies Act, 2013 is adopted for all of the above purposes.

However, the FEMA Regulations have
a different definition when it comes to acquisition of immovable property
abroad. They provide that a resident can acquire immovable property abroad
jointly with a relative who is a person resident outside India, provided there
is no outflow of funds from India, and for this purpose the definition of
relative means husband, wife, brother or sister or any lineal ascendant or
descendant of that individual.

Agricultural
land laws

The Maharashtra Tenancy and
Agricultural Lands Act, 1948 seeks to govern the relationships between
tenants and landlords of agricultural lands. A person lawfully cultivating any
land belonging to another person is deemed to be a tenant if such
land is not cultivated personally by the owner. Land is said to be
cultivated personally if a (parcel of) land is cultivated on one’s own account
by labour of family members, i.e., spouse, children or siblings in case of a
joint family. A joint family is defined to mean an HUF and in case of other
communities, a group or unit the members of which are by custom joint in estate
or residence. In one case, even a married sister living with her husband has
been regarded as a part of the family – Case No. 8953 O/154 of 1954.
No land purchased by a tenant shall be transferred by him by way of sale, gift,
exchange, etc., without the previous sanction of the Collector. Rule 25A
provides the circumstances in which, and conditions subject to which, sanction
shall be given by the Collector u/s 43. One of them is for a gift in favour of
a member of the landowner’s family.

The Maharashtra Agricultural
Lands (Ceiling on Holdings) Act, 1961 imposes a ceiling on holding of
agricultural land in Maharashtra. Under section 4 of the Act, the ceiling on
the holding of agricultural lands is per ‘Family Unit’. This is a unique
and important concept introduced by the Act. It is very essential to have a
clear picture as to who is and who is not included in one’s ceiling computation
since that could make all the difference between holding and acquisition of the
land. A family unit is defined to mean the following – a person; his spouse or
more than one spouse if that be the case (thus, if a person dies leaving two or
more widows, then they would constitute one consolidated family unit for
considering the ceiling [State Of Maharashtra vs. Smt. Banabai and
Anr.(1986) 4 SCC 281]; his minor sons; his minor unmarried daughters;
and if his spouse is dead then the minor sons and minor unmarried daughters
from that spouse.

Thus, the married daughter of a
person, whether minor or major, would constitute a separate family unit and
hence any land held by such a daughter would not be included in computing the
ceiling of a person. This is the reason why many people transfer excess
agricultural land to their married daughters so as to exclude it from the
ceiling limits. Since a daughter is a relative u/s 56(2)(x) of the Income-tax
Act, the transaction is out of the purview of that section. Similarly, a
daughter is a relative under the Maharashtra Stamp Act, 1958 and hence a gift
of agricultural land to one’s married daughter attracts a concessional stamp
duty of Rs. 200 + 1% of the market value. Further, it is important to note that
a person’s parents are not included in his ceiling and hence, if either or both
of one’s parents are alive and holding land, then the same would not be
included in the person’s ceiling computation. Similarly, land held by one’s
major son and / or his wife is not included in a person’s ceiling computation.

Benami
Act

The Benami Property Transactions Act,
1988 is an Act which has gained a lot of prominence of late. Attachment orders
are being issued by the Competent Authority in respect of benami properties. In
such a situation, it becomes very important to understand what are the
exceptions to benami property. The Act provides for three situations when
property held for the benefit of relatives would not be treated as benami:

(i) Property held by a Karta, or a member of an HUF, as the case
may be, and the property is held for his benefit or the benefit of other
members in the family and the consideration for such property has been provided
or paid out of the known sources of the HUF;

(ii) Property held by any individual in the name of his spouse / any
child of such individual and the consideration for such property has been
provided or paid out of the known sources of the individual; and

(iii) Property held by any person in the
name of his sibling or lineal ascendant / descendant, whose names and the
individual’s name appear as joint-owners in any document, and the consideration
for such property has been provided or paid out of the known sources of the
individual.

Rent
Act

The
Maharashtra Rent Control Act, 1999 defines a tenant to include, when the tenant
dies, any member of the tenant’s family who is residing with him in case of a
residential property. However, the Act does not define the term family member.
The Supreme Court in S.N. Sudalaimuthu Chettiar vs. Palaniyandavan, AIR
1966 SC 469 has defined the term family (in the context of an
agricultural land law) to mean ‘a group of people related by blood or marriage,
relatives’. Accordingly, the son-in-law was held to be a tenant since he was
residing with the tenant.

Accounting
Standards

For the purposes of the related
party definition, the Accounting Standards also give a definition of the term
relative. AS-18 on Related Party Disclosures defines it as an individual’s
spouse, child, sibling, parent who may be expected to influence or be influenced
by that individual in his / her dealings with the entity. On the other hand,
Ind AS 24 on Related Party Disclosures uses the term close members of the
family of a person and defines it to include the person’s children, spouse /
domestic partner, sibling, parent; children of that person’s spouse / domestic
partner and dependants of that person or his / her spouse / domestic partner.
Thus, the definition under Ind AS is much wider than the one found under Indian
GAAP.

IBC,
2016

The latest law to come out with its
own definition of the term ‘relative’ is the Insolvency and Bankruptcy Code,
2016 as amended by the 2018 Amendment Act. The Act provides that a relative of
a person or his spouse would constitute a related party in relation to that
person. The list of relatives included by the Code for this purpose is very
long:

(i) members
of an HUF

(ii) spouse

(iii) parents

(iv) children

(v) grandchildren

(vi) grandchild’s children

(vii) siblings

(viii) sibling’s children

(ix) parents of either parent

(x) siblings of either parent

(xi) wherever the relation is that of a son, daughter, sister or
brother, their spouses are also included in the definition of relative.

CONCLUSION

Perhaps
the time has come to subsume all these definitions into one consolidated
definition of the term ‘relative’ which could be used in all laws rather than
each legislation coming up with its own definition. However, having said that,
it is also true that what may be good for one law may not be so for another
law. Hence, a very long list of relatives may be beneficial under taxing
statutes but not so under regulatory statutes, such as the Companies Act since
it would increase the number of ineligible persons. However, an effort must be
made to strike a balance and arrive at a consolidated definition. Till that
time, the word ‘relative’ would continue to be a relative term!

shailesh.kwebmaker

JOINT AND MUTUAL WILLS

INTRODUCTION

Quite
often, during a conversation about Wills the topic veers towards Joint Wills
and / or Mutual Wills. Ironically, this is a subject which finds no official recognition
in the Indian Succession Act, 1925, which is the Act governing Wills by most
people in India. In spite of this, it is a very popular subject! Both these
terms are often used interchangeably, but there is a stark difference between
the two. This month, let us examine the meaning of Mutual Wills and Joint Wills
and their salient features.

JOINT WILLS

A
Joint Will, as the name suggests, is a Will which is made jointly by two
persons, say, a husband and his wife. One Will is prepared for the couple in
which the distribution of their joint and even their separate properties is
laid down. It is like two Wills in one. The Will usually provides that on the
death of the husband all properties would go to his wife and vice versa.
It also lays down the distribution of properties once both pass away. The
Supreme Court in Dr. K.S. Palanisami (Dead) vs. Hindu Community in
General and Citizens of Gobichettipalayam and others, 2017 (13) SCC 15
(Palanisami’s case) has defined a Joint Will as follows:

‘A
joint will is a will made by two or more testators contained in a single
document, duly executed by each testator, and disposing either of their
separate properties or of their joint property… It is in effect two or more
wills and it operates on the death of each testator as his will disposing of
his own separate property; on the death of the first to die it is admitted to
probate as his own will and on the death of the survivor, if no fresh will has
been made, it is admitted to probate as the disposition of the property of the
survivor. Joint wills are now rarely, if ever, made.’

In
Kochu Govindan Kaimal & Others vs. Thayankoot Thekkot Lakshmi Amma
and Others, AIR 1959 SC 71, the Apex Court described Joint Wills as
follows:

‘…in
my judgment it is plain on the authorities that there may be a joint will in
the sense that if two people make a bargain to make a joint will, effect may be
given to that document. On the death of the first of those two persons the will
is admitted to probate as a disposition of the property that he possesses. On
the death of the second person, assuming that no fresh will has been made, the
will is admitted to probate as the disposition of the second person’s
property…’

MUTUAL WILLS

A Mutual Will, on the
other hand, is entirely different from a Joint Will (although they appear to be
the same). The Supreme Court in the case of Shiv Nath Prasad vs. State of
West Bengal, (2006) 2 SCC 757 has explained a Mutual Will in detail:

‘…we need to
understand the concept of mutual wills, mutual and reciprocal trusts and secret
trusts. A will on its own terms is inherently revocable during the lifetime of
the testator. However, “mutual wills” and “secret trusts”
are doctrines evolved in equity to overcome the problems of revocability of
wills and to prevent frauds. Mutual wills and secret trusts belong to the same
category of cases. The doctrine of mutual wills is to the effect that where
two individuals agree as to the disposal of their assets and execute mutual
wills in pursuance of the agreement, on the death of the first testator (T1),
the property of the survivor testator (T2), the subject matter of the
agreement, is held on an implied trust for the beneficiary named in the
wills. T2 may alter his / her will because a will is inherently revocable,
but if he / she does so, his / her representative will take the assets subject
to the trust. The rationale for imposing a “constructive trust” in
such circumstances is that equity will not allow T2 to commit a fraud by
going back on her agreement with T1. Since the assets received by T2, on
the death of T1, were bequeathed to T2 on the basis of the agreement not to
revoke the will of T1, it would be a fraud for T2 to take the benefit, while
failing to observe the agreement and equity intervenes to prevent this
fraud. In such cases, the instrument itself is the evidence of the agreement
and he, that dies first, does by his act carry the agreement on his part into
execution. If T2 then refuses, he / she is guilty of fraud, can never unbind
himself / herself and becomes a trustee, of course. For no man shall deceive
another to his prejudice. Such a contract to make corresponding wills in many
cases gets established by the instrument itself as the evidence of the
agreement… In the case of mutual wills generally we have an agreement
between the two testators concerning disposal of their respective properties.
Their mutuality and reciprocity depends on several factors…’

The Supreme Court in
Palanisami’s case has given another view on what constitutes a Mutual
Will:

‘The
term “mutual wills” is used to describe joint or separate wills made as the
result of an agreement between the parties to create irrevocable interests in
favour of ascertainable beneficiaries. The agreement is enforced after the
death of the first to die by means of a constructive trust. There are often
difficulties as to proving the agreement, and as to the nature, scope, and effect of the trust imposed on the estate of the second to die.’

Thus, a Mutual Will
prevents a legatee from taking benefit under the Will in any manner contrary to
the provisions of the Will, i.e., such a Mutual Will cannot be revoked
unilaterally. For example, by way of a Mutual Will a husband bequeaths his
estate to his wife and his wife bequeaths her estate to him. Both of them also
provide that if any of them were to predecease the other, they bequeath all
their property to the wife’s brother. The wife dies and the husband revokes his
Mutual Will bequeathing everything to his niece. Such a revocation would not be
allowed since it would constitute a breach of trust upon the husband who
executed the Will on the understanding that after him and his spouse, the
estate would go as they had agreed earlier.

Mutual Wills can be
and usually are two separate Wills unlike a Joint Will which is always one
Will.

In Dilharshankar
C. Bhachecha vs. The Controller of Estate Duty, Ahmedabad, (1986) 1 SCC 701,
the Court explained the difference between a Joint and a Mutual Will as
follows:

‘…Persons may make
joint wills which are, however, revocable at any time by either of them or by
the survivor. A joint will is looked upon as
the will of each testator, and may be proved on the death of one. But the
survivor will be treated in equity as a trustee of the joint property if there
is a contract not to revoke the will; but the mere fact of the execution of a
joint will is not sufficient to establish a contract not to revoke… The term
mutual wills is used to describe separate documents of a testamentary character
made as the result of an agreement between the parties to create irrevocable
interests in favour of ascertainable beneficiaries. The revocable nature of the
wills under which the interests are created is fully recognised by the Court of
Probate; but in certain circumstances the Court of Equity will protect and
enforce the interests created by the agreement despite the revocation of the
will by one party after the death of the other without having revoked his
will… There must be evidence of an agreement to create interests under the
mutual wills which are intended to be irrevocable after the death of the first to
die…’

A
Mutual Will can also be a Joint Will, in which case it is termed a Joint and
Mutual Will. Mutual Wills may be made either by a Joint Will or by separate
Wills, in pursuance of an agreement that they are not to be revoked. Such an
agreement could appear either in the Will itself or by a separate agreement.

One
of the distinctions between the two terms was explained by the Supreme Court in
Palanisami’s case as follows:

‘A
will is mutual when two testators confer upon each other reciprocal benefits,
as by either of them constituting the other his legatee; that is to say, when
the executants fill the roles of both testator and
legatee towards each other. But where the legatees are distinct from the
testators, there can be no question of a mutual will.’

Thus,
in a Mutual Will, X as a testator would make Y his legatee and Y as a testator
would make X her legatee. Thus, there would be reciprocal benefits on each
other. It is advisable that Mutual Wills should clearly set out the reciprocal
benefits being given and contain an express clause that neither testator can
revoke it unilaterally. During the lifetime of both the testators, they may
jointly decide to revoke a Mutual Will.

ARE SUCH WILLS ADVISABLE?

Personally,
the author prefers that separate Wills are drafted
for couples rather than opting for Joint and / or Mutual Wills. The estate
planning process of a couple could be separate for each partner. There may be
situations such as divorce, remarriage, etc. There may be different interests such
as one may want to bequeath to family while the other may want to donate to
charity. Lastly, obtaining execution of such Wills and obtaining their probate
could be a complicated and sometimes confusing affair. When legal heirs are
anyway grappling with problems on account of the loss of a loved one, why
burden them with one more? That’s why, having a separate Will for each partner
would be the ideal scenario. Even if the Wills are what is popularly known as Mirror
Wills, i.e., each is a reflection of the other.

However,
there is one scenario where a Mutual Will is advisable. If the intent is to
bind a couple to a certain pre-determined pattern of disposition without giving
a chance to wriggle out of this after the demise of one of the partners, then a
Mutual Will achieves this objective. For instance, often
a fear is that after remarriage of one of the partners there could be new
claimants to the joint property of the couple. To address this, a Mutual Will
could be executed where during their lifetime each of the partners could enjoy
the property but once both die, the Will would provide the course of succession
to this property. None of the surviving partners would be in a position to
alter this Mutual Will since reciprocal promises have been constituted which
could only have been altered when both
were alive.

CONCLUSION

An
analysis of the above cases shows that the intention of the testator is
paramount in construing the nature of the Will. The Court adopts an armchair
construction method where it sits in the chair of the testator. Hence, it
is very important that the Will is drafted in a very clear and unambiguous
manner so as to dispel all doubts in the mind of the Court.

shailesh.kwebmaker

THE ANCESTRAL PROPERTY CONUNDRUM RELOADED

Introduction

Under the Hindu
Law, the term ‘ancestral property’, as generally understood, means any property
inherited from three generations above of male lineage, i.e., from the father, grandfather,
great-grandfather. In August, 2019, this Feature had analysed the confusion
surrounding the issue of ancestral property, more specifically, whether
ancestral property received by a person can be transferred away?

This Feature
had then noted that, as regards ancestral property, two views were prevalent.

View-1: Ancestral property cannot be alienated. According to this view, if the
person inheriting it has sons, grandsons or great-grandsons, then it
automatically becomes joint family property in his hands and his lineal
descendants automatically become coparceners along with him. A corollary of
property becoming ancestral property is that it cannot be willed away or
alienated in any other manner by the person who inherits it.

View-2: Ancestral property becomes self-acquired property in the hands of the
person inheriting it. Thus, he can deal with it by Will, gift, transfer, etc.,
in any manner he pleases.

RECENT DEVELOPMENTS

Subsequent to
the publication of this Feature in August, 2019 the Supreme Court has once
again analysed the issue of ancestral property. What is interesting to note is
that on this burning issue two decisions of the Apex Court were delivered, both
of Co-ordinate Benches and both orders delivered on the same day (without reference
to one another)! These decisions appear divergent but ultimately due to the
facts, the conclusion reached is the same. Let us examine both these decisions.

Case-1:
Arshnoor Singh vs. Harpal Kaul, CA 5124/2019, order dated 1^stJuly,
2019 (SC)

A person had
inherited property from his father who died in 1951 and which he, in turn, had
inherited from his father. This person tried to sell the property but his son
(the appellant before the Supreme Court) petitioned the Court against the same
on the grounds that the property was ancestral property and hence he could not
sell it on his own. Accordingly, the property was coparcenary / joint family
property in which the son had also acquired an interest by birth and hence his
father could not sell it as per his wish.

A two-member
Bench of the Supreme Court analysed various decisions, such as Yudhishter
vs. Ashok Kumar, 1987 AIR 558 on this subject (which were dealt with in
detail in the August, 2019 issue of the BCAJ under this Feature). It
held that after the Hindu Succession Act, 1956 came into force, the concept of
ancestral property has undergone a change. Post-1956, if a person inherited a
self-acquired property from his paternal ancestors, the said property became
his self-acquired property and did not remain coparcenary property.

However, the
Apex Court held that if the succession opened under the old Hindu law, i.e.,
prior to the commencement of the Hindu Succession Act, 1956, the parties would
be governed by Mitakshara law. The property inherited by a male Hindu
from his paternal male ancestor would be coparcenary property in his hands
vis-à-vis his male descendants up to three degrees below him. The nature of
property remained as coparcenary property even after the commencement of the
Hindu Succession Act, 1956. Incidentally, the comprehensive decision of the
Delhi High Court in the case of Surender Kumar vs. Dhani Ram, CS(OS) No.
1732/2012, dated 18^th January, 2016 had taken the very same
view.

The Supreme
Court reiterated its earlier decision in the case of Valliammai Achi vs.
Nagappa Chettiar, AIR 1967 SC 1153 that once a person obtains a share
in an ancestral property, then it is well settled that such share is ancestral
property for his male children. They become owners by virtue of their birth.
Accordingly, the Supreme Court did not allow the sale by the father to go
through since it affected his son’s rights in the property. Thus, the only
reason why the Supreme Court upheld the concept of ancestral property was
because the succession was opened prior to 1956.

Case-2: Doddamuniyappa vs. Muniswamy, CA No. 7141/2008, order dated 1^stJuly, 2019 (SC)

This decision of the Supreme Court also pertained to the very same
issue. The Supreme Court held that it was well settled and held by it in Smt.
Dipo vs. Wassan Singh 1983 (3) SCC 376, that the property inherited
from a father by his sons became joint family property in the hands of the
sons. Based on this principle, the Supreme Court concluded that property
inherited by a person from his grandfather would remain ancestral property and
hence, his father could not sell the same. In this case, neither did the
Supreme Court refer to its earlier decisions in Uttam vs. Saubhag Singh
(Supra) or Yudhishter vs. Ashok Kumar (Supra) nor did it go into the
issue of whether the succession was opened prior to 1951. It held as a matter
of principle that all ancestral property inherited by a person would continue
to be ancestral property for his heirs.

It is humbly
submitted that in the light of the above decisions, this view would not be
tenable after the enactment of the Hindu Succession Act, 1956. However, based
on the facts of the present case, one can ascertain that the first owner died
sometime before 1950 and hence it can be concluded that the succession opened
prior to 1956. If that be the case, as held in Arshnoor Singh vs. Harpal
Kaul (Supra), the property continues to be ancestral in the hands of
the heirs. Hence, while the principle of the decision in Doddamuniyappa’s case
seems untenable, the conclusion is correct!

AUTHOR’S (FINAL) VIEW

A conjoined
reading of the Hindu Succession Act, 1956 and the decisions of the Supreme
Court show that the customs and traditions of Hindu Law have been given a
decent burial by the codified Act of 1956. It is (once again) submitted that
the view expressed by the Delhi High Court in the case of Surender Kumar
(Supra) is the most comprehensive exposition on the subject of
ancestral property. To reiterate, the important principles laid down by the
Delhi High Court are that:

(i) Inheritance of ancestral
property after 1956 does not create an HUF property and inheritance of
ancestral property after 1956 therefore does not result in creation of an HUF
property;

(ii) Ancestral property can only
become an HUF property if inheritance is before 1956, and such HUF property
therefore which came into existence before 1956 continues as such even after
1956;

(iii) If a person dies after
passing of the Hindu Succession Act, 1956 and there is no HUF existing at the
time of the death of such a person, inheritance of an immovable property of
such a person by his heirs is no doubt inheritance of an ‘ancestral’ property
but the inheritance is as a self-acquired property in the hands of the legal
heir;

(iv) After passing of the Hindu
Succession Act, 1956 if a person inherits a property from his paternal
ancestors, the said property is not an HUF property in his hands and the
property is to be taken as a self-acquired property of the person who inherits
the same.

CONCLUSION

In recent
times, some newspapers have also joined the confusion bandwagon and have
started printing articles suggesting that ancestral property continues as ancestral
in the hands of the person inheriting the same. All of these help add fuel to
an already raging controversy.

Considering these latest Supreme Court decisions,
it is evident that the government needs to urgently amend the Hindu Succession
Act en masse and specifically address the burning issue of ancestral
property. A piecemeal approach to amendment should be avoided and the entire
Act should be replaced with a new one. The Act is over 60 years old and should
be substituted by a modern, comprehensive legislation which can prevent
litigation. Precious money and time would be saved by doing so. Till that time,
we will continue witnessing sequels to this puzzle known as ancestral property!

shailesh.kwebmaker

IBC OR RERA? AND THE WINNER IS…!

INTRODUCTION

The Insolvency and
Bankruptcy Code, 2016 (‘the IBC’ or ‘the Code’) has probably seen the maximum
amount of litigation of all statutes that a three-year-old enactment can
witness. In addition to the disputes at the NCLT and the NCLAT level, the
Supreme Court has also delivered several landmark and innovative judgements
under the IBC. The Code deals with the insolvency resolution of stressed
corporate debtors and, where resolution is not possible, then their
liquidation. The government has also been very proactive in amending the Act to
take care of deficiencies, changing circumstances and situations.

It is interesting to note
that the maximum cases under the IBC have been from the real estate sector. As
of 30^thJune, 2019, 421 real estate cases were referred to the NCLT
under the IBC; of these, in 164 cases companies have been ordered to be
liquidated and 257 cases are still on. It is a well-known fact that most real
estate projects, especially those in the residential sector, are reeling under
debt stress. This has led to incomplete projects, prolonged delays in handing
over possession, etc. Aggrieved home buyers tried to avail the remedy of
seeking relief under the Code. There were several decisions which held that
home buyers could drag a realtor to proceedings under the Code.

Ultimately, the Code was
amended in 2018 to expressly provide that home buyers were financial creditors
under the Code and could trigger the Code. This was done by adding an
Explanation to section 5(8)(f) of the Code in the definition financial debt
– ‘any amount raised from an allottee under a real estate project shall be
deemed to be an amount having the commercial effect of a borrowing.’

It further provided that
representatives of home buyers could be appointed on the Committee of
Creditors. Thus, the 2018 Amendment empowered home buyers to a great extent.

Another remedy available to
home buyers was to seek relief under the provisions of the Real Estate
(Regulation and Development) Act, 2016 or RERA. Yet another remedy
available is to approach the consumer forums under the Consumer Protection
Act, 1986 since various judgements have held that a flat buyer is also a
consumer under that Act.

However, an interesting
issue which arises is whether these three Acts are at conflict with one
another? And in the event of a conflict, which Act would prevail? This
interesting issue was before the Supreme Court in Pioneer Urban Land
& Infrastructure Ltd. vs. UOI, [2019] 108 taxmann.com 147 (SC). Let
us dissect this judgement and some developments which have taken place pursuant
to the same.

PIONEER’S CASE

Challenge:
The real estate developers challenged the 2018 Amendment to the IBC on the
grounds that it was constitutionally invalid. Further, since there was a
specific enactment, RERA, which dealt with real estate, the IBC, which was a
general statute, could not override the same. Further, RERA also contained a non-obstante
clause and hence it must be given priority over the IBC.

Twin
non-obstante clauses: The IBC contains a non-obstante
clause in section 238 which provides that it overrides all other laws in force.
RERA also has a similar provision in section 89 but it also has section 88; and
section 88 provides that RERA shall be in addition to, and not in derogation
of, the provisions of any other law for the time being in force.

The Supreme Court negated
all pleas of the developers and upheld the supremacy of the IBC. It held that
the non-obstante clause of RERA came into force on 1^st May,
2016 as opposed to the non-obstante clause of the Code which came into
force on 1^st December, 2016. IBC had no provision similar to section
88 of RERA. It was clear that Parliament was aware of RERA when it amended the
Code in 2018. The fact that RERA was in addition to and not in derogation of
the provisions of any other law for the time being in force also made it clear
that the remedies under RERA to allottees were intended to be additional and
not exclusive remedies. The Code as amended, was later in point of time than
RERA, and must be given precedence over RERA, given section 88 of RERA.

Further, the Code and RERA
operated in completely different spheres. The Code dealt with a proceeding in
rem in which the focus is the rehabilitation of the corporate debtor by
taking over its management. On the other hand, RERA protects the interests of
the individual investor in real estate projects by requiring the promoter to
strictly adhere to its provisions. The object of RERA was to see that real
estate projects came to fruition within the stated period and that allottees
were not left in the lurch and were finally able to realise their dream of a
home, or be paid compensation if such dream was shattered, or at least get back
monies that they had advanced towards the project with interest. Given the
different spheres within which these two enactments operated, different
parallel remedies were given to allottees.

Wrong classification plea: Another challenge was that home buyers being classified as financial
creditors and not operational creditors, was constitutionally invalid. The
Court set aside this plea also. It held that real estate developers were a
unique case where the developer who was the supplier of the flat is the debtor
inasmuch as the home buyer / allottee funds his own apartment by paying amounts
in advance to the developer for construction. Another vital difference between
operational debt and allottees is that an operational creditor has no interest
in the corporate debtor, unlike the case of an allottee of a real estate
project who is vitally concerned with the financial health of the corporate
debtor. Further, in such an event no compensation, nor refund together with
interest, which is the other option, will be recoverable from the corporate
debtor. One other important distinction is that in an operational debt there is
no consideration for the time value of money – the consideration of the debt is
the goods or services that are either sold or availed of from the operational
creditor. Payments made in advance for goods and services are not made to fund
the manufacture of such goods or the provision of such services. In real estate
projects, money is raised from the flat allottee as instalments for flat
purchase. What is predominant, insofar as the real estate developer is
concerned, is the fact that such instalment payments are used as a means of
finance qua the real estate project.

It is
these fundamental differences between the real estate developer and the
supplier of goods and services that the legislature has focused upon and
included real estate developers as financial debtors. Hence, the Supreme Court
held it was clear that there cannot be said to be any infraction of equal
protection of the laws. Thus, even though flat allottees were unsecured
creditors, they were placed on the same pedestal as financial creditors like
banks and institutions. It held that the definition of the term ‘financial
debt’ u/s 5(8)(f) of the Code (‘any amount raised under other transaction,
including any forward sale or purchase agreement, having the commercial effect
of a borrowing’) would subsume within it amounts raised under transactions
which, however, are not necessarily loan transactions so long as they have the
commercial effect of a borrowing. It is not necessary that the transaction must
culminate in money being given back to the lender. The expression ‘borrow’ was
wide enough to include an advance given by the home buyers to a real estate
developer for ‘temporary use’, i.e. for use in the construction project so long
as it was intended by the agreement to give ‘something equivalent’ to the money
to the home buyers. That something was the flat in question.

Defeats
value maximisation: The Court also negated the
argument that classifying allottees as financial creditors was directly
contrary to the object of the Code in maximising the value of assets and
putting the corporate debtor back on its feet. It held that if the management
of the corporate debtor was strong and stable, nothing debarred it from
offering a resolution plan which may well be accepted by the Committee of Creditors.
It was wrong to assume that the moment the insolvency resolution process
started, liquidation would ensue. If the real estate project was otherwise
viable, bids from others would be accepted and the best of these would then
work in order to maximise the value of the assets of the corporate debtor.

Retrospective
nature: The Court held that this Amendment [insertion of Explanation to
section 5(8)(f) of the Code] was clarificatory in nature, and this was also made clear by the
Insolvency Committee Report which expressly used the word ‘clarify’, indicating
that the Insolvency Law Committee also thought that since there were differing
judgements and doubts raised on whether home buyers would or would not be
classified as financial creditors u/s 5(8)(f), it was best to set these doubts
at rest by explicitly stating that they would be so covered by adding an
Explanation to section 5(8)(f). Therefore, the Court held that home buyers were
included in the main provision, i.e. section 5(8)(f) with effect from the
inception of the Code, the Explanation being added in 2018 merely to clarify
doubts that had arisen.

Defence for developers: The Court also laid down the defence available to developers against
initiation of proceedings under the Code. The developer may point out that the
allottee himself was a defaulter and would, therefore, on a reading of the flat
agreement and the applicable RERA Rules and Regulations, not be entitled to any
relief including payment of compensation and / or refund, entailing a dismissal
of the said application. Under section 65 of the Code, the real estate
developer may also point out that the insolvency resolution process has been
invoked fraudulently, with malicious intent, or for any purpose other than the
resolution of insolvency. The Court gave instances of a speculative investor
and not a person who was genuinely interested in purchasing a flat / apartment.
Such persons could not claim relief. Developers may also point out that in a
falling real estate market, the allottee did not want to go ahead with its
obligation to take possession of the flat / apartment under RERA and, hence,
wanted to jump ship and really get back, by way of this coercive measure, the
monies already paid by it. Hence, there were enough safeguards available to
developers against false triggering of the Code.

Parallel
remedies: The Supreme Court held that another parallel
remedy is available and is recognised by RERA itself in the proviso to section
71(1), by which an allottee may continue with an application already filed
before the Consumer Protection Forum, he being given the choice to withdraw
such complaint and file an application before the adjudicating officer under
RERA.

Supremacy:
It therefore held that even by a process of harmonious construction, RERA and
the Code must be held to co-exist and, in the event of a clash, RERA must give
way to the Code. RERA, therefore, cannot be held to be a special statute which,
in the case of a conflict, would override the general statute, viz. the
Code.

SOME SUBSEQUENT DECISIONS

The NCLT Delhi applied the
above Pioneer case in Sunil Handa vs. Today Homes Noida
India Ltd. [2019] 108 taxmann.com 517 (NCLT – New Delhi). In this case,
home buyers stated that as per the flat agreement, the possession of the flat
had to be handed over latest by the year 2016. Despite having received almost
90% of the purchase value of the flats, the corporate debtor had till date
neither handed over the possession of the said units nor refunded the amount
paid by the financial creditors. Hence, they applied for corporate insolvency
resolution under the Code. The NCLT applied the decision in the Pioneer
case and held that in the event of a conflict between RERA and IBC, the IBC
would prevail. Hence, the petition was admitted.

Again, in Rachna
Singh vs. Umang Realtech (P) Ltd. LSI-598-NCLT-2019 (PB), the NCLT
Principal Bench took the same view and upheld insolvency proceedings against
the realtor.

However, a very interesting
decision was delivered in the case of Nandkishore Harikishan Attal vs.
Marvel Landmarks Pvt. Ltd. [LSI-617-NCLT-2019 (Mum.)].

In this case, the NCLT
observed that the intention of the petitioner was only to extract more
compensation from the realtor. He did not take steps for taking possession of
the flat by clearing his pending dues in spite of repeated reminders. Thus, the
defence laid down in the Pioneer case would come to the
developer’s rescue. The NCLT held that the petitioner was a speculative
investor who had purchased flats in a booming real estate market and now wanted
to escape his liability when the real estate market was facing bad times. It
held that ‘the Flat is ready for possession but the petitioner is adamant on
taking refund… The intention of the petitioner is only to extract more
compensation from the corporate debtor rather than the resolution of the
corporate debtor…’.

A very telling observation
by the NCLT was that ‘where hundreds of flat buyers are involved, when
compensation of this magnitude is acceded as demanded or CIRP is ordered, we
are afraid that it may lead to utter chaos in the real estate market in the
country and it will affect the real estate sector wholly and a situation may
arise that no investor will be forthcoming to invest in real estate sector.
This is not a case where many of the home buyers are duped or the corporate
debtor / developer had collected the money and done nothing.’

RERA in a
bind: Press reports indicate that RERA authorities across India are now
in a fix as to how they should approach all cases given the Supreme Court’s
decision in Pioneer. They fear that RERA’s authority would now be
diluted given the supremacy of IBC. What would happen if proceedings were
pending under RERA and one of the homebuyers moved a petition under the IBC?
Thus, even one flat buyer could stall RERA proceedings. Accordingly, the RERA
officials have approached the Ministry of Housing and Urban Affairs for clarity on this aspect.

In one
of the complaints before the MahaRERA in the case of Majestic Towers Flat
Owners Association vs. HDIL, Complaint No. CC006000000079415 a
complaint was pending before the MahaRERA. The developer contended that it has
been admitted for corporate insolvency resolution under the CIRP and, hence, a
moratorium u/s 14 of the Code applied to all pending legal proceedings.
Accordingly, the MahaRERA disposed of the complaint by stating that though the
complainant was entitled to reliefs under the provisions of RERA, the said
relief could not be granted at this juncture due to the pending IBC resolution
process. Of course, if the IBC resolution process ultimately does not survive,
then the proceedings under the RERA could be revived since the moratorium is
only for the duration of the process. More such cases would be seen in the
coming months as a fallout of the Pioneer decision.

PROPOSED LEGISLATIVE CHANGES

While the 2018 Amendment to
the IBC and the SC’s decision in Pioneer were meant to protect
home buyers, it also means that a single buyer (with a default of only Rs. 1
lakh) can drag a realtor to insolvency resolution, stall all proceedings under
RERA and thereby hold up all other flat buyers who could run into hundreds or
even thousands. Even if those other buyers do not wish to be a party, the
developer would have to endure the entire process under the IBC. This is a very
dangerous situation and one which the law-makers seem to be taking cognisance
of. Press reports indicate that the government is planning to amend the Code to
stipulate that the number of homebuyers required to file an insolvency case
must be at least 100, or they must collectively account for a minimum of 5% of
the outstanding debt of the realty developer, whichever is lower. However, they
will continue to enjoy the status of financial creditors. The planned amendment
is expected to be applicable only prospectively and will have no bearing on
those real estate cases that have already been admitted by the NCLT. The
government is also said to be mulling increasing the default limit to Rs. 10
lakhs.

CONCLUSION

Time and again the Supreme
Court has come to the rescue of the IBC by stating that it comes up trumps
against all other statutes – the Income-tax Act, RERA, labour laws, etc. While
it is a law meant to speed up recoveries and unclog the debt resolution system
in India, probably the time has come to consider whether it could actually
cause more harm than good. The proposals being considered by the government should
be implemented urgently. The real estate sector is already in a mess and needs
urgent salvation.

shailesh.kwebmaker

CAN A GIFT BE TAKEN BACK?

Introduction

A gift is a transfer of
property, movable or immovable, made voluntarily and without consideration by a
donor to a donee. But can a gift which has been made be taken back by the
donor? In other words, can a gift be revoked? There have been several instances
where parents have gifted their house to their children and then the children
have not taken care of their parents or ill-treated them. In such cases, the parents
wonder whether they can take back the gift which they have made on grounds of
ill-treatment. The position in this respect is not so simple and the law is
very clear on when a gift can be revoked.

LAW ON GIFTS

The Transfer of Property
Act, 1882 deals with gifts of property, both immovable and movable. Section
122 of the Act defines a gift as the transfer of certain existing movable or
immovable property made voluntarily and without consideration by a donor to a
donee. The gift must be accepted by or on behalf of the donee during the
lifetime of the donor and while he is still capable of giving. If the donee
dies before acceptance, then the gift is void. In Asokan vs.
Lakshmikutty, CA 5942/2007 (SC), the Supreme Court held that in order
to constitute a valid gift, acceptance thereof is essential. The Act does not
prescribe any particular mode of acceptance. It is the circumstances of the
transaction which would be relevant for determining the question. There may be
various means to prove acceptance of a gift. The gift deed may be handed over
to a donee, which in a given situation may also amount to a valid acceptance.
The fact that possession had been given to the donee also raises a presumption
of acceptance.

This section is clear that
it applies to gifts of movable properties, too. A gift is also a transfer of
property and hence, all the provisions pertaining to transfer of property under
the Act are applicable to it. Further, the absence of consideration is the
hallmark of a gift. What is consideration has not been defined under this Act
and hence, one would have to refer to the Indian Contract Act, 1872. Section
2(d) of that Act defines ‘consideration’ as follows – when, at the desire of
one person, the other person has done or abstained from doing something, such
act or abstinence or promise is called a consideration for the promise.

HOW ARE GIFTS TO BE MADE?

Section 123 of the Act
answers this question in two parts. The first part deals with gifts of
immovable property, while the second deals with gifts of movable property.
Insofar as the gifts of immovable property are concerned, section 123 makes
transfer by a registered instrument mandatory. This is evident from the use of
the words ‘transfer must be effected’. However, the second part of
section 123 dealing with gifts of movable property, simply requires that a 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 insofar 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 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. This view has been upheld by the Supreme Court in Renikuntla
Rajamma (D) By Lr. vs. K. Sarwanamma (2014) 9 SCC 456.

REVOCATION OF GIFTS

Section 126 of the Transfer
of Property Act provides that a gift may be revoked in certain circumstances.
The donor and the donee may agree that on the occurrence of a certain specified
event that does not depend on the will of the donor, the gift shall be revoked.
Further, it is necessary that the condition should be express and also
specified at the time of making the gift. A condition cannot be imposed
subsequent to giving the gift. In Asokan vs. Lakshmikutty (Supra),
the Supreme Court has held that once a gift is complete, the same cannot be
rescinded. For any reason whatsoever, the subsequent conduct of a donee cannot
be a ground for rescission of a valid gift.

However,
it is necessary that the event for revocation is not dependent upon the wishes
of the donor. Thus, revocation cannot be on the mere whims and fancies of the
donor. For instance, after gifting the donor cannot say that he made a mistake
and now he has had a change of mind and wants to revoke the gift. A gift is a
completed contract and hence unless there are specific conditions precedent
which have been expressly specified, there cannot be a revocation. It is quite
interesting to note that while a gift is a completed contract, there cannot be
a contract for making a gift since it would be void for absence of
consideration. For instance, a donor cannot enter into an agreement with a
donee under which he agrees to make a gift but he can execute a gift deed
stating that he has made a gift. The distinction is indeed fine! It needs to be
noted that a gift which has been obtained by fraud, misrepresentation,
coercion, duress, etc., would not be a gift since it is not a contract at all.
It is void ab initio.

DECISIONS ON THIS ISSUE

In Jagmeet
Kaur Pannu, Jammu vs. Ranjit Kaur Pannu AIR 2016 P&H 210, the
Punjab and Haryana High Court considered whether a mother could revoke a gift
of her house in favour of her daughter on the grounds of misbehaviour and
abusive language. The mother had filed a petition with the Tribunal under the
Maintenance and Welfare of Parents and Senior Citizens Act, 2007 which had set
aside the gift deed executed by the mother. It held that the deed was voidable
at the mother’s instance. The daughter appealed to the High Court which set
aside the Tribunal’s order. The High Court considered the gift deed which had
stated that the gift was made voluntarily, without any pressure and out of
natural love and affection which the mother bore towards the daughter. There
were no preconditions attached to the gift.

The
High Court held that the provisions of section 126 of the Transfer of Property
Act would apply since this was an important provision which laid down a rule of
public policy that a person who transferred a right to the property could not
set down his own volition as a basis for a revocation. If there was any
condition allowing for a document to be revoked or cancelled at the donor’s own
will, then that condition would be treated as void. The Court held that there
have been decisions of several courts which have held that if a gift deed was
clear and operated to transfer the right of property to another but it also
contained an expression of desire by the donor that the donee will maintain the
donor, then such expression in the gift deed must be treated as a pious wish of
the donor and the sheer fact that the donee did not fulfil the condition could
not vitiate the gift.

Again,
in the case of Syamala Raja Kumari vs. Alla Seetharavamma 2017 AIR (Hyd)
86 a similar issue before the High Court was whether a gift which was
made without any pre-conditions could be subsequently revoked. The donor
executed a gift deed in favour of his daughters out of love and affection. He
retained a life-interest benefit and after him, his wife retained a life-interest
under the said document. However, there were no conditions imposed by the donor
for gifting the property in favour of the donees. All it mentioned was that he
and his wife would have a life-interest benefit. Subsequently, the donor
executed a revocation deed stating that he wanted to cancel the gift since his
daughters were not taking care of him and his wife and were not even visiting
them. The Court set aside the revocation of the gift. It held that once a valid
unconditional gift was given by the donor and was accepted by the donees, the
same could not be revoked for any reason. The Court held that the donees would
get absolute rights in respect of the property. By executing the gift deed, the
donor had divested his right in the property and now he could not unilaterally
execute any revocation deed for revoking the gift deed executed by him in
favour of the plaintiffs.

Similarly,
in the case of Sheel Arora vs. Madan Mohan Bajaj, 2007 (6) Bom CR 633,
the donor executed a registered gift deed of a flat in favour of a donee.
Subsequently, the donor unilaterally executed a revocation deed cancelling the
gift. The Bombay High Court held that after lodging the duly executed gift deed
for registration, there was a unilateral attempt on the part of the donor to
revoke the said gift deed. Section 126 of the Transfer of Property Act provides
that the revocation of gift can be done only in cases specified under the
section and the same requires participation of the donee. In the case on hand, there was no participation of the donee
in an effort on the part of the donor to revoke the said gift deed. On the
contrary, unilateral effort on the part of the donor by execution of a deed of
revocation itself disclosed that the donor had clearly accepted the legal consequences
which were to follow on account of the execution of a valid gift deed and
presentation of the same for registration.

However,
in the case of S. Sarojini Amma vs. Velayudhan Pillai Sreekumar 2018 (14)
SCALE 339, the Supreme Court considered a gift where, in expectation
that the donee would look after the donor and her husband, she executed a gift
deed. The gift deed clearly stated that the gift would take effect after the
death of the donor and her husband. Subsequently, the donor filed a deed of
cancellation of the gift deed. The Supreme Court observed that a conditional
gift became complete on the compliance of the conditions mentioned in the deed.
Hence, it allowed the revocation.

GIFTS MADE RESERVING INTEREST
FOR DONOR

One other mode of making a gift is a gift where the donor reserves an
interest for himself. For instance, a father may gift his flat to his son but
reserve a life-interest benefit for himself and his wife. Thus, although the
son would become the owner of the flat immediately, he would have an overriding
obligation to allow his parents to reside in the flat during their lifetime.
Thus, as long as they are alive, he would not be able to sell / lease or
otherwise transfer the flat or prevent them from staying in the flat. This issue
of whether a donor can reserve an interest for himself was a controversial one
and even the Supreme Court had opined for and against the same.

Ultimately,
a larger bench of the Supreme Court in Renikuntla Rajamma (D) By Lr. vs.
K. Sarwanamma (Supra) dealt with this matter. In this case, the issue
was that since the donor had retained to herself the right to use the property
and to receive rents during her lifetime whether such a reservation or
retention rendered the gift invalid? The Supreme Court upheld the validity of
such a gift and held that what was retained was only the right to use the
property during the lifetime of the donor which did not in any way affect the
transfer of ownership in favour of the donee by the donor. Thus, such a gift
reserving an interest could be a via media to making an absolute gift and then
being at the mercy of the donee. However, the gift deed should be drafted very
carefully else it would fail to serve the purpose.

CONCLUSION

‘Donor beware of how you gift, for a gift once given cannot be easily
revoked!’ If there are any
doubts or concerns in the mind of the donor then he should refrain from making
an absolute unconditional gift or consider whether to avoid the gift at all.
This is all the more true in the case of old parents who gift away their family
homes and then try to claim the same back since they are being ill-treated by
their children. They should be forewarned that it would not be easy to revoke
such a gift. In all matters of estate and succession planning, due thought must
be given to all possible and probable scenarios and playing safe is better than
being sorry!

shailesh.kwebmaker

COURT AUCTION SALES: STAMP DUTY VALUATION

Introduction

Last month, we examined a
decision of the Bombay High Court rendered by Justice Gautam Patel in respect
of stamp duty on antecedent title documents. That was a pathbreaking decision
which will help ease the property-buying process. This month, we will examine
another important decision, again rendered by Justice Gautam Patel and again in
the context of the Maharashtra Stamp Act, 1958.

The issue before the Bombay
High Court this time was what should be the value on which stamp duty should be
levied in the case of sale of property through a Court public auction. Would it
be the value as mentioned by the Court on the Sale Certificate, or would it be
the value as adjudicated by the Collector of Stamps? This is an important issue
since many times the Stamp Duty Ready Reckoner rate is higher than the value
arrived at through a public auction.

THE CASE

The decision was rendered
in the case of Pinak Bharat & Co. and Bina V. Advani vs. Anil Ramrao
Naik, Comm. Execution Application No. 22/2016, Order dated 27.03.2019 (Bom).
The facts of the case were that there was a plot of land at Dadar, Mumbai which
was being auctioned to satisfy a Court decree. The Court obtained a valuation
which pegged the value at more than Rs. 30 crore. It was then sought to be sold
through a Court-conducted public auction twice but both attempts failed.
Finally, the claimants offered Rs. 15.30 crore as the auction price for the
property. Their bid was accepted by the Court which issued a Sale Certificate
in their favour. The Sheriff’s Office directed the Stamp Office to register the
sale certificate on the basis of the auction price of Rs. 15.30 crore.

When the purchasers went to
register the Sale Certificate, the Collector first stated that the fair market
value as per its adjudication was Rs. 155 crore. Aggrieved, the purchasers
moved the High Court since they would have had to pay stamp duty based on the
valuation of Rs. 155 crore and there would also have been adverse consequences
u/s. 56(2) of the Income-tax Act for the buyers.

At the hearing, the
Collector stated that the earlier assessment was tentative or preliminary, without
having all necessary information at hand. Now that additional material was
available, including a confirmation that there were tenants, the market value
had been reckoned again and was likely to be assessed in the region of about
Rs. 35 crore. This value, too, was more than double the Court-discovered price
of Rs. 15.30 crore. Hence, the question before the Court was which valuation
should be considered – the adjudication by the Collector or the
Court-discovered public auction price?

COURT’S ORDER

The Bombay High Court held
that the questions that arose for determination were that when a sale
certificate issued under a Court-conducted public auction was submitted for
adjudication under the Maharashtra Stamp Act, how should the Collector of
Stamps assess the ‘market value’ of the property? Was he required to accept the
value of the accepted bid, as stated in the Court-issued Sale Certificate, or
was he required to spend time and resources on an independent enquiry? Could a
distinction be drawn between sales by the government / government bodies at a
predetermined price, which had to be accepted by the Collector as the market
value, and a sale by or through a Court?

For
this purpose, Article 16 of Schedule I to the Maharashtra Stamp Act provides
that a Certificate of Sale granted to the purchaser of any property sold by
public auction by a Court or any other officer empowered by law to sell
property by public auction was to be stamped at the same duty as is leviable on
a conveyance under Article 25 on the market value of the property. Thus,
it becomes necessary to determine the market value of the property.
When an instrument comes to the Collector for adjudication, he must determine
the duty on the same. If he has reason to believe that the market value of the
property has not been truly set forth in the instrument, he must determine ‘the
true market value of such property’ as laid down in the Maharashtra Stamp
(Determination of True Market Value of the Property) Rules, 1995.

Thus, the Collector is not
bound to accept as correct any value or consideration stated in the instrument
itself. Should he have reason to believe that it is incorrect, he is to
determine the true market value. Rule 4(6) of these Rules states that every
registering officer shall, when an instrument is produced before him for
registration, verify in each case the market value of land and buildings, etc.,
as the case may be, determined in accordance with the above statement and
Valuation Guidelines issued from time to time (popularly, known as the Stamp
Duty Ready Reckoner). However, it provides an important exception inasmuch as
if a property is sold or allotted by government / semi-government body /
government undertaking or a local authority on the basis of a predetermined
price, then the value determined by said bodies shall be the true market value
of the subject matter property. In other words, where the sale is by one of the
government entities, then the adjudicating authority must accept the
value stated in the instrument as the correct market value. He cannot make any
further enquiry in this scenario. However, it is important that this exception
makes no mention of a sale through a Court auction!

The Court raised a very
important question that why should a sale through a Court by public auction on
the basis of a valuation obtained, i.e., by following a completely open and
transparent process, be placed at any different or lower level than the
government entities covered by the first proviso? It observed that the process
that Courts follow was perhaps much more rigorous than what the exception
contemplates, because the exception itself did not require a public auction at
all but only that the government body should have fixed ‘a predetermined
price’. The Court explained its system of public auction:

(a) A sale through the Sheriff’s Office was always
by a public auction.

(b) If it was by a private treaty, it required a
special order.

(c) A sale effected by a Receiver was not,
technically, a sale by the Court. It was a sale by the Receiver appointed in
execution and the Receiver may sell either by public auction or by private
treaty.

(d) Wherever a sale took place by public auction,
there was an assurance of an open bidding process and very often that bidding
process took place in the Court itself.

(e) Courts always obtained a valuation so that they
could set a reserve price to ensure that properties were not sold at an
undervaluation and to avoid cartelisation and an artificial hammering down of
prices.

(f) The reserve price was at or close to a true
market value. Usually, the price realised approximates the market value.
Sometimes the valuation was high and no bids were at all received. However, in
such a scenario, the decree holders could not be left totally without recovery
at all and it was for this reason that Courts sometimes permitted, after
maintaining the necessary checks and balances, a sale at a price below the
market value even by public auction.

The Court held that if the
sale by the Deputy Sheriff or by the Court Receiver was by a private treaty,
then it was definitely open for the adjudicating authority to determine the
true market value.

However, it held that
totally different considerations arose where there was a sale by a
Court-conducted public auction and such a sale was preceded by a valuation
obtained beforehand. The Court held that such a sale or transaction should
stand on the same footing as government sales excluded in Rule 4. The correct
course of action in such a situation would be for the adjudicating authority to
accept the valuation on the basis of which the public auction was conducted as
fair market value; or, if the sale is confirmed at a rate higher than the
valuation, then to accept the higher value, i.e., the sale amount accepted.

The Court
laid down an important principle that there could not be an inconsistency
between the Court order and a Court-supervised sale on the one hand and the
adjudication for stamp duties on the other. This was the only method by which
complete synchronicity could be maintained between the two. It held that
consistency must be maintained between government-body sales at predetermined
prices and Court-supervised sales.

If a Court was satisfied
with the valuation and accepted it, then it was not open to the adjudicating authority
to question that valuation. The Court emphatically held that it was never open
to the adjudicating authority to hold, even by implication, that when a Court
sold the property through a public auction by following due process, it did so
at an undervaluation! The seal / confirmation of the Court on the sale carries
great sanctity. It held that if the validity or the very basis of the sale was
allowed to be questioned by an executive or administrative authority, then it
would result in the stamp authority calling into question the judicial orders
of a Court. This, obviously, cannot be the case!

An important principle
reiterated by the Court was that the Stamp Act was not an Act that validated,
permitted or regulated sales of property. It only assessed the transactions for
payment of a levy to the exchequer. The stamp adjudicating authority can only
adjudicate the stamp duty and can do nothing more and nothing less. It cannot,
therefore, question the sale in any manner. Hence, the Court-discovered public
auction price could never be questioned by the stamp office. The Court,
however, added a caveat that this principle would only apply to a situation
where the Court had actually obtained a fair market value of the property
before confirming the sale (even if the sale took place at a value lower than
such a valuation). If there was no fair market valuation obtained by the Court,
or an authenticated copy of a valuation was not submitted along with the sale
certificate, then the adjudicating authority must follow the usual provisions
mentioned in the Rules.

Hence,
the Court laid down a practice that in all cases where the Deputy Sheriff
lodges a sale certificate for stamp duty adjudication, it must be accompanied
by a copy of the valuation certificate which must be authenticated by the
Prothonotary and Senior Master of the High Court. It negated the plea of the
government to use the valuation carried out by the Town Planner’s office in all
public auctions conducted by the Court. It held that the discretion of a Court
could not be limited in such a manner. The Court could use such a valuation, or
it may prefer to use the services of one of the valuers on its panel, or may
even obtain a valuation from an independent agency. That judicial discretion
could not be circumscribed on account of a Stamp Act requirement.

Finally, the Court laid
down the following principles when it came to levying stamp duty on
Court-conducted sales:

(a) Where there was a sale by a private treaty,
the usual valuation rules stipulated in the Maharashtra Stamp Act would apply,
i.e., adjudication in accordance with the Reckoner;

(b) Where the sale was by the Court, i.e., through
the office of the Sheriff, or by the Court Receiver in execution, and was by
public auction pursuant to a valuation having been previously obtained, then –

(i) If the sale price was at or below the
valuation obtained, then the valuation would serve as the current market value
for levying stamp duty;

(ii) If the final sale price, i.e., the final bid,
was higher than the valuation, then the final bid amount and not the valuation
would be taken as the current market value for the purposes of stamp duty;

(iii) Where multiple valuations were obtained, then
the highest of the most recent valuations, i.e., most proximate in time to the
actual sale, should be taken as the current market value.

Accordingly, since in the
case at hand the valuation was obtained at Rs. 30 crore, that value was treated
as the value on which stamp duty was to be levied. Thus, the lower auction
price of Rs. 15.30 crore was not preferred but the valuation of Rs. 30 crore
was adopted.

CONCLUSION

The above judgement would
be relevant not only for levying stamp duty in Court-conducted public auctions,
but would also be useful in determining the tax liability of the buyer and the
seller. The seller’s capital gains tax liability u/s. 50C of the Income-tax Act
or business income u/s. 43CA of the Income-tax Act, are both linked with the
stamp duty valuation. Similarly, if the buyer buys the immovable property at a
price below the stamp duty valuation, then he would have Income from Other
Sources u/s. 56(2)(x) of the Income-tax Act. Several decisions have held in the
context of the Indian Stamp Act and the Stamp Acts of other States that the
Ready Reckoner Valuation is not binding on the assessees. Some of the important
decisions which have upheld this view are Jawajee Nagnatham (1994) 4 SCC
595 (SC), Mohabir Singh (1996) 1 SCC 609 (SC), Chamkaur Singh, AIR 1991 P&H
26. This decision of the Bombay High Court is an additional step in the
same direction.

However, it must be
remembered that in cases where the valuation is higher than the auction price,
the auction price would be considered for levying stamp duty. Hence, this
decision has a limited applicability to those cases where the Reckoner Value is
higher than the valuation report and the public auction price.

shailesh.kwebmaker

UNDUE INFLUENCE AND FREE CONSENT

Introduction

One of the biggest
issues with a Will is whether it has been obtained by fraud or undue influence.
If yes, then it is invalid. Section 61 of the Indian Succession Act, 1925
states that any Will which has been caused by such importunity which takes away
the free agency of the testator is void. The Law Lexicon, 4^th
Edition, Lexis Nexis, states that importunity (insistence
or cajolery) must be such which the testator is too weak to resist; which would
render the act no longer the act of the deceased, not the free act of a capable
testator.

Similarly, in the
context of a contract, the Indian Contract Act, 1872 states that all
agreements are contracts only if they are made by the free consent of the
parties. Free consent is that which is not caused by undue influence. Section
16 of this Act defines ‘undue influence’ as follows:

‘(1) A contract is said to be
induced by undue influence where the relations subsisting between the parties
are such that one of the parties is in a position to dominate the will of the
other and uses that position to obtain an unfair advantage over the other;

(2) In particular and
without prejudice to the generality of the foregoing principle, a person is
deemed to be in a position to dominate the will of another:

(a) where he holds a real or
apparent authority over the other or where he stands in a fiduciary relation to
the other; or

(b) where he makes a contract
with a person whose mental capacity is temporarily or permanently affected by
reason of age, illness, or mental or bodily distress

(3) Where
a person who is in a position to dominate the will of another enters into a
contract with him, and the transaction appears on the face of it or on the evidence
adduced, to be unconscionable, the burden of proving that such contract was not
induced by undue influence shall lie upon the person in a position to dominate
the will of the other.’

Hence, both in the
context of a Will and a contract, ‘undue influence’ is a major factor. While it
would render a Will void, it makes a contract voidable at the option of the
party whose consent was so caused.

Let us examine this very
vital concept in a bit more detail, especially in the light of a Supreme Court
decision rendered in the case of Raja Ram vs. Jai Prakash Singh, CA No.
2896/2009, order dated 11^th September, 2019 (SC). What makes
this decision even more important is that the facts are such that they could be
relevant even in a host of cases. The key questions considered in this decision
were whether mere old age and infirmity of the executor of an agreement could
be considered as grounds for undue influence? Further, whether the fact that
the agreement was executed by the executor in favour of those with whom he was
living was also grounds for undue influence? While the Supreme Court examined
these questions in the context of a non-testamentary instrument, i.e., a sale
deed, they would be equally relevant in the case of a Will.

FACTS
OF THE CASE

The decision in the case
of Raja Ram (Supra) would be better appreciated in the light of
its facts. The opposite parties to the case were two brothers and their
respective families. The parents of the brothers were living with one of the
brothers. The father was 80 years old. He executed a registered sale deed of a
parcel of land in favour of the son with whom he was living. The father died
within ten months of executing the sale deed.

The other brother
alleged that the deed was obtained by his brother fraudulently, by deceit and
undue influence because of old age and infirmity of the father who was living
with him. It was alleged that the father was old, infirm and bedridden and sick
for the last eight years; his mental faculties were impaired and he was
entirely dependent upon the defendants who were in a position to exercise undue
influence over him. It was pleaded that the father by reason of age and
sickness was unable to move and walk and had a deteriorated eyesight due to cataract.
It was also pleaded that he was deaf.

The Supreme Court stated
that there were two main questions which it had to consider:

(a) The physical condition of the
father and his capacity to execute the sale deed; and

(b) Whether the defendants could exercise
undue influence over the father.

DECISION
OF THE COURT

The Court considered the
definition of undue influence as appearing in section 16 of The Indian
Contract Act (Supra). It also noted that under the Indian Evidence Act,
1872 the onus of proving good faith in a transaction is on the party who is in
a position of active confidence to another. It noted the following facts and
gave important verdicts on each of them:

(a) Except for a mere statement,
no evidence was produced to show that the father’s mental capacity was
impaired. Mere old age cannot be a presumption of total loss of mental
faculties, such as in the case of senility or dementia. The father had executed
another sale deed in favour of a third party and the same was not challenged.
There was no evidence of rapid deterioration in condition after the same.

(b) Merely being old, infirm and
having a cataract cannot be equated with being bedridden. The fact that the
father went to the Sub-Registrar’s office for registration demolishes the
theory of him being bedridden. Hardness of hearing could not be equated with
deafness.

(c) The Court referred to its
earlier decision in the case of Subhas Chandra Das Mushib vs. Ganga
Prosad Das Mushib and Ors., 1967 (1) SCR 331 wherein it was held that
there was no presumption of imposition or fraud merely because a donor was old
or of weak character.

Thus, as regards the
first question, the Court concluded that the physical condition of the father
and his capacity to execute the sale deed was not in doubt.

It next turned to the
important question of undue influence. The allegations of the same were
completely bereft of any details or circumstances with regard to the nature,
manner or kind of undue influence exercised by the defendants over the father.
A mere bald statement was made attributed to the infirmity of the deceased. The
Court held that the defendants were in a fiduciary relationship with the
deceased and their conduct in looking after him and his wife in old age may have
influenced the thinking of the deceased. However, that, per se, could
not lead to the only irresistible conclusion that the defendants were therefore
in a position to dominate the will of the deceased, or that the sale deed
executed was unconscionable. The Court held that the onus of proving there was
no undue influence would come on the defendants only once the plaintiffs
established a prima facie case.

The Supreme Court
referred to its earlier decision in the case of Anil Rishi vs. Gurbaksh
Singh, (2006) 5 SCC 558 where it had held that under the Indian
Evidence Act if the plaintiff fails to prove the existence of the fiduciary
relationship or the position of active confidence held by the
defendant-appellant, the burden would lie on him as he had alleged fraud. Next,
it proceeded to lay down certain important principles in the context of whether
undue influence could be presumed merely because a relative is taking care of
his / her elders:

(i) In every caste, creed,
religion and civilized society, looking after the elders of the family was a
sacred and pious duty;

(ii) If one were to straightway
infer undue influence merely because a sibling was looking after the family
elder, it would result in an extreme proposition which could not be allowed
without sufficient and adequate evidence. The Court held that any other
interpretation by inferring a reverse burden of proof straightway, on those who
were taking care of the elders, as having exercised undue influence, could lead
to very undesirable consequences;

(iii) While such a contrary view
might not lead to neglect of the elders, it would certainly create doubts and
apprehensions leading to lack of full and proper care under the fear of
allegations with regard to exercise of undue influence;

(iv) If certain members of the
family were looking after the elders (either by choice or out of compulsion)
there was bound to be more affinity between them and the elders. This is a very
crucial principle established by
the Court.

The Court reiterated the
principles laid down by it in its earlier decision of Subhas Chandra Das
(Supra) wherein it was held that merely because two parties were
closely related to each other no presumption of undue influence could arise.
Even if one party naturally relied upon the other for advice, and the other was
in a position to dominate the will of the first, it only proved ‘influence’.
Such influence might have been used wisely, judiciously and helpfully. However,
the law required that more than mere influence, there was undue influence. In
that decision the Supreme Court observed that Halsbury’s Laws of England,
Third Edition, Vol. 17, states that there was no presumption of fraud
merely because a donor was old or of weak character and there was no
presumption of undue influence in the case of a gift to a son, grandson, or
son-in-law, although made during the donor’s illness and a few days before his
death. In Poosathurai vs. Kappanna Chettiar, (1920) 22 BomLR 538, the Bombay High Court
held that where the relation of influence has been established, and it is also
made clear that the bargain is with the ‘influencer’ and is in itself
unconscionable, then the person in a position to use his dominating power has
the burden thrown upon him of establishing affirmatively that no domination was
practised so as to bring about the transaction.

The Apex Court also
distinguished its earlier decision rendered in the case of Krishna Mohan
Kul vs. Patima Maity, (2004) 9 SCC 468. In that case, it was established
that the executor of a deed was more than 100 years of age. He was paralytic
and his mental and physical conditions were not in order. He was practically
bedridden with paralysis and though his left thumb impression was stated to be
affixed on the document, there was no witness who could substantiate that he
had in fact put his thumb impression. Hence, based on such specific facts, it
held that the executant was an illiterate person, was not in proper physical
and mental state and, therefore, the deed of settlement and trust was void and
invalid. Hence, the Apex Court concluded that Raja Ram’s case
could be distinguished on facts from this decision.

APPLICABILITY
TO WILLS

As
discussed above, the applicability of the ratio descendi of the case of Raja
Ram is pari passu applicable to Wills. A similar decision was
rendered by the Supreme Court in the case of Surendra Pal vs. Saraswati
AIR 1974 SC 1999. In that case, a testator under his Will bequeathed
his entire estate to his second wife, excluding his first wife and her
children. The excluded relatives alleged undue influence on the part of the
second wife. The Supreme Court set aside such allegations. It held that if
undue influence, fraud and coercion is alleged, the onus is on the person
making the allegations to prove the same. If he does not discharge this burden,
the probate of the Will must necessarily be granted if it is established that
the testator had full testamentary capacity and had, in fact, executed it
validly with a free will and mind. In order to understand what the testator
intended and why he intended so, one had to sit in his armchair to ascertain
his frame of mind and the circumstances in which he executed the Will. The
Court observed that the testator was at complete loggerheads with the children
from his first marriage. Hence, with a family so hostile towards him, it was
but natural for the testator to provide for his second wife even without her
asking him or importuning him to do so. There was no suggestion that the
testator was feeble-minded or completely deprived of his power of independent
thought and judgement.

In
the case of Bur Singh vs. Uttam Singh (1911) 13 BOMLR 59, it was
held that in order to set aside a Will there must be clear evidence that the
undue influence was in fact exercised, or that the illness of the testator so
affected his mental faculties as to make them unequal to the task of disposing
of his property.

In
several cases, the testator excludes a close relative from his Will. In such
cases, the question of undue influence of the beneficiaries inevitably crops
up. Various Supreme Court decisions have time and again held that such
circumstances alone cannot lead to an inference of the Will being void due to
undue influence. In the cases of Uma Devi Nambiar vs. TC Sidhan (2004) 2
SCC 321 and Rabindra Nath Mukherjee vs. Panchanan Banerjee, 1995 SCC (4) 459,
the Supreme Court held that deprivation of the natural heirs by the testator
should not raise any suspicion because the whole idea behind execution of a
Will was to interfere with the normal line of succession. So natural heirs
would be debarred in every case of a Will; it may be that in some cases they
are fully debarred and in others only partially. Again, in Pentakota
Satyanarayana vs. Pentakota Seetharatnam (2005) 8 SCC 67, this view was
held when the testator’s wife was given a smaller share than others.

Similarly,
in Mahesh Kumar (D) By Lrs vs. Vinod Kumar, (2012) 4 SCC 387, the
Supreme Court was dealing with a case where a testator bequeathed all his
wealth to one son in preference to the others since he was living with that son
and the attitude of the other sons was extremely hostile towards their parents.
The Court held that the fact that one son took care of the parents in their old
age showed that there was nothing unnatural or unusual in the decision of the
testator to give his property only to him. Any person of ordinary prudence
would have adopted the same course and would not have given anything to the
ungrateful children from his / her share in the property. Thus, the Court held
that there was nothing invalid in the Will.

In the case of Narayanamma
vs. Mayamma, 1999 (5) KarLJ 694, the Karnataka High Court held that no
cogent reason was given in the Will as to why one daughter of the testator was
preferred over the other two daughters and hence the Will appeared circumspect.
While one may not entirely agree with the reasoning of this decision, it is
always advisable that in all such cases an explanation is given in the Will as
to the reason why the natural heirs are excluded. It is better to play safe and
avoid protracted litigation for the beneficiaries.

CONCLUSION

To sum up, the question
of free consent in the case of a Will / contract would always be one which
would be decided on the basis of surrounding facts and circumstances. Those
deprived, in most cases, might raise an objection of undue influence. However,
as the above decisions have very clearly established, mere old age or closeness
of relations or taking care of the executor is no ground for undue influence.

shailesh.kwebmaker

THE ANCESTRAL PROPERTY CONUNDRUM

INTRODUCTION

Hindu Law is often difficult to understand because most of it
is uncodified and based on customs and rituals, while some of it is based on
enactments. One feature of Hindu Law which attracts a lot of attention is “ancestral
property”. After the 2005 amendment to the Hindu Succession Act, 1956 this
issue has gained even more traction. One controversy in this area is whether
ancestral property received by a person can be transferred away.

WHAT IS ANCESTRAL PROPERTY?

Under the Hindu Law, the term “ancestral property” as
generally understood means any property inherited from three generations above
of male lineage, i.e., from the father, grandfather, great grandfather. The
Punjab and Haryana High Court has 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). Hence, property
inherited from females, such as mothers, etc., would not fall within the
purview of ancestral property. The same 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. Further, three
generations downwards automatically get a right in such ancestral property by
virtue of being born in the family. Thus, the son, grandson and great grandson
of a Hindu all have an automatic right in ancestral property which is deemed to
be joint property. This view has also been held by the Privy Council in Muhammad
Hussain Khan vs. Babu Kishva Nandan Sahai, AIR 1937 PC 238.

View-1: Ancestral property cannot be alienated

One commonly accepted view in relation to ancestral property
is that if the person inheriting it has sons, grandsons or great grandsons,
then it becomes joint family property in his hands and his lineal descendants
automatically become coparceners along with him. In Ganduri Koteshwaramma
vs. Chakiri Yanadi, (2011) 9 SCC 788, the Court held that the effect of
the 2005 amendment to the Hindu Succession Act was that the daughter of a
coparcener had the same rights and liabilities in the coparcenary property as
she would have had if she had been a son and this position was unambiguous and
unequivocal. Thus, on and from 9th September, 2005, according to this view, the
daughter would also be entitled to a share in the ancestral property and would
become a coparcener as if she had been a son.

A corollary of property becoming ancestral property is that
it cannot be willed away or alienated in any other manner by the person who
inherits it. Thus, if a person receives ancestral property and he has either a
son and / or a daughter then he would not be entitled to transfer such ancestral
property other than to his children. Hence, he cannot under his Will give it to
his son in preference over his daughter or vice versa. This has been the
generally prevalent view when it comes to ancestral property as modified by the
Hindu Succession Act amendment which placed daughters on an equal footing with
sons. Of course, if a person inherits ancestral property and he has no lineal
descendants up to three degrees downwards, male or female, then in any event he
is free to do what he wants with such property. Further, this concept only
applies to inheritance of property, i.e., property received on intestate
succession of the deceased.

JURISPRUDENCE ON THE SUBJECT

This concept of ancestral
property automatically becoming joint coparcenary property has undergone
significant changes. The Supreme Court in the case of CWT vs. Chander Sen
(1986) 161 ITR 370 (SC) examined the issue of whether the income /
asset which a son inherits from his father when separated by partition should
be assessed as income of the HUF of the son or as his individual income /
wealth? The Court referred to the effect of section 8 of the Hindu Succession
Act, 1956 which lays down the general rules of succession in the case of males.
The first rule is that the property of a male Hindu dying intestate shall
devolve according to the provisions of chapter II and class I of the schedule
provides that if there is a male heir of class I, then upon the heirs mentioned
in class I of the schedule. The heirs mentioned in class I of the schedule are
son, daughter, etc., including the son of a predeceased son but does not
include specifically the grandson, being a son of a son living.

Therefore, the short
question is, when the son as heir of class I of the schedule inherits the
property, does he do so in his individual capacity or does he do so as karta
of his own undivided family? The Court held that in view of the preamble to the
Act, i.e., that to modify where necessary and to codify the law, it was not
possible that when schedule indicates heirs in class I to say that when son
inherits the property in the situation contemplated by section 8 he takes it as
karta of his own undivided family. The Act makes it clear by section 4 that one
should look to the Act in case of doubt and not refer to the pre-existing Hindu
law. Thus, it held that the son succeeded to the asset in his individual
capacity and not as a karta of his HUF.

Again, in Yudhishter vs. Ashok Kumar, 1987 AIR 558,
the Supreme Court followed its aforesaid earlier decision and held that it
would be difficult to hold that property which devolved on a Hindu under
section 8 of the Hindu Succession Act, 1956 would be HUF property in his hand
vis-a-vis his own sons. Thus, it held that the property which devolved upon the
father of the respondent in that case on the demise of his grandfather could
not be said to be HUF property.

Once again, in Bhanwar Singh vs. Puran (2008) 3 SCC 87,
it was held that having regard to section 8 of the Act, the properties ceased
to be joint family property and all the heirs and legal representatives of the
deceased would succeed to his interest as tenants-in-common and not as joint
tenants. In a case of this nature, the joint coparcenary did not continue. The
meaning of joint tenancy is that each co-owner has an undefined right and
interest in property acquired as joint tenants. Thus, no co-owner can say what
is his or her share. One other important feature of a joint tenancy is that
after the death of one of the joint tenants, the property passes by
survivorship to the other joint tenant and not by succession to the heirs of
the deceased co-owner. Whereas tenants-in-common is the opposite of joint
tenancy since the shares are specified and each co-owner in a tenancy in common
can state what share he owns in a property. On the death of a co-owner, his
share passes by succession to his heirs or to the beneficiaries under the Will
and not to the surviving co-owners.

The Supreme Court in Uttam vs. Saubhag Singh, Civil
Appeal 2360/2016 dated 02/03/2016 held that on a conjoint reading of
sections 4, 8 and other provisions of the Act, after joint family property has
been distributed in accordance with section 8 on principles of intestacy, the
joint family property ceases to be joint family property in the hands of the
various persons who succeeded to it and they hold the property as tenants in
common and not as joint tenants.

View-2: Ancestral Property becomes Sole Property

The Delhi High Court has
given a very telling decision and a diametrically opposite view in the case of Surender
Kumar vs. Dhani Ram, CS(OS) No. 1732/2012 dated 18/01/2016.
In this case, the issue was whether the properties of the deceased were HUF
properties in the hands of his legal heirs. The grandson of the deceased
claimed a share as a coparcener in the properties since they were inherited by
his grandfather as joint family properties and hence, they continued to be so.
The Delhi High Court negated this claim and laid down the following principles
of law as regards joint family properties:

(a) Inheritance of
ancestral property after 1956 (the year in which the Hindu Succession Act was
enacted) does not create an HUF property and inheritance of ancestral property
after 1956 therefore does not result in creation of an HUF property;

(b) Ancestral property can
only become an HUF property if inheritance is before 1956 and such HUF property
which came into existence before 1956 continues as such even after 1956;

(c) If a person dies after
passing of the Hindu Succession Act, 1956 and there is no HUF existing at the
time of the death of such a person, inheritance of an immovable property of
such a person by his heirs is no doubt inheritance of an “ancestral property”
but the inheritance is as a self-acquired property in the hands of the legal
heir and not as an HUF property, although the successor(s) indeed inherits
“ancestral property”, i.e., a property which belonged to his ancestor;

(d) The only way in which a
HUF / joint Hindu family can come into existence after 1956 (and when a joint
Hindu family did not exist prior to 1956) is if an individual’s property is
thrown into a common hotchpotch;

(e) An HUF can also exist if paternal ancestral properties
are inherited prior to 1956, and such status of parties qua the properties has
continued after 1956 with respect to properties inherited prior to 1956 from
paternal ancestors. Once that status and position continues even after 1956 of
the HUF and of its properties existing, a coparcener, etc., will have a right
to seek partition of the properties;

(f) After passing of the
Hindu Succession Act, 1956, if a person inherits a property from his paternal
ancestors, the said property is not an HUF property in his hands and the
property is to be taken as self-acquired property of the person who inherits
the same.

Accordingly, the Court held that a mere averment that
properties were ancestral could not make them HUF properties unless it was
pleaded and shown that the grandfather had inherited the same prior to 1956 or
that he had actually created an HUF by throwing his own properties into a
common hotchpotch or family pool. A similar view was expressed by the Delhi
High Court earlier in Sunny (Minor) vs. Raj Singh CS(OS) No. 431/2006;
dated 17/11/2005.

AUTHOR’S VIEW

It is submitted that the
view expressed by the Delhi High Court in the case of Surender Kumar
(supra) is correct. A conjoined reading of the Hindu Succession Act,
1956 and the decisions of the Supreme Court cited above show that the customs
and traditions of Hindu Law have been given a decent burial by the codified Act
of 1956! The law as understood in times of Manusmriti is not what it is today.
Hence, a parent is entitled to bequeath by his Will his ancestral property to
anyone, even if he has a son and / or a daughter. It is not necessary that such
ancestral property must be bequeathed only to his children. The property (even
though received from his ancestors and hence ancestral in that sense) becomes
the self-acquired property of the father on acquisition and he can deal with it
by Will, gift, transfer, etc., in any manner he pleases.

CONCLUSION

“Ancestral property” has
been and continues to be one of the fertile sources of litigation when it comes
to Hindu Law. Precious time and money is spent on litigating as to whether the
same can be alienated or not. It is time for the government to revamp the Hindu
Succession Act en masse and specifically address such burning issues!

shailesh.kwebmaker

ORDINANCE FOR CO-OPERATIVE HOUSING SOCIETIES

INTRODUCTION

The Maharashtra Government has introduced the Maharashtra
Ordinance No. IX of 2019 dated 09.03.2019 to amend the Maharashtra Co-operative
Societies Act, 1960 (“the Act”). This Ordinance would remain in
force for a period of six months, i.e., up to 8^th September, 2019
after which it would lapse unless the Government comes out with an Amendment
Act or renews the Ordinance. A new Chapter, XIII-B, consisting of section 154B
to 154B-29, has been inserted in the Act specifically dealing with co-operative
housing societies.

One of the complaints against the Act was that it was geared
more towards general co-operative societies and did not have special provisions
for co-operative housing societies. That issue is sought to be addressed by
this new Chapter. While the Ordinance has made several amendments to the Act,
it has introduced key changes to the concepts of membership of a co-operative
society. This article examines some of the amendments made by the Ordinance in
relation to membership of a co-operative housing society.

NEW CATEGORIES OF MEMBERSHIP

The Ordinance has introduced new categories of membership in
a co-operative housing society. A “Member” has been defined to mean:

(a) a person joining in an application for the registration
of a housing society; or

(b) a person duly admitted to membership of a society after
its registration;

Thus, an Associate Member has now also been classified as a
Member. A Joint Member has also been categorised as a Member. Further, a new
category of membership called Provisional Member has been introduced. A house
construction co-operative housing society; tenant ownership housing society;
tenant co-partnership housing society; co-operative society; house mortgage
co-operative societies; premises co-operative societies, etc., are all included
in the definition of a housing society.

An “Associate Member” has been defined to mean any of the
specified ten relations of a Member; these are the husband, wife,
father, mother, brother, sister, son, daughter, son-in-law, daughter-in-law,
nephew or niece of a person duly admitted to membership of a housing society.
For this purpose, there must be a written recommendation of a Member for the
Associate Member to exercise his rights and duties. Further, an Associate
Member’s name would not appear in the Share Certificate issued by the society
to the Member. Hence, it is evident from this definition that only one of the ten
relatives can be inducted as an Associate Member. It is worth noting that the
Ordinance has some drafting errors in the definition of Associate Member in the
English text. However, on a reading of the Marathi version the position becomes
clearer.

A “Joint Member”, on the other hand, has been defined to mean
a person who either joins in an application for the registration of a housing
society or a person who is duly admitted to membership after its registration.
The Joint Member holds share, right, title and interest in the flat jointly but
whose name does not stand first in the share certificate. Thus, a Joint Member
would not be the first name holder in the share certificate but would be the
second or third name holder. Thus, the difference between an Associate Member
and a Joint Member is as follows:

The Act defines an Associate Member as a member who holds
jointly a share in the society but whose name does not appear first in the
share certificate. Thus, this existing definition in the Act (applicable for
co-operative societies) is a combination of the definitions for Associate and
Joint Members introduced by the Ordinance which would now be applicable for
co-operative housing societies. Further, this existing definition treats any
person as an Associate Member, whereas as per the Ordinance only ten specified
relatives can be Associate Members. The existing definition under the Act would
apply to general co-operative societies while the definitions introduced by the
Ordinance would apply only for co-operative housing societies. Thus, there
would be two separate definitions.

The society may admit any person as an Associate, Joint or
Provisional Member. However, this has to be read in the context of the
definition of the term Associate Member which states that only the specified
relatives of a Member can be admitted as Associate Members.

VOTING RIGHTS OF MEMBERS

A Member of a society shall have one vote in its affairs and
the right to vote shall be exercised personally. It is now expressly provided
that an Associate Member shall have right to vote but can do so only with the
prior written consent of the main Member.

In case of Joint Member, the person whose name stands first
in the share certificate has the right to vote. In his absence, the person
whose name stands second, and in the absence of both, the person whose name
stands third shall have the right to vote. However, this is provided that such
Joint Member is present at the General Body Meeting and he is not a minor.

Based on the above, the differences between an Associate and
a Joint Member can be enumerated as follows:

Associate Member

Joint Member

Only one of ten
specified relatives can be treated as an Associate Member

Any person can be made a
Joint Member

An Associate Member’s
name cannot be entered in the share certificate issued by the Society

A Joint Member’s name is
entered in the share certificate issued by the Society

An Associate Member can
vote only with the prior written permission of the Member. It does not state
that this can be done only if the main Member is absent. Hence, an Associate
Member can vote even if the main Member is present provided he has got his
prior written consent

A Joint Member can vote
only if the main Member is absent.
Thus, if the main Member is present, a Joint Member cannot vote even
with the prior written permission of the main Member

PROVISIONAL MEMBER

One of the perennial issues
in the case of a housing society has been that of the role that a nomination
plays in the case of the demise of a Member. A nomination continues only up to
and till such time as the Will is executed. No sooner is the Will executed,
than it takes precedence over the nomination. A nomination does not confer any
permanent right upon the nominee nor does it create any legal 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. In spite of this very clear position in law,
several cases have reached the High Courts and even the Supreme Court. The
following are some of the important judicial precedents on this issue:

(1) The Bombay High Court in the case of Om Siddharaj
Co-operative Housing Society Limited vs. The State of Maharashtra & Others,
1998 (4) Bombay Cases, 506, has observed as follows in the context of a
nomination made in respect of a flat in a co-operative housing society:

“…If a person is
nominated in accordance with the rules, the society is obliged to transfer the
share and interest of the deceased member to such nominee. It is no part of the
business of the society in that case to find out the relation of the nominee
with the deceased Member or to ascertain and find out the heir or legal
representatives of the deceased Member. It is only if there is no nomination in
favour of any person that the share and interest of the deceased Member has to
be transferred to such person as may appear to the committee or the society to
be the heir or legal representative of the deceased Member.”

(2) Again, in the case of Gopal Vishnu
Ghatnekar vs. Madhukar Vishnu Ghatnekar, 1981 BCR, 1010, the Bombay
High Court has observed as follows in the context of a nomination made in
respect of a flat in a co-operative housing society:

“…It is very clear on the
plain reading of the Section that the intention of the Section is to provide
for who has to deal with the society on the death of a Member and not to create
a new rule of succession. The purpose of the nomination is 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 purpose is to avoid confusion in case there are disputes between the heirs
and legal representatives and to obviate the necessity of obtaining legal
representation and to avoid uncertainties as to with whom the society should
deal to get proper discharge. Though in law the society has no power to
determine as to who are the heirs or legal representatives, with a view to
obviate similar difficulty and confusion, the Section confers on the society
the right to determine who is the heir or legal representative of a deceased
Member and provides for transfer of the shares and interest of the deceased
Member’s property to such heir or legal representative.

Nevertheless, the persons
entitled to the estate of the deceased do not lose their right to the same…
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 is only meant to
provide for the 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 of
having this Section is 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…

It is only as between the society and the nominee or heir or
legal representative that the relationship of the society and its Member are
created and this relationship continues and subsists only till the estate is
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 are decided
in the court of law. Thereafter, the society will be bound to follow such
decision… To repeat, a society has a right to admit a nominee of a deceased
Member or an heir or legal representative of a deceased Member as chosen by the
society as the Member.”

(3) A single judge of the
Bombay High Court in Ramdas Shivram Sattur vs. Rameshchandra Popatlal
Shah 2009(4) Mh LJ 551 has held that a nominee has no right of
disposition of property since he is not an absolute owner. It held that the law
does not provide for a special Rule of Succession altering the Rule of
Succession laid down under the personal law.

(4) The position of a
nominee in a flat in a co-operative housing society was also analysed by the
Supreme Court in Indrani Wahi vs. Registrar of Co-operative Societies, CA
No. 4646 of 2006(SC).This decision was rendered in the context of the
West Bengal Co-operative Societies Act, 1983.The Supreme Court held that there
can be no doubt that the holding of a valid nomination does not ipso facto
result in the transfer of title in the flat in favour of the nominee. However,
consequent upon a valid nomination having been made, the nominee would be
entitled to possession of the flat. Further, the issue of title had to be left
open to be adjudicated upon between the contesting parties. It further held that
there can be no doubt that where a Member of a co-operative society nominates a
person, the co-operative society is mandated to transfer all the share or
interest of such Member in the name of the nominee.

It is also essential to
note that the rights of others on account of an inheritance or succession are a
subservient right. Only if a Member had not exercised the right of nomination,
then and then alone, the existing share or interest of the Member would devolve
by way of succession or inheritance. It clarified that transfer of share or
interest, based on a nomination in favour of the nominee, was with reference to
the co-operative society concerned and was binding on the said society. The
co-operative society had no option whatsoever, except to transfer the
membership in the name of the nominee but that would have no relevance to the
issue of title between the inheritors or successors to the property of the
deceased. The Court finally concluded that it was open to the other members of
the family of the deceased to pursue their case of succession or inheritance in
consonance with the law.

Taking a cue from these
cases, the Ordinance seeks to make certain changes to the Act. It has
introduced the concept of a Provisional Member. This is defined to mean a person
who is duly admitted as a Member of a society temporarily after the death
of a Member on the basis of nomination till the admission of
legal heir or heirs as the Member of the society in place of the deceased
Member. The salient features of Provisional Membership are as follows:

a)
It is temporary in nature;

b) It comes into force only once the main Member
dies;

c) It can apply on the basis of a valid
nomination;

d) It would continue only till the legal heirs of
the deceased Member are admitted as members of the society. This could be by
way of a Will or an intestate succession.

Thus, the Ordinance seeks to clarify the legal position which
has been expounded by various Court judgements, i.e., the Provisional Member
would only be a stop-gap arrangement between the date of death and the
execution of the estate of the deceased. However, it proceeds on one incorrect
assumption. It states that such membership will last till such time as the
legal heirs of the deceased Member are made members. What happens in case of a
Will where the Member has bequeathed his right in favour of a beneficiary who
is not his legal heir? A legal heir is not defined under any Act. It is a term
of general description. The Law Lexicon by Ramanatha Aiyar (4^th
Edition) defines it as including only next of kin or relatives by blood. It is
known that a person can make even a stranger a beneficiary under his Will. In
such an event, a strict reading of the Ordinance suggests that the Provisional
Membership would also continue since the legal heirs of the deceased have not
been taken on record.

However, that would be an absurd construction since once the
Will is executed, it is the beneficiary under the Will who should become the
Member. Hence, it is submitted that this definition needs redrafting. The
position has been correctly stated in the proviso to section 154B-13
also introduced by the Ordinance. This correctly states that the society shall
admit a nominee as a Provisional Member after the death of a Member till the
legal heirs or person who is entitled to the flat and shares in accordance with
succession law or under Will or testamentary document are admitted as Member in
place of such deceased Member. Hence, this recognises the fact that a person
other than legal heirs can also be added as a Member.

The Ordinance also provides for the contingency of what
happens if there is no nomination. In such cases, the society must admit such
person as Provisional Member as may appear to the Managing Committee to be the heir
/ legal representative of the deceased Member. It further states that a
Provisional Member shall have right to vote.

PROCEDURE ON THE DEATH OF A
MEMBER

Normally, in the case of a housing society, any transfer of
share or interest of a Member is not effective unless the dues of the society
have been paid and the transferee applies and acquires membership of the
co-operative housing society. However, this provision does not apply to the
transfer of a Member’s interest to his heir or to his nominee.

The Ordinance introduces
section 154B-11 which states that on the death of a Member of a society, the
society is required to transfer the share, right, title and interest in the
property of the deceased Member in the society to any person on the basis of:

Testamentary documents, i.e., a Will;

Succession certificate / legal heirship
certificate – in case of intestate succession;

Document of family arrangement executed by
the persons who are entitled to inherit the property of the deceased Member; or

Nominees.

This is the first time that
a document of family arrangement has been given statutory recognition. The
amendment equates a Memorandum of Family Arrangement to be at par with a
testamentary or intestamentary succession document. Scores of Supreme Court
judgements, such as Ram Charan Das vs. Girja Nandini Devi (1955) 2 SCWR
837; Tek Bahadur Bhujil vs. Debi Singh Bhujil, (1966) 2 SCJ 290; K. V.
Narayanan vs. K. V. Ranganadhan, AIR 1976 SC 1715, etc., have held that
a family arrangement does not amount to a transfer and hence there is no need
for registration of a Family Settlement MOU. In spite of this, in several cases
the Registration Authorities are reluctant to mutate the rights in the Property
Card or the Record of Rights based on an unregistered Family Settlement MOU. In
several cases, even co-operative societies do not agree to transfer the share
certificates based on the Family Settlement MOU unless it is registered and
stamped.

The Ordinance now provides that the society must transfer the
flat based on a Document of Family Arrangement executed by the persons who are
entitled to inherit the property of the deceased Member. However, this has
restricted the transfer only to those persons who are entitled to inherit the
property of the deceased. For instance, in the case of an intestate Hindu male,
his Class I heirs, Class II heirs, agnates and cognates are entitled to inherit
his property. Thus, a document signed between any of these relatives should be
covered under this provision.

CONCLUSION

The Ordinance has made
significant changes for co-operative housing societies especially in the area
of Membership. The concept of Provisional Member is also a welcome amendment.
However, one feels that the Ordinance has been drafted in a hurry resulting in
some drafting errors. It would be desirable that these are rectified when the
Amendment Bill is tabled by the Government.

shailesh.kwebmaker

OVERVIEW OF SECTION 138 OF THE NEGOTIABLE INSTRUMENTS ACT

Introduction

Section 138 of the Negotiable
Instruments Act, 1881 (“the Act”) is one of the few
provisions which is equally well known both by lawmen and laymen. The section
imposes a criminal liability in case of a dishonoured or bounced cheque.
According to a 2008 Report of the Law Commission of India, over 38 lakh cheque
bouncing cases were pending at the Magistrate level as of October 2008. Over 10
years have passed since that Report and this figure is expected to have
leapfrogged!! The Magistrate Court is the first Court in the hierarchy of
criminal justice in India and if this entry level forum itself is clogged one
can very well understand why justice in India often takes so long. This Article
looks at some of the important facets of this Act including key recent changes
which have been introduced in the Act.

When
does the section get triggered?

Let us briefly examine the impugned
section. Section 138 of the Act provides that if any cheque is drawn by a
person (drawer) in favour of another person (payee)
and if that cheque is dishonoured because of insufficient funds in the drawer’s
bank account, then such drawer is deemed to have committed an offence. The
penalty for this offence is imprisonment for a term which may be extended to 2
years and / or with a fine which may extend to twice the amount of the cheque.

In order to invoke the provisions
of section 138, the following three steps are necessary:

(i) the
cheque must be presented to the bank within a period of 3 months from the date
on which it is drawn or within the period of its validity, whichever is
earlier;

(ii) once the payee is informed by the bank about the dishonour of the
cheque, then he must within 30 days of such information make a demand for the
payment of the said amount of money by giving a notice in writing, to the
drawer of the cheque; and

(iii) the drawer of such cheque fails to make the payment of the said
amount of money to the payee of the cheque, within 15 days of the receipt of
the said notice.

A fourth step is specified u/s.142
of the Act which provides that a complaint must be made to the Court within one
month of the date from which the cause of action arises (i.e., the notice
period). A rebuttable presumption is drawn by the Act that the holder of the
cheque received it for the discharge, in whole or in part, of any debt or other
liability.

It is presumed, unless the contrary
is proved, that the holder of a cheque received the cheque of the nature
referred to in section 138 for the discharge, in whole or in part, or any debt
or other liability.

Thus, in order to prosecute a
person for an offence u/s. 138, It is manifest that the following ingredients
are required to be fulfilled:

(a) a
drawer must have drawn a cheque on his bank account for paying a sum to the
payee;

(b) the
cheque should have been issued for the discharge of any legally enforceable
debt / liability;

(c) the
payee must present such cheque within 3 months from the date on which it is
drawn or within the period of its validity whichever is earlier;

(d) such
cheque is returned by the drawer’s bank as unpaid, because of insufficient
funds;

(e) on
such cheque getting bounced, the payee demands repayment in writing and sends
such notice within 30 days of the dishonour intimation from the bank; and

(f) even
after receipt of such written notice, the drawer fails to make payment of the
said amount of money to the payee of the cheque within 15 days of the receipt
of the said notice.

To illustrate, suppose a cheque is
deposited in a bank and the intimation of dishonour is received by the payee on

1^st November 2018, then he has time till 30^th November
2018 to send a demand Notice to the drawer. Assuming that the Notice is
received by the drawer on 30^th November 2018, then he has time till
15^th December 2018 to make good the payment. If not done, then the
payee can file a complaint starting 16^th December 2018. The
complaint must be made by the payee within a period of 1 month from the date on
which the cause of action arises u/s. 138. It may be noted that a month is
defined under the General Clauses Act, to mean a month reckoned according to
the British Calendar. Thus, in this example, the last date for filing the
complaint would be 15^th January 2019. This definition is relevant
since in several cases, it is presumed that a month means a period of 30 days
for filing a complaint. This becomes all the more relevant with a cause of
action which arises in the month of February. Thus, the maximum period is 1
month and not 30 / 31 days.

Who
can be Prosecuted in the cases u/s 138?

Various decisions have established
who can be prosecuted u/s. 138 in the case of dishonouring of a cheque. These
can be briefly summarised as follows:

(a) The
drawer of the cheque himself in case of an individual drawer;

(b) In
a case where the drawer is a company/firm / LLP – the Partners / the Directors
and the persons concerned for running of the company / firm / LLP including the
Managing Director, Designated Partner or any other officer of the entity with
whose consent or connivance the offence has been committed. Section 141 of the
Act regulates offences by companies and makes the directors, manager, secretary
and other officer of the company liable if the offence is attributable to any
neglect on their part.

The following Table indicates the
persons who can be implicated in case of a company / LLP:

Category

Degree of Averment

Reason

Managing Director or Designated Partner

No need to make an averment that he is in-charge of and
responsible to the company, for the conduct of the business of the company. It
is sufficient if an averment is made that the accused was the Managing
Director / Joint Managing Director or Designated Partner at the relevant
time.

The prefix ‘Managing’ to the word ‘Director’ makes it clear that
he was in charge of and was responsible to the company for the conduct of the
business wof the company. The same would be the case with a Designated
Partner.

A director or an officer of the company who signed the cheque on
behalf of the company

No need to make a specific averment that he was in charge of and
was responsible to the company, for the conduct of the business of the
company or make any specific allegation about consent, connivance or
negligence.

The very fact that the dishonoured cheque was signed by him on
behalf of the company, would give rise to responsibility.

Any other Director or officer of the company.

A specific averment is required in the complaint that such
person was in charge of, and was responsible to the company, for the conduct
of the business of the company is necessary. (Such officers can also be made
liable u/s. 141(2) by making necessary averments relating to consent and
connivance or negligence).

The Supreme Court has made it clear
in a catena of judgments that the complainant has to make out specific
averments to rope in directors u/s. 141 of the Act. Further, the Supreme Court
in the following Judgments have laid down the principle that the complainant
needs to demonstrate how and in what manner the director was responsible and
was in charge of affairs of the company:

a) National Small Industries Corp. Ltd vs. Harmeet Singh Paintal and
Anr., 2010 All MR Cri 921

b) Saroj Kumar Poddar vs. State (NCT of Delhi) and Anr., 2007 ALL MR
Cri. 560

c) N. K. Wahi vs. Shekar Singh and Ors., 2007 (9) SCC 481

A company functions through its directors and officers who are responsible for
the conduct of the business of the company. A criminal liability on account of
dishonour of cheque primarily falls on the drawer company and is extended to
officers of the company. The normal rule in the cases involving criminal
liability is against vicarious liability, that is, no one is to be held
criminally liable for an act of another.

The legal position concerning the
vicarious liability of a director in a company which is being prosecuted for
the offence u/s. 138 came up for consideration before the Supreme Court on more
than one occasion. In a landmark decision in the case of National Small
Industries Corporation Limited vs. Harmeet Singh Paintal and Anr, 2010 ALL MR
CRI 921 the Supreme Court has laid down the following principles:

(a) The primary responsibility is
on the complainant to make specific averments as are required under law in the
complaint so as to make the accused vicariously liable. For fastening the
criminal liability, there is no presumption that the director knows about the
transaction.

(b) Section 141 does not make all
the directors liable for the offence. The criminal liability can be fastened
only on those who, at the time of commission of the offence, were in charge of
and were responsible for the conduct of business of the company.

(c) Vicarious liability can be
inferred against a company only if the requisite statements, which are required
to be averred in the complaint, are made so as to make the accused therein
vicariously liable for offence committed by the company along with averments in
the complaint containing that the accused were in charge of and responsible for
the business of the company and by virtue of their position they are liable to
be proceeded with.

(d) Vicarious liability on the part of a person must be pleaded and
proved and not inferred. (There is no presumption u/s. 139 of the Negotiable
Instruments Act of vicarious liability)

(e) The person sought to be made
liable should be in charge of and responsible for the conduct of the business
of the company at the relevant time. This has to be averred as a fact as there
is no deemed liability of a director in such cases. The Court has reiterated
the position taken by it in its earlier decisions including the landmark
judgment delivered by it in the case of SMS Pharmaceuticals Ltd. vs.
Neeta Bhalla,2005 (4) Mh.L.J. 731.

In the case of Central Bank
of India vs. Asian Global Limited 2010 AIR(SC) 2835, the Supreme Court
has laid down that the allegations have to be clear and unambiguous showing
that the directors were in charge of and responsible for the business of the
company.

In this respect, the Act has taken
due care of Government nominated Directors and they shall not be liable for
prosecution under u/s. 138 r.w.s 141 of the Negotiable Instruments Act. Sadly,
such an exemption does not exist for Independent Directors!

Where
should a cheque bouncing complaint be filed?

One of the most litigious issues in
relation to a bounced cheque has been which Court has jurisdiction over a case?
Say, a debtor which has its registered office in Ranchi, Jharkhand issued a
cheque drawn on a Ranchi bank to a creditor based in Mumbai and the cheque once
deposited in the Mumbai bank bounces. Now, should the complaint be filed in
Mumbai or in Ranchi?

This answer could make a big
difference since the ease of filing a case in one’s own city or State is
manifold as compared to a remote location. This issue saw several Supreme Court
and High Court decisions leading to a see-saw one way and the other. A slew of
decisions came out strongly in favour of the accused unlike the earlier
decisions which were pro-complainant. Let us look at the history and the
current position on this very important aspect which made several creditors and
banks jittery.

A two-member bench of the Supreme
Court in K Bhaskaran vs. Sankaran Vaidhyan Balan (1999) 7 SCC 510
laid down five important components for filing a complaint u/s. 138 of the Act:

(a) Drawing of the cheque,

(b) Presentation of the cheque to the bank,

(d) Giving notice in writing to the drawer of the cheque demanding
payment of the cheque amount, and

(e) Failure of the drawer to make payment within 15 days of the receipt
of the notice

The Apex Court finally concluded
that since an offence could pertain to any of the above five acts there could be
five offences which could be committed at five different locations and hence,
the suit could be filed in any Court having jurisdiction over these locations.

Thus, the complainant can select any of the
five Courts for filing his complaint within whose jurisdiction the five acts were
done.

However, a subsequent Supreme Court
decision in the case of Dashrath Rupsingh Rathod vs. State of
Maharashtra, Cr. A. No. 2287 /2009 Order dated 1^st August 2014
led to debtors across the Country celebrating and creditors panicking. It
overruled all the earlier decisions on this subject and held that the case u/s.
138 had to be filed only where bank of the accused was located. This was
because of the fact that the offence of cheque dishonour has occurred where the
bank of the accused was located. Hence, in the above example, the creditor
would have had to file his case before the Magistrate Court of Ranchi! Imagine
the sheer harassment it would cause the creditor and that too to recover his
own money.

This decision caused a great deal
of inconvenience to litigants and finally the Parliament amended the Act with
effect from 15^th June 2015 by inserting sub-section (2) in section
142 of the Act to define the jurisdiction for filing the case. It states that
if the cheque is delivered for collection through an account, then the
complaint would be filed at a place where the bank branch of the payee is
situated. Continuing with our above example, since the Mumbai-based creditor
deposited his Ranchi debtor’s cheque in his Mumbai Bank Account, the complaint
would be filed before the Metropolitan Magistrate of Mumbai. Indeed, a welcome
relief! The Constitutional Validity of this provision was challenged in the
case of Vikas Bafna & Ors vs. UOI, WP (C) 1351/2016 (Cha). It
was contended that the amendment took away a valuable right of the accused to
defend himself properly and that since the amendment nullified a Supreme Court
decision it was Constitutionally invalid. The Chattisgarh High Court negated
this plea and held that all laws which cause some hardship cannot be treated as
being constitutionally invalid.

Process
of Complaint

The process of filing a complaint
u/s. 138 of the Act is as follows:

(a) A
complaint under the Act is filed by the payee before a Magistrate or JMFC (Judicial
Magistrate First Class) or Metropolitan Magistrate (only for the 4 Metros).

(b) The
complainant is examined u/s. 200 of the Criminal Procedure Code (CrPC) where
his verification statement is filed. For the complainants verification can be
filed by way of an Affidavit also.

(d) Once
the process is issued, summons are sent to the accused.

(e) After
the summons are issued, if the accused does not appear before the Court, then a
Warrant of Arrest is issued.

(f) Once
the accused appears before the Court, he has to secure bail and the plea of the
accused is recorded.

In this respect, there has been an important
amendment with effect from 1^stSeptember 2018
to the Negotiable Instruments Act vide the insertion of section 143A. This
section states that if the accused pleads not guilty to the accusation made in
the complaint, then the Magistrate may direct the Accused to pay to the
complainant an interim compensation of up to 20% of the amount of the
cheque. The interim compensation has to be paid within 60 days from the
date of the order. If the accused does not pay the same the same can be
recovered as if a fine was levied as per section 421 of the CrPC.

Two salient features of this
important amendment which are worth noting are as follows:

(i) The
power to ask an accused to pay interim compensation is discretionary with the
Magistrate and is not mandatory. The words used are “may order”
and not “shall order”. Hence, it is not that in each and every
case, the Court would order interim compensation, it may decide to avoid it
altogether in a case.

(ii) Further, the interim compensation is not a fixed sum of 20% of
the cheque amount. It is an amount of up to 20% and hence, it could be any sum
even lower than 20% of the cheque amount. Thus, for instance, the Court may
order the accused to pay 5% as interim compensation.

(g) Once
plea is recorded, the complainant has to file his evidence.

(h) After
the evidence of the complainant /prosecution is recorded, the Magistrate
records the statement of the accused where questions are put to the accused
based on the evidence filed by the complainant. After the statement is recorded,
the accused has a choice to lead his evidence or has the right to remain
silent.

(i) Once
the evidence of the accused is closed the matter proceeds for arguments and
judgment.

(j) The
Court would then pass a judgment either of conviction of the accused or of his
acquittal. A judgment of conviction is appealable by the drawer in the Court of
Sessions. If an acquittal is given, then a leave has to be sought by the payee
from the High Court to file an Appeal in the High Court within 60 days of the
acquittal order.

Conclusion

One can only hope that given the
gravity of the violations and the consequences, the Government amends the
Negotiable Instruments Act to exempt Independent and Non-executive Directors.
In fact, such an amendment is also welcome in other similar statutes
prescribing a criminal liability on the directors. SEBI which has been the
driving force behind the corporate governance movement in India should take up
this matter with the Government. If we want more independent directors on our
companies, then we must make laws to facilitate the same!

shailesh.kwebmaker

Registration of Wills

Introduction

One of the
modes of succession is through a will, also known as testamentary
succession. A will is a document which contains the last wishes of a
person as regards the manner and mode of disposition of his property. The
making of wills in India is governed by the provisions of the Indian
Succession Act, 1925 (“the Act”). While intestate succession is
different for different religions, the law governing the making of wills is the
same for people of all religions except Muslims. The Act does not apply to
wills made by Muslims as they are governed by their respective Shariat Laws.
Succession, whether through wills or otherwise, always has some interesting
issues, one such being whether a will should be registered and if yes, does it
have any special advantages?

Meaning

As the
term `will’ indicates, it signifies a wish, desire, choice, etc., of a person.
A person expresses his will as regards the disposition of his property. The Act
defines a will to mean “the legal declaration of the intention of the
testator with respect to his property which he desires to be carried into effect
after his death”. The General Clauses Act, 1897, defines the term will to
include “a codicil and every writing making a voluntary posthumous disposition
of property”. The Indian Penal Code defines a will to denote any testamentary
document.

One of the
important facets of a will is that the intention manifests only after the
testator’s (person making the will) death, i.e., it is a posthumous disposition
of his property. Till the testator is alive, the will has no force. He can
dispose of all his properties in a manner contrary to that stated in the will
and such action would be totally valid. E.g., A makes a will bequeathing all
his properties to his brother. However, during his lifetime itself, he
transfers all his properties to his son with the effect that at the time of his
death he is left with no assets. Such action of the testator cannot be
challenged by his brother on the ground that he was bound to follow the will
since the will would take effect only after the death of the testator. In this
case as the property bequeathed would not be in existence, the bequest would
fail.

Disputes

Making a
will does not mean a blanket insurance against succession disputes. A will may
be challenged on various counts. Some of the common grounds on which a will is
challenged include:

(a) The will does not comply with
the rules laid down under the Indian Succession Act in respect of a valid will.

(b) The will is not genuine,
i.e., it has been obtained by fraud, forgery, undue influence, coercion, under
duress, etc.

From time
immemorial, wills have been and will continue to be a source of family
disputes. This is true not just in India but also in the west, e.g., USA,
England, etc. It is often said that “where there is a will, there is a
legal dispute” or that “where there is a will, there is a disgruntled relative”.
In order that these legal disputes are minimised and the claims by disgruntled
relatives set aside, it is necessary that the will is a valid will and one
which can stand scrutiny in a court of law. One such precaution which is often
suggested to reduce disputes is to register the will.

Registration of a will

The
testator of a will or the executor, after him, may register the will with the
Registrar of Sub-Assurances under the Registration Act, 1908. However, it is
not compulsory to register a will. Even if a will bequeaths immovable property,
registration is not compulsory. In fact, section 17(1) of the Registration Act
which prescribes those instruments which require compulsory registration,
expressly states that only non-testamentary instruments are required to be
mandatorily registered.

Procedure

The procedure
for registering a will is as follows:

(a) The will is to be registered with the
appropriate Registrar of Sub-Assurances.

(b) In case a person other than the testator
presents a will for registration, then such other person must satisfy the Registrar
that the will was executed by the testator who has since expired, and that the
person registering the will is authorised to do so.

(c) The other procedures which are applicable for
the registration of any document would equally apply to a will also. For
instance, after the amendment in the Registration Act inserted in 2001, every
document which is to be registered requires the person presenting the document
to affix his passport size photograph and also his finger-print. It may be
noted that as is the case with any will, no stamp duty is payable even if it is
registered. There is no difference on this count.

(d) Persons who are exempted from personally
appearing before the Registrar, include:

(i) A person who is unable to come without risk
or serious inconvenience due to bodily infirmity;

(ii) A person in jail under civil or criminal
process;

(iii) Persons who are entitled to exemption under
law from personal attendance in Court.

In such
cases, the Registrar shall either himself go to the house of such person or the
jail where the person is confined and examine him or issue a commission for his
examination.

A testator may also deposit
his will for safekeeping with the Registrar by depositing it in a sealed
envelope which contains the name of the testator and a statement about the
nature of the document. Once the registrar receives the cover he would enter the
name of the testator in his register book along with the date of presentation
and the receipt. Thereafter, he is required to place the envelope in his
fireproof safe. Such a deposited will can be withdrawn by the testator or by
his duly authorised agent. On his death, an application can be made to the
registrar to open the cover and cause the contents of the will to be copied
into his register book.

Mulla
in his commentary on the Indian Registration Act, 10^th
Edition, Butterworths, states that the applicant need not be a claimant
or executor under the will and may be anyone who is prepared to pay the
requisite copying and other fees. Hence, the will would become a public
document open to inspection. This is one disadvantage of registering a will.

Another
option one may consider to registration is notarising the will since even this
could help prove that the will is not forged.

Benefits of registration

Registration
of a will by the testator prior to his demise raises a strong presumption in
favour of the genuineness of the will but the same cannot be said of a will
which is registered after his death, or without his knowledge– Guru Dutt
Singh vs. Durga Devi, AIR 1966 J&K 75. Registration of a will helps in establishing
the date of execution or signing beyond a doubt. Also, registration establishes
the genuineness of identity of the testator and the witnesses. However, the
Delhi High Court in Thakur Dass Virmani vs. Raj Minocha AIR 2000 Del 234
has held that where the will was registered and the signatures of the testator
were similar to her regular signatures, due execution of the will may be
presumed.

In Rabindra
Nath Mukherjee vs. Panchanan Banerjee by LRs(1954) 4 SCC 459 it has
been held that in a case where a will is registered and the Sub-Registrar
certifies that the same had been read over to the executor who, on doing so,
admitted the contents, the fact that the witnesses to the documents are
interested lost significance. The documents at hand were registered and it was on
record that the Sub-Registrar had explained the contents to the testator.
Hence, the Supreme Court did not find this as suspicious on the facts of the
case.

What registration does not prove

A will
need not be compulsorily registered; the fact that a will is not registered is
not a circumstance against the genuineness – Basaut vs. Brij Raj, A.I.R.
1935 (PC) 132.

Merely
because a will has not been registered by the testator, an adverse inference
cannot be drawn that the will is not genuine – Ishwardeo Narain Singh vs.
Kamata Devi AIR 1954 SC 280. In this case, the Supreme Court held that
there was nothing in law which required the registration of a will and wills
are in a majority of cases were not registered at all. To draw any inference
against the genuineness of the will merely on the ground of its
non-registration appeared to be wholly unwarranted.

Again in Rani
Purnima Devi vs. Kumar Khagendra Narayan Dev, 1962 SCR Supl. (3) 195,
the Apex Court held as follows while examining the genuineness of a registered
will:

“There is no doubt that if a will has been registered, that is a
circumstance which may, having regard to the circumstances, prove its
genuineness. But the mere fact that a will is registered will not by
itself be sufficient to dispel all suspicion regarding it where suspicion
exists, without submitting the evidence of registration to a close
examination. If the evidence as to registration on a close examination reveals
that the registration was made in such a manner that it was brought home to the
testator that the document of which he was admitting execution was a will
disposing of his property and thereafter he admitted its execution and signed
it in token thereof, the registration will dispel the doubt as to the
genuineness of the will. But if the evidence as to registration shows that
it was done in a perfunctory manner, that the officer registering the will
did not read it over to the testator or did not bring home to him that he was
admitting the execution of a will or did not satisfy himself in some other way
(as, for example, by seeing the testator reading the will) that the testator
knew that it was a will the execution of which he was admitting, the fact that
the will was registered would not be of much value. It is not unknown that
registration may take place without the executant really knowing what he was
registering. Law reports are full of cases in which registered wills have
not been acted upon (see’ for example, Vellasaway Sarvai v. L. Sivaraman
Servai, (1) Surendra Nath Lahiri v. Jnanendra Nath Lahiri ( 2 )and Girji Datt
Singh v. Gangotri Datt Singh)(3). Therefore, the mere fact of registration
may not by itself be enough to dispel all suspicion that may attach to the
execution and attestation of a will; though the fact that there has been
registration would be an important circumstance in favour of the will being
genuine if the evidence as to registration establishes that the testator
admitted the execution of the will after knowing that it was a will the
execution of which he was admitting.”

Registration
of a will would go a step in proving whether or not the will is the last will
of the deceased since the date of the execution of the will would get
established beyond a doubt.

A will,
which requires probate, is of no effect unless probated. The mere fact of its
registration makes no difference. Thus, a Court when called upon to probate a
will would look into the fact of its registration only as one of the several
circumstances when deciding whether to grant probate or not.

The registration of will is not the proof of the testamentary capacity
of the testator, as the Sub-Registrar is not required to make an enquiry about
the capacity of the testator.

Can a registered will be superseded by an
unregistered will?

The
question whether a registered Will can be superseded by an unregistered will
had also been a matter of consideration before the court of law, wherein the
Delhi High Court has held that there is no law that a registered will cannot be
superseded by an unregistered will. A will does not operate in praesenti.
Its operation is contingent upon the death of the testator. Till alive, the
testator can always revoke the will because a will is an instrument of trust by
a living person addressed in rem to be operative after his death. A will, be it
registered or be it unregistered can be revoked by defacing the will,
destroying the will or otherwise superseding the same. – Sunil Anand vs.
Rajiv Anand, 2008(103) DRJ 165.The following passage from the judgment
is relevant:

“….the
will Ex.PW-1 is a registered will. Secondly, there is no law that a
registered will cannot be superseded by an unregistered will.
A will does not operate in praesenti. Its operation is contingent upon
the death of the executor. A will creates no right, title or interest when it
is executed. The right is created under a will on the death of the testator.
Till alive, the testator can always revoke the will because a will is an
instrument of trust by a living person addressed in rem to be operative after
his death. A will, be it registered or be it unregistered can be revoked
by defacing the will, destroying the will or otherwise superseding
the same.”

Again, in Amara
Venkata Subbaiah and Sons and ors. vs. Shaik Hussain Bi, 2008(5)ALD547,
the Andhra Pradesh High Court has held that the law was well settled that even
an unregistered codicil in relation to a registered will, would have to be read
as amending the will. Thus, this also supports the view that a registered will
can be superseded by an unregistered will.

Conclusion

While
registration of a will may not be a panacea for the ills of probate disputes,
it certainly is a strong anti-biotic as compared to an unregistered will! It
helps dispel the element of doubt associated with a will.

shailesh.kwebmaker

ARBITRATION AWARD VS. EXCHANGE CONTROL LAW

Introduction

Indian
corporates and Foreign Investors in India anxiously awaited the Delhi High
Court’s verdict in the case of NTT Docomo Inc. vs. Tata Sons Ltd. This
decision was going to decide upon the fate of enforceability of foreign
arbitral awards in India. The Delhi High Court delivered its landmark decision
on 28^thApril 2017 reported in (2017) 142 SCL 252 (Del) and
upheld the enforceability of foreign arbitral awards. While doing so, it also
threadbare analysed whether the Foreign Exchange Management Act, 1999 would be
an impediment to such enforcement?

Factual Matrix

To better
understand this case, it would be necessary to make a deep dive into the
important facts before the matter travelled to the Delhi High Court. NTT Docomo
of Japan invested in Tata Teleservices Ltd (“TTSL”). A
Shareholders’Agreement was executed amongst Docomo, TTSL and Tata Sons Ltd (“Tata”),
the promoter of TTSL. Under this Agreement, Docomo was provided with certain
exit options in respect of its foreign direct investment. One of the Clauses
provided that if Tata was unable to find a buyer to purchase the shares of
Docomo, then it shall acquire these shares. Further, Tata had an obligation to
indemnify and reimburse Docomo for the difference between the actual sale price
and the higher of (i) the fair value of these shares as on 31^st
March, 2014 or (ii) 50% of the investment price of Docomo. Accordingly, Docomo
was provided with a downside protection of 50% of its investment. As luck
would have it, Tata was unable to obtain a buyer at this price and hence,
Docomo issued a Notice asking Tata to acquire the shares at Rs. 58.45 per
share, i.e., the minimum price stipulated in the Agreement. Tata Sons disputed
this Notice by stating that under the Foreign Exchange Management Act, 1999 (“FEMA”),
i.e., the exchange control laws of India, it can purchase shares from a
non-resident only at a price which is equal to the fair value of the investee
company. Accordingly, Tata could buy the shares only at Rs. 23.44 per share and
it approached the Reserve Bank of India (“the RBI”) for its
approval to buy the shares at Rs. 58.45 per share. Initially, the RBI felt that
this was not an assured return, which was prohibited under the FEMA but it was
in the nature of downside protection. This was a fair agreement and hence, Tata
should be allowed to honour their commitment. Further, the larger issue was of
fair commitment in Foreign Direct Investment contracts and keeping in view,
Japan’s strategic relationship with India, the contract should be fulfilled.
This was a very unique stand taken by the RBI. However, the RBI approached the
Finance Ministry, Government of India on this issue. The Finance Ministry
rejected Tata’s plea and held that an individual case cannot become an
exception to the FEMA Regulations. Consequently, the RBI wrote to Tata
rejecting permission to buy the shares at a price higher than the fair
valuation of TTSL. The guiding principle was that a foreign investor could not
be guaranteed any assured exit price. This became an issue of dispute between
the parties and the matter reached arbitration before the Arbitral Tribunal,
London.

Arbitration Award

The Arbitral Tribunal gave an Award in favour of Docomo after
considering the Agreement and India’s exchange control laws. It held that the
Agreement was drafted after considering the FEMA since a simple put option was
not permissible. The Agreement did not qualify the Tata obligation to provide
downside protection by making it subject to the FEMA Regulations. It held that
Tata had clearly failed in its obligation to find a buyer and the FEMA
Regulations did not excuse non-performance. Further, the RBI’s refusal of
special permission did not render Tata’s performance impossible. Accordingly,
it awarded damages to Docomo along with all costs of arbitration. It however,
expressed no view on the question whether or not special permission of the RBI
was required before Tata could perform its obligation to pay damages in
satisfaction of the Award.

Armed with
this Award, Docomo moved the Delhi High Court seeking an enforcement and
execution of the foreign Award. The RBI filed an intervention application in
this suit opposing the payment by Tata. Subsequently, Tata and Docomo filed
consent terms under which Tata agreed to pay the damages claimed by Docomo,
subject to a ruling on the objections raised by the RBI. Further, it was
decided to obtain permission of the Competition Commission of India and a
Withholding Tax Certificate from the Income-tax authorities before remitting
the funds. In lieu of the same, Docomo agreed to suspend all proceedings
against Tata wherever they were launched and give up all claims against
Tata.

RBI’s Plea

The RBI
contended that for the Award to hold that the FEMA Regulations need not be
looked into, was illegal and contrary to the public policy of India. Since the
RBI had rejected the permission to pay Rs. 38 per share, the matter had
achieved a finality. Payment of an assured return was contrary to the
fundamental policy of the nation.

High Court’s Verdict

At the
outset, the Delhi High Court dealt with whether the RBI could have a locus
standi to the Award and held that any entity which is not a party to the
Award cannot intervene in enforcement proceedings. Even though the Award dealt
with the FEMA provisions in detail that ipsofacto did not give a right
to the RBI to intervene.

The Court
held that there was no statutory requirement that where the enforcement of an
arbitral Award resulted in remitting money to an non-Indian entity outside
India, RBI has to necessarily be heard on the validity of the Award. The mere
fact that a statutory body’s power and jurisdiction might be discussed in an
adjudication order or an Award will not confer locus standi on such body
or entity to intervene in those proceedings.In the absence of a provision that
expressly provides for it, the question of permitting RBI to intervene in such
proceedings to oppose enforcement did not arise.

The Court
held that the Award was very clear that what was awarded to Docomo were damages
and not the price of the shares. It was not open to RBI to re-characterise the
nature of the payment in terms of the Award. RBI has not placed before the
Court any requirement for any permission of RBI having to be obtained for
Docomo to receive the money as damages in terms of the Award.

The Court
held that it was unable to find anything in the consent terms which could be
said to be contrary to any provision of Indian law much less opposed to public
policy. The issue of an Indian entity honouring its commitment under a contract
with a foreign entity which was not entered into under any duress or coercion
will have a bearing on its goodwill and reputation in the international arena.
It would indubitably have an impact on the foreign direct investment inflows
and the strategic relationship between the countries where the parties to a
contract are located. These too were factors that had to be kept in view when
examining whether the enforcement of the Award would be consistent with the
public policy of India.

The
Arbitral Tribunal had clearly held that the sum awarded was towards damages and
not sale of shares. Hence, the question of obtaining the special permission of
the RBI did not arise. If the Court allowed enforcement of the Award, then the
RBI would be as much bound by the verdict as would the parties to the Award. It
further observed that the RBI had at no stage contended that the Shareholders’
Agreement was void or illegal. The damages were more of a downside
protection and not an assured return on investment. Hence, the FEMA
Regulations freely permitted remittance outside India. The RBI could not
recharacterise the payment from damages to sale consideration more so when Tata
had not objected to it. The Court laid down a very important principle which
is that the FEMA contained no absolute prohibition on contractual obligations.
It even upheld the consent terms and held that there was nothing contrary to
public policy.

Finally,
it concluded by dismissing the plea of the RBI and upholding the enforceability
of the Award in India as if it was a decree of the Delhi High Court. In the
meanwhile, the parties have obtained the permission of the Competition
Commission of India to make the payment. Whether the RBI will challenge this
decision is something which time will tell.

Unitech City Cruz Case

A similar issue was dealt with by the Delhi High Court in an earlier
case of Cruz City 1 Mauritius Holdings vs. Unitech Ltd, (2017) 80
taxmann.com 180 (Del). This too dealt with the enforceability of a
foreign arbitration Award in respect of a Shareholders’ Agreement gone sour. It
held that under the FEMA, all foreign account transactions are permissible
subject to any reasonable restriction which the Government may impose in
consultation with the RBI. It is now permissible to not only compound
irregularities but also seek ex post facto permission. Thus, it held
that the question of declining enforcement of a foreign award on the ground of
any regulatory compliance or violation of a provision of FEMA would not be
warranted. It held that enforcement of a foreign award cannot be denied if it
merely contravenes the law of India. The Court held that the contention that
enforcement of the Award against the Indian party must be refused on the ground
that it violates any provision of the FEMA, cannot be accepted; but, any
remittance of the money recovered from the Indian party under the Award would
necessarily require compliance of regulatory provisions and/or permissions.
Another important question addressed by the Court was whether it was now open
for Unitech to raise a plea that the foreign investment made was violative of
the provisions of FEMA and Indian Law.

The Court
observed that Unitech had itself given unambiguous representations and
warranties in the Shareholders’ Agreement that the transaction was valid and
binding and enforceable and that the same did not require any approval from any
authority. It had further stated that all applicable laws were complied. Now
Unitech was contending that FEMA provisions do not permit such a transaction
without the RBI permission. The Court held that reneging on such express
commitments would be patently unjust and unfair and hence, not permissible. It
held that the Agreement was subject to Indian laws and Unitech had full
opportunity to challenge the validity before the Arbitral Tribunal but it having
failed to do so, theCourt found no reason to entertain such contentions to
resist enforcement of the Award. It is learnt that Unitech has challenged this
judgment.

Interestingly,
in this case, the Court held that the remittance under the Award was subject to
the FEMA Regulations but in the latter case of Docomo it held that no special
permission of the RBI was needed for remittance under the Award!

Takeaways

As long as
an award is towards damages, there should not be any challenge in its
enforceability even if it involves foreign remittances. No special permission
of the RBI is needed for the same. One wonders whether the Court’s verdict
would have been the same had the Agreement been drafted differently? It was a
decision on the interpretation of a specific clause and hence, in future
foreign investors could insist on wordings similar to the ones used in the
Tata-Docomo Agreement. What is also interesting are the observations of the
Delhi High Court in Unitech’s case where it has bound the Indian party by the
representations made at the time of receiving the foreign investment. Following
these decisions, some Indian corporates have started settling arbitration
proceedings and paid the disputed amounts to foreign investors. For instance,
in October, GMR Infrastructure settled an ongoing arbitration with its foreign
private equity investors by acquiring their preference shares for a
consideration of cash + kind.

Clearly,
India has a long way to go towards full capital convertibility of the Indian
Rupee. In fact, whether or not it should has been the matter of great debate.
However, a disconnect between the Arbitration Law and the FEMA Regulations /
the RBI may act as a great dampener to the foreign investment climate in the
country. These two decisions of the Delhi High Court would act as a booster
shot for foreign investors. Considering that the Government has abolished the
Foreign Investment Promotion Board / FIPB, the nodal investment authority,
maybe it is high time for the RBI to amend its Regulations to make them more in
sync with commercial contracts.

The
Indian judicial system is clearly overburdened resulting in corporates
resorting to arbitration as a dispute resolution forum. In such a scenario, an
environment which facilitates the enforceability of foreign awards would help
improve India’s ease of doing business rankings. It would be desirable if we
have a clear policy devoid of confusion and ambiguity.

shailesh.kwebmaker

INSOLVENCY & BANKRUPTCY CODE, 2016 – SC’S BOOSTER SHOTS

It was started in September, 2002 with
Anup P Shah as its author. He continues to eloquently pen it every month since
then. BCAJ had several features on tax and accounting but very little of Law.
As auditors and advisors, CAs need to have a good working knowledge of laws
which impact business. Each article provided audit steps after covering the
legal aspects. The idea behind the feature is to educate CAs and even
businessmen about laws which impact a business and hence, the name “Laws &
Business”. Anup started writing on different laws and then moved on to
different legal issues. One notable change: When he started he was CA. Anup
Shah and now he is Dr. Anup P Shah.

You are about to read the 196^th
contribution. So far the column has covered 82 Laws and 164 legal issues. Two
editions of compilation of Laws and Business have been published by BCAS. When
we asked the author, what keeps him going after sixteen years of monthly
writing: “Writing crystallizes thinking – while readers may benefit from the
Feature, I get a larger benefit since before one can write on a subject, one
must study and analyse it thoroughly. In addition, the desire to learn new
legal issues and a zeal to write keeps the keyboard pounding!” Soon the feature will hit a double century!

Insolvency & Bankruptcy
Code, 2016 – SC’s Booster Shots

Introduction

Rarely has a law witnessed
as many legal challenges in its initial years as the Insolvency &
Bankruptcy Code, 2016 (“Code”) has! Although, the Code is less
than three years old, it has seen numerous battles not just at the NCLT level
but even at the Supreme Court. In addition, the Code itself has been amended
many times to address changing circumstances and in response to Court
decisions. Hence, it has been an evolving legislation. Promoters of companies
under insolvency resolution have tried resorting to judicial forums to prevent
losing control over their companies but Courts have been wary of allowing their
pleas. However, each time the Code has emerged stronger and more robust than
before. In the last few months, the Supreme Court has on three occasions,
delivered landmark decisions, which have helped uphold the validity of the
Code. Let us examine these decisions of the Apex Court in the context of the
Code.

Case-1: Swiss Ribbons (P.) Ltd. vs. UOI,
[2019] 101 taxmann.com 389 (SC)

The Supreme Court by its
Order dated 25^th January 2019, upheld the Insolvency and Bankruptcy
Code, 2016 in its entirety with some minor adjustments. This case was not fact
based since it involved a challenge to the Constitutional validity of the Code.
Some of the salient features of this path breaking decision are discussed
below. The main thrust of the petitioner’s argument was that the Code suffered
from various Constitutional infirmities and arbitrariness and hence, deserved
to be struck down. The Court held the primary focus of the legislation was to
ensure revival and continuation of the corporate debtor by protecting the
corporate debtor from its own management and from a corporate death by
liquidation. The Code was thus a beneficial legislation which put the corporate
debtor back on its feet and was not a mere recovery legislation for creditors.
The interests of the corporate debtor had, therefore, been bifurcated and
separated from that of its promoters / those who were in management. Thus, the
Corporate Insolvency Resolution Process (“CIRP”) was not
adversarial to the corporate debtor but, in fact, protective of its interests.

It observed that in the
working of the Code, the flow of financial resource to the commercial sector in
India had increased exponentially as a result of financial debts being repaid.
Approximately 3300 cases were disposed of by the NCLT based on out-of-court
settlements between corporate debtors and creditors which themselves involved
claims amounting to over Rs. 1,20,390 crore. The experiment conducted in
enacting the Code was proving to be largely successful.

Distinction between Operational and Financial
Creditors is Valid

It was argued that the
distinction between operational and financial creditors was Constitutionally
invalid and nowhere in the world was such an artificial bifurcation found. It
was quite likely that since operational creditors were often unsecured (e.g.,
creditors for goods and services) as compared to financial creditors (e.g.,
banks, NBFCs, etc.,) who may be secured, there might not be enough funds left
behind for the operational creditors after paying off the financial creditors.
Further, it was contended that operational creditors had no right to vote as
compared to financial creditors who alone could vote. Moreover, a financial
creditor could trigger a resolution application under the Code merely on a
default taking place. However, in the case of an operational creditor even if a
default takes place and an application is filed before the NCLT, the same would
be rejected if the debtor can prove that a dispute exists with the operational
creditor.

The Court noted that the
reason for differentiating between financial debts, which were secured, and
operational debts, which were unsecured, was in the relative importance of the
two types of debts when it comes to the objects sought to be achieved by the
Code. Giving priority to financial debts owed to banks and lenders would
increase the availability of finance, reduce the cost of capital, promote
entrepreneurship and lead to faster economic growth. The Government also will
be a beneficiary of this process as the economic growth will increase revenues.
Financial creditors from the very beginning are involved with assessing the
viability of the corporate debtor. They can, and therefore do, engage in
restructuring of the loan as well as reorganisation of the corporate debtor’s
business when there is financial stress, which are the things operational
creditors do not and cannot do. Financial creditors help in preserving the
corporate debtor as a going concern, while ensuring maximum recovery for all
creditors being the objective of the Code, and hence, are clearly different
from operational creditors and therefore, there is obviously an intelligible
differentia between the two which has a direct relation to the objects sought
to be achieved by the Code.

Further, the NCLAT has,
while looking into viability and feasibility of resolution plans that are
approved by the committee of creditors, always examined whether operational
creditors are given roughly the same treatment as financial creditors, and if
not, such plans are either rejected or modified so that the operational
creditors’ rights are safeguarded. Moreover, a resolution plan cannot pass
muster u/s. 30(2)(b) read with section 31 unless a minimum payment is made to
operational creditors, being not less than liquidation value.

The Regulations framed under
the Code have been amended to expressly provide that a resolution plan shall
now include a statement as to how it has dealt with the interests of all
stakeholders, including financial creditors and operational creditors, of the
corporate debtor. This further strengthens the rights of operational creditors
by statutorily incorporating the principle of fair and equitable dealing of
operational creditors’ rights, together with priority in payment over financial
creditors.

Hence,
the Court concluded that no discrimination resulted since it was demonstrated
that there was an intelligible differentia which separated the two kinds of
creditors.

Section12A withdrawal of CIRP

In the
past, there have been instances where on account of settlement between the
applicant creditor and the corporate debtor, judicial permission for withdrawal
of the CIRP was required. The Supreme Court, under Article 142 of the
Constitution, passed orders allowing withdrawal of applications after the
creditors’ applications had been admitted by the NCLT. Thus, without
approaching the Supreme Court, it was not possible to withdraw an application
even if both parties consented to the same – Lokhandwala Kataria
Construction P Ltd vs. Nisus Finance and Investment Managers LLP,
CA No. 9279/2017 (SC) and Mothers Pride Dairy P Ltd vs. Portrait
Advertising and Marketing P Ltd, CA No. 9286/2017 (SC).

To remedy this situation,
section 12A was inserted in the Code which allows for the withdrawal of an
insolvency petition filed against a corporate debtor if 90% of the Committee of
Creditors (CoC) approve such a withdrawal. It was argued that this section gave
unbridled and uncanalised power to the CoC to reject legitimate settlements
between creditors and corporate debtors. The Apex Court held that once the CIRP
was triggered, the proceeding became a proceeding in rem, i.e., a collective
proceeding, which could not be terminated by an individual creditor. All
financial creditors have to come together to allow such withdrawal as,
ordinarily, an omnibus settlement involving all creditors ought, ideally, to be
entered into. This explained why 90%, which was substantially all the financial
creditors, have to grant their approval to an individual withdrawal or
settlement. In any case, the figure of 90%, pertained to the domain of
legislative policy. The Court further pointed out that there was an additional
safeguard by way of section 60 of the Code, which provided that if the CoC
arbitrarily rejected a just settlement and/or withdrawal claim, the NCLT, and
thereafter, the NCLAT could always set aside such a decision. Thus, the Court
upheld section 12A of the Code.

Role of RP

The
Court did not find merit in the plea that the resolution professional was given
adjudicating powers under the Code. It held that he was given an administrative
role as opposed to quasi-judicial powers. The Court distinguished between the
role of a resolution professional who had an administrative role versus a
liquidator who had a quasi-judicial role. Thus, the resolution professional was
only a facilitator of the resolution process, whose administrative functions
were overseen by the CoC and ultimately by the NCLT.

Section 29A: Relief to ‘Related Party’

A multi-fold attack was
raised against section 29A which disentitled certain persons to act as
resolution applicants. Firstly, it was stated that the vested rights of
erstwhile promoters to participate in the recovery process of a corporate
debtor were impaired by a retrospective application of section 29A. It was
contended that section 29A was contrary to the object sought to be achieved by
the Code, in particular, speedy resolution process as it would inevitably lead
to challenges before the NCLT and NCLAT, which would slow down and delay the
CIRP. In particular, so far as section 29A(c) was concerned, a blanket ban on
participation of all promoters of corporate debtors, without any mechanism to
weed out those who are unscrupulous and have brought the company to the ground,
as against persons who are efficient managers, but who have not been able to
pay their debts due to various other reasons, would not only be manifestly
arbitrary, but also be treating unequals as equals. Also, maximisation of value
of assets was an important goal to be achieved in the resolution process and section 29A was contrary to such a goal since an
erstwhile promoter, who may outbid all other applicants and may have the best
resolution plan, would be kept, thereby impairing the object of maximisation of
value of assets. Another argument which was made was that under the Code, a
person’s account may be classified as an NPA in accordance with the guidelines
of the RBI, despite him not being a wilful defaulter. Lastly, persons who may
be related parties in the sense that they may be relatives of the erstwhile
promoters were also debarred, despite the fact that they may have no business
connection with the erstwhile promoters who have been rendered ineligible by
section 29A.

The Supreme Court held that
the Code was not retrospective in application and hence, it was clear that no
vested right of the promoters was taken away by the application of section 29A. The Court held that it must be borne in
mind that section 29A had been enacted in the larger public interest and to
facilitate effective corporate governance. The Parliament rectified a loophole
which allowed a back-door entry to erstwhile managements in the CIRP. Hence,
the Court upheld the validity of section 29A. However, it held that the mere
fact that somebody happened to be a relative of an ineligible person was not
good enough to oust such person from becoming a resolution applicant, if he was
otherwise qualified. In the absence of showing that such a person was connected
with the business activity of the ineligible resolution applicant, such a person
could not automatically be disqualified. Hence, the expressions related party
and relative contained in the Code would disqualify only those persons who were
connected with the business activity of the resolution applicant.

Ultimately, the Supreme Court
upheld the validity of the Code in its entirety with a minor tweak for
relatives / related parties!

Case-2: Arcelor Mittal India Private
Limited vs. Satish Kumar Gupta, (2018) 150 SCL 354 (SC)

This decision pertained to
the bid for Essar Steel India Ltd. 29A of the Code contains several
disqualifications for bidders, one of which is that a person would not be
eligible to submit a resolution plan, if such person, or one acting jointly or
in concert with such person was disqualified. In this case, there were two
bidders – the erstwhile promoters and another resolution applicant. It so
happened that both the promoters as well as the resolution applicant were
disqualified by virtue of the various clauses of section 29A. Hence, both of
them modified their shareholding structures and reapproached the NCLT. The
issue finally reached the Supreme Court as to whether both these bidders were
eligible to bid?

The Court adopted a
purposive interpretation of the section and held that the legislative intention
was to rope in all persons who may be acting in concert with the person
submitting a resolution plan. The opening lines of section 29A of the Code
referred to a de facto as opposed to a de jure position of the
persons mentioned therein. This was a typical instance of a “see through
provision”, so that one was able to arrive at persons who were actually in
“control”, whether jointly, or in concert, with other persons. A wooden,
literal, interpretation would obviously not permit a tearing of the corporate
veil when it came to the “person” whose eligibility was to be
considered. However, a purposeful and contextual interpretation was necessary.
While a shareholder is a separate legal entity from the company where he holds
shares, for verifying the resolution plan, it is imperative to lift the
corporate veil and ascertain the constituents who make up the Company. The
Court upheld the doctrine of piercing the corporate veil as enshrined in LIC
of India vs. Escorts Ltd (1986) 1 SCC 264 and distinguished the legal
personality concept of Soloman’s case. It observed that a slew of
judgments has held that where a statute itself lifts the corporate veil, or
where protection of public interest is of paramount importance, or where a
company has been formed to evade obligations imposed by the law, the court will
disregard the corporate veil.

The Court held that seen
from the wide language used in the section, any understanding, even if it is
informal, and even if it is to indirectly cooperate to exercise control over a
target company, is included in the definition of persons acting in concert and
it is not merely restricted to cases of formal joint venture agreements. The
stage at which ineligibility is to be examined is when the resolution plan was
submitted by a resolution applicant. So long as a person or persons acting in
concert, directly or indirectly, can positively influence, in any manner,
management or policy decisions, they could be said to be “in control”. The
expression “control”, in section 29A, denotes only positive control, which
means that the mere power to block special resolutions of a company cannot
amount to control. The Supreme Court also examined the decision of the SAT in the case of Shubhkam Ventures vs. SEBI (Appeal No. 8 of 2009
decided on15.1.2010) which had taken a similar view.

The Court held that since
section 29A is a see-through provision, great care must be taken to ensure that
persons who are in charge of the corporate debtor for whom such resolution plan
is made, do not come back in some other form to regain control of the company
without first paying off its debts. One of the persons mentioned in section 29A
who is ineligible to act as an resolution applicant is a person prohibited by
SEBI from either trading in securities or accessing the securities market. The
Court held that it was clear that it was clear that if a person was prohibited
by a regulator of the securities market in a foreign country from trading in
securities or accessing the securities market, the disability would equally
apply.

Lastly, the court dealt
with the timeline for completing a CIRP. The time limit for completion of the
CIRP as laid down in section 12 of the Code is a period of 180 days from the
date of admission of the application by the NCLT. This is extendable by a
maximum period of 90 days only if 66% of the CoC approve of the same and the
NCLT agrees to the same. If no resolution takes place within such period of 270
days, then the only option is to liquidate the corporate debtor. The Supreme
Court held that the timelines mentioned in the Code are mandatory and cannot be
extended. Nevertheless, the Court also relied on a legal maxim, Actus curiae
neminem gravabit – the act of the Court shall harm no man. Accordingly, it
held that where a resolution plan is upheld by the NCLAT, either by way of
allowing or dismissing an appeal before it, the period of time taken in
litigation ought to be excluded.

Ultimately, the Supreme
Court held that both the applicants were ineligible under the Code but
exercising its special powers under Article 142 it granted one more opportunity
to them to pay off the NPAs of their related parties and then resubmit their
bids.

Case-3: Brilliant Alloys P Ltd vs. S Rajagopal, SLP
No. 31557 / 2018, Order dated 14-12-2018

Section 12A of the Code
allows for the withdrawal of an insolvency petition filed against a corporate
debtor if 90% of the Committee of Creditors (CoC) approve such a withdrawal.
However, Reg. 30A of the Insolvency and Bankruptcy Board of India (Insolvency
Resolution Process for Corporate Persons) Regulations, 2016 provides that an
application for withdrawal u/s. 12A shall be submitted to the resolution
professional before the issue of invitation for expression of interest. Hence,
a question arises as to whether if the debtor and creditor agree to it, can the
petition be withdrawn even after the expression of interest has been issued?

The Supreme Court allowed
the withdrawal and held, that this Regulation has to be read along with the
main provision section 12A which contained no such stipulation. Accordingly,
this stipulation could only be construed as directory depending on the facts of
each case.

Conclusion

The
Supreme Court has time and again stepped in to protect and augment the Code. It
has endeavoured to preserve the basic fabric of the Code and to uphold its
provisions. However, at the same time it has made amendments where it felt a
change was required. The Code is a complicated and intricate legislation dealing
with an extremely complex subject and hence, such an evolution is expected.
However, it is heartening to note that the Apex Court has been up to the
challenge and has done it in a very timely manner. The Supreme Court decisions
have acted as a booster shot in the arm to the Code. The success of the Code
can be best summed up by the Supreme Court’s observations in Swiss Ribbons
(supra), “The defaulter’s paradise is lost. in its place, the economy’s
rightful position has been regained.”

shailesh.kwebmaker

FAMILY SETTLEMENTS – PART I

INTRODUCTION

Maximum disputes
take place within family members rather than among strangers! Family fights have been popular in India right from the times of
“the Mahabharata”. The fight between the Kauravas and the Pandavas is something
which several Indian families witness on a regular basis. As family businesses
grow, new generations join the business, new lines of thinking originate,
disputes originate between family members and gradually it gives rise to a
family settlement / arrangement.

Corporate India has
witnessed a spate of family feuds in almost all major corporate houses. A family arrangement is one of the oldest
alternative dispute resolution mechanisms which is known. The scope of a family
arrangement is extremely wide and is recognised even in ancient English Law.
This is because the world over, Courts lean in favour of peace and amity within
the family rather than family disputes.
In the last about 60 years, a good part of the law relating to Family
Arrangement / Settlement is well settled through numerous court decisions
including several decisions of the Supreme Court. It is ironic that in a
country where a substantial part of businesses are run and owned by joint
families, there is no legislation which governs or regulates such family
settlements or arrangements. Hence, the entire law in this respect is case-law
made.

WHAT IS A FAMILY SETTLEMENT / ARRANGEMENT?

It is important to
analyse the basic principles governing family settlement involving properties
held mainly by individuals. Various Courts, including the Supreme Court of
India, have laid down the basic principles relating to family arrangements. Halsbury’s
Laws of England also lays down some important principles in this respect:

“The agreement
may be implied from a long course of dealing, but it is more usual to embody or
to effectuate the agreement in a deed to which the term “family
arrangement” is applied. Family arrangements are governed by principles
which are not applicable to dealings between strangers.

When deciding
the rights of parties under a family arrangement or a claim to upset such an
arrangement the court considers what in the broadest view of the matter is most
in the interest of the family, and has regard to considerations which, in
dealing with transactions between persons not members of the same family, would
not be taken into account. Matters which would be fatal to the validity of
similar transactions between strangers are not objections to the binding effect
of family arrangements. …………”

CONCEPTS AND PRINCIPLES OF FAMILY ARRANGEMENTS / SETTLEMENT

From the analysis
of the numerous judgments, such as Maturi Pullaiah vs. Maturi Narasimham,
AIR 1966 SC 1836; Sahu Madho Das vs. Mukand Ram, AIR 1955 SC 481; Kale vs. Dy.
Director of Consolidation, (1976) AIR SC, 807; Hiran Bibi vs. Sohan Bibi, AIR
1914 PC 44; Hari Shankar Singhania vs. Gaur Hari Singhania (2006) 4 SCC 658,
etc., the concepts and principles of family arrangement are summarised
below :

(a) A
family arrangement is an agreement between members of the same family intended
to be generally and reasonably for the benefit of the family either by
compromising doubtful or disputed rights or by preserving the family property
or the peace and security of the family by avoiding litigation or by saving its
honour.

(b) If the arrangement of compromise is one
under which a person, having an absolute title to the property, transfers his
title in some of the items thereof to the others, the formalities presented by
law have to be complied with since, the transferees derive their respective
title through the transferor. If, on the other hand, the parties set up
competing titles and differences are resolved by the compromise, there is no
question of one deriving title from the other and, therefore, the arrangement
does not fall within the mischief of section 17 read with section 49 of the
Registration Act, as no interest in property is created or declared by the
document for the first time. It is assumed that the title had always resided in
him or her, so far as the property falling to his or her share is concerned,
and therefore, no conveyance is necessary.

(c) A
compromise or family arrangement is based on the assumption that there is an
antecedent title of some sort in the parties and the agreement acknowledges and
defines what that title is, each party relinquishing all claims to property
other than that falling to his share and recognising the right of the others,
as they had previously asserted it, to the portions allotted to them
respectively. That explains why no conveyance is required in these cases to
pass the title from one in whom it resides to the person receiving it under the
family arrangement. It is assumed that the title claimed by the person
receiving the property under the arrangement had always resided in him or her
so far as the property falling to his or her share is concerned and therefore
no conveyance is necessary.

It does not mean
that some title must exist as a fact in the persons entering into a family
arrangement. It simply means that it is to be assumed that the parties to the
arrangement had an antecedent title of some sort and that the agreement
clinches and defines what that title is.

(d) A compromise by way of family settlement is
in no sense an alienation by a limited owner of family property. Once it is
held that the transaction being a family settlement is not an alienation, it
cannot amount to the creation of an interest. For, in a family settlement each
party takes a share in the property by virtue of the independent title which is
admitted to that extent by the other parties.

(e) In the usual type of family arrangement,
unless any item of property which is admitted by all the parties to belong to
one of them is allotted to another, there is no ‘exchange’ or other transfer of
ownership.

(f) By virtue of a family settlement or
arrangement members of a family descending from a common ancestor or a near
relation seek to sink their differences and disputes, settle and resolve their
conflicting claims or disputed titles once for all in order to buy peace of
mind and bring about complete harmony and goodwill in the family. Family
arrangements are governed by a special equity peculiar to themselves, and will
be enforced if honestly made.

The object of the
arrangement is to protect the family from long-drawn out litigations or perpetual strifes which mar
the unity and solidarity of the family and create hatred and bad blood between
the various members of the family.

A family settlement
is a pious arrangement by all those who are concerned. A family settlement is
not within the exclusive purview of Hindus, but applies equally to various
other communities also, such as Parsis, Christians, Muslims, etc.

(g) The term “family” has to be
understood in a wider sense so as to include within its fold not only close
relations or legal heirs but even those persons who may have some sort of
antecedent title, a semblance of a claim.

It is not necessary
that the parties to the compromise should all belong to one family. The word
‘family’ in the context of a family arrangement is not to be understood in a narrow
sense of being a group or a group of persons who are recognised in law as
having a right of succession or having a claim to a share in the property in
dispute. If the dispute which is settled is one between near relations then the
settlement of such a dispute can be considered as a family arrangement.

Even illegitimate
and adopted children would be covered within the broader definition of the term
“family”. Thus, a settlement arrived at in relation to a dispute between
legitimate and illegitimate children would also be covered within the ambit of
a family settlement. Children yet to be born may also be covered.

(h) Courts have made every attempt to sustain a
family arrangement rather than to avoid it, having regard to the broadest
considerations of family peace and security. It is not necessary that every
party taking benefit under a family settlement must necessarily be shown to
have, under the law, a claim to a share in the property. All that is necessary
is that the parties must be related to one another in some way and have a
possible claim to the property or a claim or even a semblance of a claim on
some other ground as, say, affection.

(i) The said settlement must be voluntary and
should not be induced by fraud, coercion or undue influence.

(j) The family settlement must be a bona
fide one so as to resolve family disputes and rival claims by a fair and
equitable division or allotment of properties between the various members of
the family. The bona fides and propriety of a family arrangement have to
be judged by the circumstances prevailing at the time when such settlement was
made.

(k) Even if bona fide disputes, present
or possible, which may not involve legal claims are settled by a bona fide
family arrangement which is fair and equitable the family arrangement is final
and binding on the parties to the settlement.

(l) It
is not necessary that there must exist a dispute, actual or possible in the
future, in respect of each and every item of property and amongst all members
arrayed one against the other. It would be sufficient if it is shown that there
were actual or possible claims and counter-claims by parties in settlement
whereof the arrangement as a whole had been arrived at, thereby acknowledging
title in one to whom a particular property falls on the assumption (not actual
existence in law) that he had an anterior title therein.

(m) The consideration for such a settlement, if
one may put it that way, is the expectation that such a settlement will result
in establishing or ensuring amity and goodwill amongst persons bearing
relationship with one another.

(n) The family arrangement may be even oral.

(o) A family arrangement might be such as the
Court would uphold although there were no rights in dispute, and if sufficient
motive for the arrangement was proved, the Court would not consider the
adequacy of consideration.

(p) If in the interest of the family properties
or family peace the close relations settle their disputes amicably, the Court
will be reluctant to disturb the same. The Courts lean strongly in favour of
family arrangements that bring about harmony in a family and do justice to its
various members and avoid, in anticipation, future disputes which might ruin
them all.

(q) The essence of a family arrangement is an
agreement on some areas of dispute by the family members. The agreement is for
the benefit of all the members. The ultimate aim of the agreement is to
preserve amity and goodwill within the family and avoid bad blood. However,
every document cannot be styled as a family arrangement. For example, if the
patriarch of a family makes a will under which he divides his personal shares
in various businesses and family properties among his family members, then the
same cannot be called a family arrangement as it is merely a distribution of
the deceased’s estate as per his will. One of the key requirements for a family
arrangement is the existence of a dispute or a possible dispute. Under a will,
there is no consideration for the acceptance of arrangement.

(r) A family settlement is different from an
HUF partition. While an HUF partition must involve a joint Hindu family which
has been partitioned in accordance with the Hindu Law, a family arrangement is
a dispute resolution mechanism involving personal property of the members of a
family who are parties to the arrangement. A partition does not require the
existence of disputes which is the substratum for a valid family arrangement.
An HUF partition must always be a full partition unlike in a family settlement.

(s) The question of whether a Muslim family can
undergo a family settlement has been the subject matter of various judicial
decisions. All of these have upheld the validity of the same.

(t) If one of the family members voluntarily
gives up his share in the joint family property, i.e., he styles a gift deed as
a deed of family settlement, then it is not a case of a valid family
arrangement. Any settlement which does not envisage a dispute cannot be a
settlement.

(u) If the terms of the settlement are clear and
unambiguous and are not impossible to perform, then the plea of practical
inconvenience cannot be raised at the stage of implementation. That factor must
be considered at the stage of entering into the settlement and not later.

(v) Principles governing a family settlement are
different from commercial settlement. These are governed by a special equity
principle where the terms are fair and bona fide taking into
consideration the well-being of the family. Technical considerations like the
law of limitation should give way to peace and harmony in the enforcement of
settlements. The duty of the court is that such an arrangement and the terms
should be given effect to in letter and spirit.

(w) Consideration is one of the important
aspects of any contract. Under the Indian Contract Act, any contract without
consideration is null and void. In the case of a family settlement, the
consideration is the giving up of mutual claims and rights and love and
affection. In India, the Courts do not enquire into the adequacy of consideration
as in the case of USA.

EXAMPLES OF A VALID / INVALID FAMILY SETTLEMENT.

(a) A father has started a
business in which he is later on joined by his two sons. All the assets and
business interests are jointly owned by the family. After several years,
disputes arise between the two sons as to who is in command and who owns which
property. This leads to a lot of bad blood and ill-will within the family. In
order to buy peace and avoid unnecessary litigation, the father, the two sons
and their families effectuate a family settlement under which all the
businesses and properties are equally divided between the two brothers’
families. This is a valid family settlement and would be recognised in a court
of law.

(b) A father and son are joint in business. The
son has played an active role in the business and in creating the wealth. After
many years, the two develop a bitter dispute over various issues with the
result that the son wants to opt out of the business. The son gives up all his
rights and interest in the family properties and in return for the same the
father pays him some money. This is a valid family settlement.

(c) A family settlement is purported to have
been executed by all the family members of a particular family. However, the married
daughter has not signed the family settlement MOU. In such a case, it cannot be
said that the family settlement would bind the daughter – Sneh Gupta vs.
Devi Sawarup(2009) 6 SCC 194.

WHAT PROPERTIES CAN BE COVERED?

From the various
principles laid down regarding valid family arrangements, it is clear that
valid family arrangements can relate to self-acquired properties, or other
properties of the family. It is neither a pre-requisite nor even a necessary
condition that a valid family arrangement must relate to ancestral property
only. An analysis of the various Case Laws, such as, H. H. Vijayaba,
Dowager Maharani Saheb, 117 ITR, 784 (SC); Narayandas Gattani, 138 ITR 670
(Bom); Ziauddin Ahmed, 102 ITR 253 (Gau); Shanti Chandran, 241 ITR 371 (Mad),
etc., reveals that even where the property involved in the family settlement
was other than an ancestral property, and the family arrangements were held to
be valid:

(a) The property involved was that of the
relatives of the partners of a firm, which firm had mounting creditors. These relatives conveyed their properties for
the benefit of the creditors of the firm to discharge debts incurred by the
firm. It was held that the conveyance amounted to a valid family arrangement
and hence was not exigible to gift tax.

(b) An oral family arrangement, made by father,
during his lifetime, under which he directed a larger share to one son out of
his self-acquired non-ancestral property was held to be a valid family
arrangement.

(c) The property involved was certain joint
family land. Major part of the property
was apportioned to the sons of the Karta. It was held that the transaction was
a family settlement.

(d) Payments promised under a family arrangement
to be made to the assessee’s son out of the assessee’s private property, was
held to be a valid family arrangement.

(to be continued…..)

shailesh.kwebmaker

Civil Suit or Criminal Case?

I. Introduction

How often
have we seen a commercial deal gone sour, be it, a joint venture, an
investment, a lending transaction, a trading transaction, etc.? In most of the
cases, the dispute is entirely civil in nature, i.e., the remedies for the
parties lies in arbitration or approaching a Civil Court. However, in some
cases, the aggrieved party also moves the Criminal Court on the pretext that it
involves some sort of cheating or forgery or such other economic offences. This
gives the dispute an entirely different twist and could lead to arrest of the
defendant. While a criminal complaint may be justified in certain cases, it is
not so always and sometimes it is used as a bargaining ploy to exert greater
pressure on the other party. The Bombay High Court in the case of Ramesh
Dahyalal Shah vs. State of Maharashtra and Others, Cr. Appln. No. 613/2016,
Order dated 6^th December 2017, had an occasion to consider
one such commercial dispute where the plaintiff also sought recourse to
criminal course of action.

II. Facts

2.1 One, Tushar Thakkar, the main respondent in
the suit, entered into negotiations with the applicant in the suit, based on
which he was to invest in a company owned by the applicant on the following
terms:

(a) A Shareholders’ Agreement was executed based
on which the respondent acquired a 45% stake in the company.

(b) The respondent was to be made the
Vice-Chairman of the Board of Directors of the company.

(d) He and the applicant were to jointly take all
important decisions of the company.

(e) The applicant submitted a Project Report
about setting up a plant at Karnataka. Based on the same, he obtained a bank
loan.

2.2 There were disputes between the respondent
and applicant based on which the respondent filed complaints alleging the
following:

(a) He was not called for General Body meetings.

(b) The Directors and financers of the company
were neglecting and avoiding him.

(c) They also did not keep their promises like
appointing him as the Vice Chairman, paying his monthly remuneration and did
not give him authority to sign all the cheques, nor did they inform the change
in share holding to the bank, nor allow him to jointly take decisions of the
company, etc. He suffered loss of goodwill also since he was not given a
distributorship as promised. Thus, he alleged that the company and the
applicant cheated him.

(d) Further, instead of installing new plant and
machinery at Karnataka, he alleged that second-hand machinery was installed
which was over 18 years old. It was alleged that this was done with the
connivance of the registered valuers and the bank. Moreover, the machinery was
over-invoiced, thereby getting more capital subsidy from the Government and
causing revenue loss.

The
respondent accordingly, claimed a certain amount from the applicant and various
cases for criminal breach of trust were made out against the applicant, the
registered valuers and the Government bank and accordingly, a case was
registered with the Economic Offence Wing, Mumbai.

2.3 Consequently, the accused filed a Writ
Petition before the High Court seeking quashing of the FIR registered with the
EOW on the grounds that a civil dispute has been given the colour of a criminal
complaint.

2.4 Thus, the question, for consideration before
the Bombay High Court was whether the dispute between the parties was of a
predominantly civil nature which was being converted to a criminal nature by
the respondent so as to recover his claims from the applicant?

III. Verdict of
Bombay High Court

3.1 The Court held that it was of the firm view,
that the matter was entirely a civil case and there was not even a prima
facie criminal case under the Indian Penal Code pertaining to cheating,
forgery of security / will, using a genuine document as forged, falsification
of accounts, etc. It held that there clearly was a breach of the terms and
conditions of the shareholders agreement.

3.2 The Court considered the following facts
before delivering its verdict:

(a) The respondent approached the applicant for
investing in his company.

(b) The terms of the Shareholders’ Agreement were
very clear.

3.3 The Court also considered various Supreme
Court decisions which have distinguished between a civil offence and a criminal
complaint. The Court relied on the Supreme Court’s verdict in Hridaya
Ranjan Prasad Verma vs. State of Bihar (2000) 4 SCC 168 wherein it was
held that the distinction between a mere breach of contract and the offence of
cheating is a fine one. It would depend upon the intention of the accused at
the time of inducement, which may be judged by his subsequent conduct. However,
every breach of contract would not give rise to criminal prosecution for
cheating unless fraudulent or dishonest intention was shown right at the
beginning of transaction. Thus, it was necessary to show that he had fraudulent
or dishonest intention at the time of making the promise. Based on that the
Court held that both parties had disputes regarding the Shareholders Agreement
and hence, it was clear that there was no cheating intention from the
beginning.

3.4 The fact that the dispute was first filed
before the Company Law Board showed that it was predominantly a civil dispute.
Accordingly, the High Court held that the main demand and grievance of the
respondent appeared to get back his sum invested. The Company Law Board also
held that there were no circumstances indicating fraud or mismanagement of the affairs
or other misconduct of the company.

3.5 The Court noted that two recovery suits were
also filed by the respondent before the High Court for recovering the amounts
claimed by him.

3.6 The Court also noted that the machinery
imported was verified by a Government empanelled valuer and this valuation was
seconded by a bank appointed valuer when complaints were made by the
respondent. The Court agreed with the Company Law Board’s Order that the banks
would not invite any adverse report to their own project report prepared by
their officers during the time, they decide to advance loans to a company.
However, in absence of any corroborative material, it became difficult to
disbelieve the reports of independent persons merely because they were
favouring the applicant or to infer connivance between them and the applicant
so as to implead them also along with consortium of banks as accused in the
case. The Court noted that the Government bank had specifically noted that,
after inspection and verification of the cost of the project, primary and
secondary research and analysis of the comparative cost estimates of reputed
suppliers (domestic and international) for plant and machinery purchased and
installed by the Company, the costs incurred by the Company were reasonable and
fair and in line with the market norms taking into account the
specification/configuration and suitability for the project.

3.7 The High Court noted that it was apparent
that the respondent had approached every forum available to him to raise his
grievances and after being unsuccessful there, now he was giving the colour of
criminal offence to this civil dispute by filing the complaint and levelling
the same allegations. Once he realised that the Government banks were not
supporting him, he implicated them also in the case along with the two valuers.

The Court
made a very telling observation that the intention of the respondent, therefore,
appeared to be to use the police machinery with malafide intention to recover
the amounts which he was unable to recover by civil mode. Therefore, it was a
sheer abuse of the process of law.

3.8 The Court concluded that a case which was
predominantly of civil nature had been given the robe of criminal offence that
too, after availing civil remedies. It relied on the Supreme Court’s verdict in
State of Haryana vs. Bhajan Lal
,1992 Supp (1) SCC 335, which held that where a criminal proceeding was
manifestly attended with malafide intention and/or the proceeding was
maliciously instituted with object to serve the oblique purpose of recovering
the amount, such proceeding needed to be quashed and set aside.

Again in Chandran
Ratnaswami vs. K.C. Palanisamy (2013) 6 SCC 740, it was held that, when
the disputes were of civil nature and finally adjudicated by the competent
authority, (the CLB in the present case) and the disputes were arising out of
alleged breach of joint venture agreement and when such disputes had been
finally resolved by the Court of competent jurisdiction, then it was apparent
that complainant wanted to manipulate and misuse the process of Court. In this
judgment, it was held that, it would be unfair if the applicants are to be tried
in such criminal proceeding arising out of the alleged breach of a Joint
Venture Agreement. It was further held that the High Court was entitled to
quash a proceeding when it came to the conclusion that allowing the proceeding
to continue would be an abuse of the process of the Court or that the ends of
justice required that the proceedings ought to be quashed. It relied on its
earlier decision in State of Karnataka vs. L. Muniswamy and Others,
(1977) 2 SCC 699 where it was observed that the wholesome power u/s. 482 of the Criminal Procedure Code, entitled the High Court to quash a
proceeding when it came to the conclusion that allowing the proceeding to
continue would be an abuse of the process of the Court or that the ends of
justice required that the proceeding ought to be quashed. The High Courts had
been invested with inherent powers, both in civil and criminal matters, to
achieve a salutary public purpose. A court proceeding ought not to be permitted
to degenerate into a weapon of harassment or persecution. In the case of Inder
Mohan Goswami vs. State of Uttaranchal, (2007) 12 SCC 1, it was held
that the court must ensure that criminal prosecution is not used as an
instrument of harassment or for seeking private vendetta or with an ulterior
motive to pressurise the accused.The issuance of non-bailable warrants involved
interference with personal liberty. Arrest and imprisonment meant deprivation
of the most precious right of an individual. Therefore, the courts had to be
extremely careful before issuing non-bailable warrants. Similarly, in Uma
Shankar Gopalika vs. State of Bihar, (2005) 10 SCC 336, it was held
that the complaint did not disclose any criminal offence at all, much less any
cheating offence and the case was purely a civil dispute between the parties
for which a remedy was available before a civil court by filing a properly
constituted suit. Thus, allowing the police investigation to continue would
amount to an abuse of the process of court and to prevent the same it was just
and expedient for the High Court to quash the same by exercising the powers
u/s. 482 of the Criminal Procedure Code.

In G.
Sagar Suri vs. State of U.P. and Others, (2000) 2 SCC 636 the Apex
Court held that a Court’s Jurisdiction u/s. 482 of the Criminal Procedure Code
had to be exercised with great care. In
exercise of its jurisdiction, the High Court was not to examine the matter
superficially. It was to be seen if a matter, which was essentially of civil
nature, had been given the cloak of a criminal offence. Criminal proceedings
were not a shortcut of other remedies available in law. Before issuing process
a criminal court has to exercise a great deal of caution. For the accused it
was a serious matter. Again in Chandrapal Singh vs. Maharaj Singh, AIR
(1982) SC 1238, the Court held that that chagrined and frustrated
litigants should not be permitted to give vent to their frustration by cheaply
invoking jurisdiction of the criminal court.

Further, in Indian
Oil Corpn vs. NEPC India Ltd, 2006 (3) SCC Cri 736, the Apex Court
cautioned about the growing tendency to convert purely civil disputes into
criminal cases. Also, in V.Y. Jose vs. State of Gujarat, (2009) 3 SCC 78,
it was held that a matter which essentially involved disputes of civil nature,
should not be allowed to be subject matter of a criminal offence, the latter
being a shortcut of executing a decree which was non-existent.

3.9 The High Court distinguished other cases,
such as, Parbatbhai Aahir vs. State of Gujarat, Cr. Appeal No.1723 / 2017
dated 4^th October, 2017 where allegations were made in the
FIR of extortion, forgery, fabrication of documents, utilisation of those
documents to effectuate transfers of title before registering authorities and
the deprivation of the complainant of his interest in land on the basis of
fabricated power of attorney. The Supreme Court held that these were serious in
nature and cannot be mere civil in nature and thus, the High Court was
justified in refusing to quash the FIR even though the parties decided to
settle the matter.

4.0 Accordingly, the Bombay High Court allowed
the applications and quashed and set aside the F.I.R.s registered with the,
Police Station, the investigation of which was taken over by Economic Offence
Wing.

IV. Conclusion

Several
civil cases are masquerading as criminal cases in the hope of getting the
accused to pay up. This decision would act as a defence to all such accused.
However, having said that it is unfortunate that one has yet go through the
process of the law and in several cases, it is only after the matter reaches
the High Court that relief is granted.Till then, the process of arrest, bail,
custody, etc., are an unfortunate episode in the life of the accused!

One can only
hope that the Police would frame some directions which would serve as a
reference point to all Police Stations as to how to handle a case which appears
to be of a civil nature. Instead of instantly arresting the accused, the Police
may first carry out a detailed investigation of the matter, hear both parties
and then reach a conclusion as to whether or not to arrest the accused.

shailesh.kwebmaker

Can A Step-Son Be Treated As A Legal Heir?

Introduction

The Hindu Succession Act, 1956 (“the Act”) lays down the
succession pattern for intestate death of Hindu males and females. In the case
of a Hindu male dying intestate, section 8 of the Act states that his Heirs
being relatives in Class I of the Schedule to the Act are entitled to his
estate. Covered amongst the Class I Heirs are his mother, widow, son and
daughter. A question which arises is that whether a step-son can be treated as
a Class-I Heir for the purposes of the Act? The Act does not define the term
son.

This issue was raised before the Bombay High Court in the Chamber
Summons No. 495/2017 issued in the case of Dudhnath Kallu Yadav vs. Ramashankar Ramadhar Yadav, Suit No.
2219/2000. Let us analyse this interesting issue.

Facts

A Hindu male coparcener, who was party to a suit for an HUF Partition,
died intestate. On his death, his heirs were brought on record as defendants in
the said suit. A step-son of the deceased (son of his wife from her earlier
marriage) also filed a claim for being taken on record as a defendant in the
said suit since he claimed that he too was a legal heir of the deceased. Thus,
this became the issue before the Bombay High Court as to whether a step-son can
be treated as a legal heir of an intestate Hindu under the Hindu Succession
Act?

Bombay High Court’s decision

It may be noted that section 2 of the Income-tax Act, 1961, defines a
child to include a step-child and an adopted child. Hence, for purposes of the
Income-tax Act, a step child would be treated as a relative of an individual.
Accordingly, reliance was placed by the step-son on the income-tax definition
to assert his claim of being a legal heir. The Bombay High Court held that the
claim was clearly preposterous. It is important to note that the controversy
involved a claim to the property of a male Hindu dying intestate. The Schedule
to the Hindu Succession Act refers to Heirs in ClassI within the meaning of
section 8 of that Act. A son was
included in Class I of the Schedule. The applicant, as son of the wife of the
deceased from her first marriage, could not claim as a son of the deceased. The
expression “son” appearing in the Hindu Succession Act did not include a
step-son. The expression “son” not having been defined under the Hindu
Succession Act, the definition of “son” under the General Clauses Act may be
appropriately referred to. In clause (57) of section 2 of the General Clauses
Act, the expression “son” included only an adopted son and not a step-son. It
held that even otherwise a “son” as understood in common parlance meant a
natural son born to a person after marriage. It is the direct
bloodrelationship, which is the essence of the term “son” as normally understood.
It also held that the Income-tax definition could not be imported into the
Hindu Succession Act.

The appellant relied on the Supreme Court’s decision in the case of K.
V. Muthu vs. Angamuthu Ammal (1997) 2 SCC 53, in which it had held that
“son” as understood in common parlance means as natural son born to a
person after marriage. It is the direct blood relationship which is the essence
of the term in which “Son” is usually understood, emphasis being on
legitimacy. In legal parlance, however, “son” has a little wider
connotation. It may include not only the natural son but also the grandson, and
where the personal law permits adoption, it also includes an adopted son. It
would appear that it is not in every case that a son who is not the real son of
a person would be treated to be a member of the family of that person but would
depend upon the facts and circumstances of a particular case. In this decision,
the Supreme Court held that a foster son would also be treated as a son. The
Bombay High Court held that this decision was not of help to the appellant. The
word “son” appearing in Class I of Schedule to the Act would include an adopted
son, but there was no warrant for including a step-son within the meaning of
the expression “son” used in Class I. The context in which the term “son” was
used in the Schedule did not admit of a step-son being included within it.

The Bombay High Court also referred to the Supreme Court decision in the
case of Lachman Singh vs. Kirpa Singh, 1987 SCR (2) 933 where the
Apex Court, in the context of another section of the Act, had held that a son
does not include a step-son. It held that the words ‘son’ and ‘step-son’ were
not defined in the Act. According to Collins English Dictionary, a ‘son’ meant
a male offspring and ‘step-son’ meant a son of one’s husband or wife by a
former union. Under the Act, a son of a female by her first marriage would not
succeed to the estate of her second husband on his dying intestate. Children of
any predeceased son or adopted son fell within the meaning of the expression
‘sons’.

However, if Parliament had felt that the word ‘sons’ should include
‘step-sons’ also, it would have said so in express terms. The Court noted that
it should be remembered that under the Hindu law as it stood prior to the
coming into force of the Act, a step-son, i.e., a son of the husband of a
female by another wife did not simultaneously succeed to the stridhana of the
female on her dying intestate. In that case the son born out of her womb had
precedence over a step-son.

Parliament would have made express provision in the Act if it intended
that there should be such a radical departure from the past. Hence, it
concluded that the word ‘sons’ in clause (a) of section 15(1) of the Act did
not include ‘step-sons’ and that step-sons did not fall in the category of the
heirs of the husband.

The Bombay High Court accordingly concluded that there was no merit in
the Applicant’s claim to be treated as a legal heir of the deceased defendant
and that he could not claim to defend the suit as such a legal heir.

Similar Verdicts

A similar view has been held by the Punjab & Haryana High Court in
the case of Mohinder Singh vs. Joginder Singh and Others, RSA No. 1350 of
1981, Order dated 5.12.2008 where the Court held that the heirs,
entitled to succeed to the estate of a deceased male Hindu were enumerated in
section 8 of the Hindu Succession Act, 1956 and did not include the son of a
wife from a previous marriage.Again, the Delhi High Court in Maharaja
Jagat Singh vs. Lt. Col. Sawai Bhawani Singh, I.A. NO.11365/2010, Order dated
05.12.2017 has also taken a similar view wherein it held that it was of
the opinion that the judgment of the Supreme Court in Lachman Singh’s case
(supra) was decisive on the question that step-children could not be
equated to children.

Again in Tarabai Dagdu Nitanware and Others vs. Narayan Keru
Nitanware, WP No. 14090 /2017 Order Dated 15.01.2018, the Bombay High
Court was faced with the issue of the succession pattern of a property of a
Hindu female who died intestate. She had received a property from her parents
and left behind her husband and his children from his earlier marriage. Thus,
she did not leave behind any biological children. The Bombay High Court held that step-children
are not children for the purposes of the Act and hence, it would be treated as
if she died issueless. Accordingly, the Court held that the property would
revert to her parents’ heirs and not devolve upon her husband and her
step-children.

Outcome

It may be noted that these decisions only impact a case of an intestate
succession. A testamentary succession, i.e., one where a Will is made is on a
different footing. A person can make a Will in favour of any stranger let alone
a step-child. Hence, when it comes to making of a Will, the above decisions
have no say at all and it is only when a person dies without making a valid
Will that these cases would apply. Also, the Income-tax Act is very clear and
specific in as much as section 2 expressly covers a step-child within the ambit
of the term child. The definition of the term relative found in the Explanation
to section 56(2)(x) of the Act, does not use the word ‘child,’ but instead uses
the phrase lineal ascendant or descendant of the individual. The Indian
Succession Act defines a lineal descendant in relation to a person as lineal
consanguinity which subsists between two persons, one of whom is descended in a
direct line from the other, as between a man and his son, grandson, etc.,
in the direct descending line. Hence, it stands to reason that since a child
includes a step-child, the phrase lineal descendant which would include a
child, would also cover a step-child.

The above judgements could also have a bearing on the concessional stamp duty provided for gift deeds under the
Maharashtra Stamp Act, 1958. A concessional duty of Rs. 200 is provided for
gifts of residential house / agricultural properties made to a son / daughter.
A view may now be taken that this would not include step-children. The cases
would also be relevant in the context of Agricultural Laws, such as, the
Maharashtra Agricultural Lands (Ceiling on Holdings) Act, 1961 which prescribes
a familywise ceiling on agricultural land and defines a family to include a son
of the agriculturist.

Conclusion

The issue of
whether a step-child can be considered to be a legal heir has always been a
vexed one. Considering the rise in the number of divorces and remarriages in
India, it may be worthwhile for the Parliament to have a relook at this issue
and consider amending the laws to expressly provide for succession by
step-children. There is some merit in the argument that after remarriage,
step-children should be entitled to be treated as legal heirs of their
step-father! However, at the same time, he would also be entitled to succeed to
the estate of his biological father since he continues to remain his legal
heir. Would he then become a Class I heir of two fathers? A fascinating
scenario indeed!!

shailesh.kwebmaker

Property Tax

Introduction

The Municipal Corporation
of Greater Mumbai (“BMC”) has revised the Property Tax system applicable in the
city of Mumbai. Instead of the earlier rateable value system which was in
force, the property tax was quite low and remained constant for years together.
However, the BMC now has a Capital Value System for levying property tax which
levies tax on the basis of the Stamp Duty Ready Reckoner of the property. This
system is expected to garner substantial revenue for the BMC as it would link
the values to more realistic figures instead of the rent capitalisation values
which were quite low.

Capital Value based System

Under the new system,
property tax is computed as a percentage of the Stamp Duty Ready Reckoner Value
of the property. Currently, the Reckoner of 2015 is adopted as the basis for
this purpose. This value would be adopted for a period of 5 years starting from
1-4-2015. Hence, the capital value would remain unchanged for 5 years, i.e.,
till 2020. After 5 years, as per the present system the Reckoner Rates would be
increased. However, if a building is constructed after 2015, then the Reckoner
rate of the year in which it was constructed would be adopted and would remain
in force till 2020. The rates for levying tax on this capital value depends
upon the Category of the property and are as follows:

– Residential
with metered water supply in City and suburbs @ 0.359%

– Residential
with un-metered water supply in City @ 0.775%

– Residential
with un-metered water supply in suburbs @ 0.552%

– Shops
/ commercial / industrial with metered water supply in City and suburbs @
0.880%

– Shops
/ commercial / industrial with un-metered water supply in City @ 1.90%

– Shops
/ commercial / industrial with un-metered water supply in suburbs @ 1.280%

– Open
Land with metered water supply in City and suburbs @ 1.630%

– Open
Land with un-metered water supply in City @ 3.518%

– Open
Land with un-metered water supply in Suburbs @ 2.370%

In
addition, the BMC has exempted houses in the city with a carpet area up to 500
sq. ft. from property tax. The BMC is also considering passing a proposal for
concession in property tax for houses measuring between 500 sq. ft. and 700 sq.
ft.

The BMC has announced that
soon, personalised property tax bills will be issued, to the people who own
flats in those buildings that have Occupancy Certificates (OCs). However,
property tax of the unsold flats and common areas, will be paid by the builder.
Under the earlier system, the BMC issued a common property tax bill to a
housing society, which then collected the tax dues from the flat owners and
paid the amount to the BMC. The main problem with the earlier system, was that
if a member failed to pay the property tax, then, all the members were
penalised. Now, in the personalised property tax billing system, this will
stop.

Valuation Rules

Valuation of Open Land

Capital Value of open land,
i.e., land which does not have anything built upon it and which is not
appurtenant to a building is computed as follows: Value of open land under the
Reckoner * Weightage of user category * FSI permitted * Area of Land. The
weightage factor is given separately in Schedule A to the Rules for different
types of properties.

Valuation of Building / Flat

The Rules for valuing a
building / flat / premises for computing property tax are as follows:

(a) Capital Value of a Building / Flat is computed
as follows: Value of building under the
Stamp Duty Ready Reckoner * Weightage of user category (depending upon whether
the building falls under Part II, III or IV of Schedule A) * Weightage for Age
of Building * Weightage for Floor factor for Lift * Carpet Area of Building.
The weightage factors are given separately in Schedule A for different types of
properties.

There are eight major steps
to using the Stamp Duty Ready Reckoner which are as follows:

(i) Find out the Village Number and Village
Name in which the property is located;

(ii) Ascertain the Zone and the Sub-Zone;

(iii) Find out the CTS No. of the property;

(iv) Determine the type of property, e.g.,
Residential, Office, etc.;

(v) Calculate the Carpet Area of the Flat /
Office. Stamp Duty is paid on the basis of Built-up Area but for Property Tax
the Carpet Area is adopted;

(vi) Find out the Market Value for the type of
Property;

(vii) Ascertain if there are any Special Factors
as prescribed in the Reckoner;

(viii) The
Market Value of the Property for Stamp Duty purposes = Adjusted Fair Market
Value * Carpet Area of the Property

(b) The following are the weightages given while
valuing a building or a flat or office:

(i) User category

(ii) Nature and type of building~ weights have been
assigned for open terrace, dry balcony, porch, etc.

(iii) Age of building

(iv) Floor factor of building with Lift

For
instance, in the case of a residential building the Schedule provides some
weightages in the following manner:

User Category of Building weightage to reckoner
Rate (UC)

Nature and Type of Building weightage (NTB)

Weightage for Age Factor of Building (AF)

Weightage for Floor Factor (FF)

Residential
user 0.50

RCC
1.00

0-5
years 1.00

Car
Park basement 0.70

Five
Star Hotel 1.00

Pucca
Building 0.70

5-10
years 0.95

Ground
Floor 1.00

Factory
1.25

Semi
permanent Building 0.50

10-15
years 0.90

1^st
-10^th Floor 1.00

Shops
and Commercial 0.80

15-20
years 0.85

11^th-20^th Floor – 1.05

20-25
years+ 0.80

21^st
-30^th Floor – 1.10

31^st
– 50^th Floor – 1.15

CV = BV *
UC * NTB * AF * FF * CA

Where

CV = Capital Value of a
Building

BV = Base Value of the
building as per the Stamp Duty Ready Reckoner

UC = User category of
residential, shop, open land, etc.

NTB = Nature and Type of
Building, i.e., RCC, semi-pucca, etc.

AF = Age Factor
Depreciation

FF = Floor Factor
Adjustment for Building with Lift

CA = Carpet Area

(d) Some examples of computation of the capital
value of a property is as follows:

Illustration
-1: Carpet area of a Residential flat of 1000 sq.ft.on the 5^th
floor of a RCC constructed building at Colaba. The building is 40 years old and
as per the Reckoner of 2015, it falls in Zone 1/3 where the rate for
residential building is Rs. 497,500 per sq. mt. The weightages of various
factors would be as follows:

Particulars

Weightage

Base
Value as per Reckoner (BV)

497,500

—

Carpet
area (CA)

1000 sq. ft / 92.90 sq. mt

Weightage
for User Category (UC)

Flat

0.50

Weightage
for Nature and Type of Building (NTB)

RCC Building

1.00

Weightage
for Floor Factor (FF)

5^th -10^th Floor

1.05

Weightage
for Age of Building (AF)

35-40 years

0.65

Thus, the Capital Value of
the Flat would be worked out as under:

497,500 * 0.50
*1.00*1.05*0.65* 92.90 =Rs. 1,57,71,807

On this Capital Value, the
Property Tax for a Residential property @ 0.359% would be Rs. 56,620 per year
or Rs. 4,718 per month.

Illustration-2:
Carpet area of an Office is 10,000 sq.ft. and is located on the 15th floor of a
RCC constructed building at Bandra Kurla Complex. The building is more than 10
years old and as per the Reckoner of 2015 it falls in Zone 31/72 where the rate
for an Office is Rs. 155,300 per sq. mt. The weightages of various factors
would be as follows:

Particulars

Weightage

Base
Value as per Reckoner (BV)

Rs.155,300

—

Carpet
area (CA)

10,000 sq. ft / 929.02 sq. mt.

Weightage
for User Category (UC)

Office

0.80

Weightage
for Nature and Type of Building (NTB)

RCC Building

1.00

Weightage
for Floor Factor (FF)

11^th – 20^th Floor

1.10

Weightage
for Age of Building (AF)

10-15 years

0.90

Thus, the Capital Value of
the Flat would be worked out as under:

155,300 * 0.80
*1.00*1.10*0.90* 929.02 =Rs. 11,42,67,230

On this Capital Value, the
Property Tax for an office property @ 0.880% would be Rs. 10,05,551 per year or
Rs. 83,796 per month.

Conclusion

The Capital value based
Property Tax system is based on the Ready Reckoner and hence, suffers from the
same flaws which the Reckoner is infamous for. However, a good part is that for
residential properties, only 50% of the reckoner rate is adopted. Nevertheless,
double rates for the same property, non-consideration of various factors, such
as, differences in areas / properties, condition of flats, etc., would
all apply even to this system.

shailesh.kwebmaker

FAMILY SETTLEMENTS – PART II

We
continue with our analysis of family settlements….

Capital Gains Tax liability

Taxation
is always a key consideration in any transaction more so in a family settlement
which involves properties / assets changing hands. Under the Income-tax Act,
any profits or gains arising from the transfer of a capital asset are
chargeable to capital gains tax. Thus, the primary condition for levy of
capital gains tax is that there must be a “transfer” as
defined in section 2(47) of the I.T. Act. This primary condition must be
satisfied before a tax levy on a capital gain may come in (C.A. Natarajan
vs. CIT, 92 ITR 347 (Mad)). A family arrangement, in the interest of
settlement, may involve movement of property or payment of money from one
person to another. Several judgments have held that there is no “transfer”
involved in a family arrangement. Therefore, there is no question of capital
gains tax incidence under a family arrangement.

The
following principles emerge from various cases:

(a) The transaction of a family settlement entered
into by the parties bona fide for the purpose of putting an end to the dispute
among family members, does not amount to a “transfer”. It is not also
the creation of an interest.

(b) The assumption underlying the family arrangement is that the
parties had antecedent rights in all the assets and this proposition of law
leads to the legal inference that the same does not amount to any transfer of
title. Section 47 of the Income-tax Act excludes certain transfers and since
the family arrangement is not held to be a transfer, it would not require to be
listed in section 47 unlike a partition which is a transfer and had to be
specifically excluded from section 45. Since section 45 can apply only to
capital gains arising from transfers, family arrangements fall outside the
scope of section 45, in view of the legal position that a family arrangement is
not a transfer at all.

(c) In a family settlement, the consideration for
assets received is the mutual relinquishment of the rights in joint property
and hence, cost of assets received on settlement is the cost to the previous
owner.

(d) Even a married daughter can be made a
party to a family settlement between her paternal family members – State
of AP vs. M. Krishnaveni (2006) 7 SCC 365. If she surrenders shares
held by her pursuant to a family arrangement, then it would not be a taxable
transfer – P. Sheela, 308 ITR (AT) 350 (Bangl).

(e) In B.A. Mohota Textiles Traders (P.) Ltd.
[TS-234-HC-2017(BOM)], the Bombay High Court held that any transfer of
shares by a company would not be the same as transfer by its members even if
the transfer was pursuant to a family arrangement between the family members.

While
on the subject of income-tax, one should also bear in mind the applicability of
the provisions of section 56(2)(x) of the Income-tax Act, 1961, which treats
the value of certain property received without consideration / adequate
consideration by an individual donee as his income. The section applies to any
gift of cash, immovable property and certain types of movable property, such
as, shares, jewellery, arts and paintings, etc. While a gift between
specifiedrelatives is exempt, gifts received from other relatives is taxable.
Here an issue which arises is that whether an asset received from a non-defined
relative under a family settlement could be taxed under this section? Is not
the settlement of disputes a valid consideration for the receipt of the asset?
In this respect, the decisions in the case of DCIT vs. Paras D Gundecha,
(2015) 155 ITD 180 (Mum) andSKM Shree Shivkumar vs. ACIT(2014) 65 SOT 232
(Chen) have held that property received on family settlement is not
taxable u/s. 56(2).

Whether Registration and Stamp Duty is required?

One
of the main issues under a family settlement is that whether the instrument
which records the family arrangement between the family members requires
registration under the Registration Act, if it affects the rights or interests
in immovable properties. A natural corollary of registration is the payment of
stamp duty. Stamp duty is leviable as on rates as applicable on a conveyance.
In most states in India, the stamp duty rates on a conveyance are the highest
rates. For instance, in the State of Maharashtra, the rate of conveyance on
immovable properties is 5%. As with all principles which involve a family
settlement, the law relating to registration of family settlement instruments
have been laid down by various Supreme Court and High Court decisions. There
are no express decisions on the issue of whether stamp duty is leviable.
However, the decisions rendered in the context of the Registration Act are
equally applicable. The principles laid down by some important cases, such as, Ram
Charan Das vs. Girja Nandini Devi (1955) 2 SCWR 837; Tek Bahadur Bhujil vs.
Debi Singh Bhujil, (1966) 2 SCJ 290; K. V. Narayanan vs. K. V. Ranganadhan, AIR
1976 SC 1715; Chief Controlling Revenue Authority vs. Shri Abdul Karim Ebrahim
Balwa, (2000) 102 BOMLR 290, etc., are as under:

(a) If a person has an absolute title to the
property and he transfers the same to some other person, then it is treated as
a transfer of interest and hence, registration would be required.

(b) A family arrangement may be even oral in
which case no registration is necessary. The registration may be necessary only
if the terms of the family arrangement are reduced to writing. Here also, a
distinction should be made between a document containing the terms and recitals
of a family arrangement made under the document and a mere memorandum prepared
after the family arrangement has already been made either for the purpose of
the record or for information of the Court for making necessary mutation. In
such a case, the memorandum itself does not create or extinguish any rights in
immovable properties and is, therefore, not compulsorily registerable.

(c) A family arrangement, the terms of which may be
recorded in a memorandum, need not be prepared for the purpose of being used as
a document on which future title of the parties are founded. When a document is
nothing but a memorandum of what had taken place, it is not a document which
would otherwise require compulsory registration.

(d) A family arrangement as such can be
arrived at orally. Its terms may be
recorded in writing as a memorandum of what had been agreed upon between the
parties. The memorandum need not be prepared for the purpose of being used as a
document on which future title of the parties be founded. It is usually
prepared as a record of what had been agreed upon so that there be no hazy
notions about it in future. It is only when the parties reduce the family
arrangement to writing with the purpose of using that writing as a proof of
what they had arranged and, where the arrangement is brought about by the
document as such, that the document would require registration as it is then
that it would be a document of title declaring for future what rights in what
properties the parties possess.

(e) If a document would serve the purpose of proof
or evidence of what had been decided between the family members and it was not
the basis of their rights in any form over the property which each member had
agreed to enjoy to the exclusion of the others, then in substance it only
records what has already been decided by the parties. Thus, it is nothing but a
memorandum of what had taken place and therefore, is not a document which would require compulsory registration u/s. 17 of the Registration Act.

(f) Registration is
necessary for a document recording a family arrangement regarding properties to
which the parties had no prior title. In one case, one of the parties claimed
the entire property and such claim was admitted by the others and the first one
obtained the property from that recognised owner by way of a gift or by way of
a conveyance. On these facts, the Court held that the person derived a title to
the property from the recognised owners and hence such a document would have to
satisfy the various formalities of law about the passing of title by transfer.

(g) If the document itself creates an interest
in an immovable property, the fact that it contemplates the execution of
another document will not exempt it from registration u/s. 17(2)(v) of the
Registration Act.

(h) If the family arrangement agreement is required
to be registered and it is not so registered, then the same is not admissible
as an evidence under the Registration Act in proof of the arrangement or under
the Evidence Act. However, the same document is admissible as a corroborative
of another evidence or as admission of the transaction, etc.

(i) The essence of the matter is whether the deed
is a part of the partition transaction or merely contains an incidental recital
of a previously completed transaction.

Reorganisation of Companies and Family Settlement

Very
often a Family Arrangement also seeks to make the family controlled companies
(whether public or private) as parties thereto so as to make the arrangement
(so far as it relates to family shareholdings in such companies) to be
effective and binding. The moot point here is, when there is a family
settlement which involves reorganisation of some of the properties of one or
more companies in the Group, whether the principles of family settlement would
be applicable even to such reorganisation?
In other words, when there is a transfer of a property from a company to
another company or to an individual as a part of a family settlement, whether
it would be correct to say that there is no transfer of the property, and
therefore direct and indirect taxes would not apply? There is not much support
on this aspect.

The
decision of Sea Rock Investment Ltd., 317 ITR 253 (Karn), dealt
with the case of a company owned by the family members which was made a party
to the family arrangement and which transferred shares held by it to various
family members. The company claimed an exemption from capital gains by stating
that it was pursuant to a family arrangement. The High Court disallowed this
stand by holding that a Company was a separate legal entity distinct from the
family members and hence, it was liable to pay tax on this ground.

In
the case of Reliance Natural Resources Ltd vs. Reliance Industries Ltd,
(2010) 7 SCC 1, the Supreme Court held that a Family Settlement MOU,
signed by the key management personnel of a listed company, did not fall within
the corporate domain. It was neither approved by the shareholders nor was it
attached to the demerger scheme which demerged various undertakings from the
listed company. The Court held that technically, the MOU was not legally
binding on the listed companies.

It
is true that a company is a separate legal entity and has an existence
independent from its shareholders and therefore, in normal circumstances, the
property of a company cannot be treated as that of its shareholders. However,
as pointed out above in various Court judgments, Courts make every attempt to
sustain a family arrangement rather than to avoid it, having regard to the
broadest considerations of family peace, honour and security. If the principles
of family settlement are confined only to the properties owned by individuals
and not to those owned through corporate entities, then it would not be
possible to use the instrument of family settlement for settling disputes between
the members of the family and it would be necessary to go through the
litigations. It is submitted that a relook may be needed at the above decisions
or else we could have a plethora of family disputes clogging the legal system.

STAMP DUTY ON OTHER INSTRUMENTS

Sometimes,
the parties to a family settlement may implement it through other modes, such
as a Release Deed, a Gift Deed, etc. Although these are not family settlement
awards in the strict sense of the term, but in the commercial sense they would
also be a part and parcel of the family settlement. Hence, the stamp duty
leviable on such instruments is also covered below.

Release Deed

A
release deed is a document by which a person relinquishes his share or interest
in a property in favour of another person. Under Article 55 of the Indian Stamp
Act, a release attracts duty at Rs. 5. However, various states have enacted
their own amendments to this Article. Earlier, a release deed attracted only
Rs. 200. For instance, in the state of Andhra Pradesh it is 3% of the
consideration or market value whichever is higher.

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
attracted 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 without consideration; in respect of ancestral
property and is executed by or in favour of the renouncer’s spouse, siblings,
parents, children, children 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. E.g., if a son releases his
share in a property acquired by his deceased father, so that his mother can
become the sole owner, it would not be a release of an ancestral property.

Similar
provisions are found under the Karnataka Stamp Act. The duty on a release deed
between family members, i.e., spouse, children, parents, siblings, wife of a
predeceased son or children of a predeceased child, is Rs. 1,000.

Gift Deed

Section
2(la) of the Maharashtra Stamp Act 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, which is “a transfer of certain existing movable or
immovable property made voluntarily and without consideration.”

An
instrument of gift not being a Settlement or a Will or a Transfer attracts duty
under Article 34 of Schedule-I to the Maharashtra Stamp Act. 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. Almost all States whether under
the Indian Stamp Act or under their respective State Acts levy duty at the same
rate as applicable to a Conveyance on the Market Value of the Property which is
the subject matter of the gift.

The
Maharashtra Stamp Act provides for a concession to gifts within the
family. Any gift of property to a family member (i.e., a spouse, sibling,
lineal ascendant / descendant) of the donor, shall attract duty @ 3% or as
specified above, whichever is less. However, if the gift is of a residential
house or an agricultural property and is to a spouse / child or a grandchild,
then the duty is a concessional sum of Rs. 200. In such a case, the
registration fees are also Rs. 200. Thus, there is a very large concession for
a gift of two types of properties, viz, a residential house or an agricultural
land made to six relatives. Both these conditions must be satisfied for the Rs.
200 concessional duty. For a gift of any other property made to any family
member, including these six relatives or for a gift of these two properties
made to any relative other than these six relatives, the concessional duty is
3% of the market value.

One
misconception often faced is the coverage of lineal ascendants – are females
covered? Can a grandmother, mother and son be treated as a lineal line? The
answer is yes, there is no requirement that lineal ascendancy or descendancy is
limited only to male members or to the same gender. All that is required is
relatives in a straight line. The definition under the Maharashtra Stamp Act is
not as wide as u/s. 56(2) of the Income Tax Act. The relatives covered u/s. 56
of the Income-tax Act but not under the Stamp Act are spouses of siblings;
uncles and aunts; spouses of one’s lineal ascendant / Descendant; lineal
ascendant /descendant of spouse and their spouses.

The
Karnataka Stamp Act, 1957 also provides for a concession for gifts
within the family of the donor. The duty is only a flat sum of Rs. 1,000 to Rs.
5,000 depending upon where the property is located. The definition of family
for this purpose means father, mother, husband, wife, son, daughter,
daughter-in-law, brothers, sisters and grandchildren of the donor.

The
Rajasthan Stamp Act, 1998 provides a concessional rate of 2.5% for gifts
in favour of father, mother, son, brother, sister, daughter-in-law, husband,
son’s son, daughter’s son, son’s daughter, daughter’s daughter. Further, in
case of gifts in favour of wife or daughter the stamp duty is only 1% or Rs. 1
lakh, whichever is less. stamp duty for a gift in favour of widow by her
deceased husband’s mother, father, brother, or sister or by her own mother,
father, brother, sister, son or daughter is Nil.

Epilogue

From
the above discussion, it would be obvious that our present laws relating to
income-tax, stamp duty, registration, etc., are inadequate to deal with family
settlement and, in fact, instead of facilitating the family settlement, they
may hamper it. This is all the more strange given the fact that a large number
of businesses and assets are family owned in India and hence, the possibility
of there being a family dispute is quite high! Hence, it is necessary to make
suitable amendments in various laws so as to facilitate family settlement.

shailesh.kwebmaker

E-Waste Disposal

Introduction
There’s a new smart phone in the market and we buy it. A new laptop is introduced and we grab it. Ever wondered what happens to the old models which we sell, scrap or simply trash (in cases where they are no longer working)? How do these electronic items ultimately get disposed off? E-Waste or electronic waste is one of the largest sources of waste being generated in today’s waste. With newer models and variants of all gadgets being launched every day, the useful life of a technological gadget has reduced drastically thereby significantly increasing the e-waste generated everyday. For instance, did you know that a study states that India is the 5th largest producer of e-waste internationally. According to the Ministry of Environment, Forest and Climate Change, Government of India, India generates over 17 lakh tonnes of e-waste very year with an annual growth rate of 5% every year. India has over a billion mobile phones and over 25% end up in e-waste every year. Recognising this, the Central Government has recently framed the E-Waste (Management) Rules, 2016.

Act
The mother statute for all things connected with the environment is the Environment (Protection) Act, 1986. It is a Central Act for the protection and the improvement of the environment. It defines environment pollution as the presence of any solid, liquid or gaseous substance in the environment in such concentration as may be injurious to the environment. Under s.3 of this Act, the Government has power to take all such measures as is necessary for protecting and improving the quality of the environment and for preventing environment pollution. This includes laying down Rules, procedures and safeguards for the handling of hazardous substances, i.e., any substance which by reason of its chemical properties is liable to cause harm to humans / living beings / environment, etc. Consequently, the Central Government has notified the amended E-Waste (Management) Rules, 2016(“the EWM Rules”) which shall come into force from the 1st October, 2016. The EWM Rules define e-waste to mean electrical and electronic equipment, in whole or in part discarded as waste by the consumer or bulk consumer as well as rejects from manufacturing, refurbishment and repair processes.

Coverage
The EWM Rules apply to various types of entities involved in the manufacture, sale, transfer, purchase, collection, storage and processing of e-waste or specified electrical and electronic equipment, including their components, consumables, parts and spares which make the product operational. Some of these entities are as follows:

(a)Manufacturer – a manufacturer of electrical and electronic equipment
(b)Producer – any person who sells (in any manner) manufactured / assembled / imported electrical and electronic equipment
(c)Bulk Consumer – Bulk users of electrical and electronic equipment, e.g., Governments departments, Public Sector Undertakings, banks, educational institutions, MNCs, partnership firms and companies that are registered under the Factories Act, 1948 and the Companies Act, 2013 and health care facilities which have a turnover of more than Rs. 1 crore or employ more than 20 employees. Althoughthis definition is not very happily worded, it appears that in order to be covered, firms and companies must satisfy the turnover or employee threshold. Registration under both Factories Act and Companies Act is not possible because in that case all firms would be excluded. Further, all IT companies which are the biggest generator of e-waste would be excluded, which cannot be the intention. This is an important definition since it casts certain reporting requirements on all bulk consumers.

(d)Dealer – buyer or seller of specified electrical and electronic equipment. The definition is wide enough to include offline and online dealers.

(e)Recycler – any person engaged in recycling and reprocessing of e-waste as per guidelines laid down by the Central Pollution Control Board.

(f)Consumer – one of the more important entities covered by the EWM Rules is a consumer which is defined to mean any person using any (and not just specified) electrical and electronic equipment but excludes bulk consumers. Hence, any individual or small office would also be covered if he/it is involved in manufacture, sale, transfer, processing or storage of specified electrical and electronic equipment. This is a very important step toward environment protection since it spreads the net very wide.

However, the Rules do not apply to a micro enterprise as defined in the Micro, Small and Medium Enterprises Development Act, 2006. This is interesting since while a micro enterprise is exempted, an individual end user is not!

The specified electrical and electronic equipment enlisted in the EWM Rules are computers, laptops, mobile phones, refrigerators, washing machines, air conditioners, televisions, printers, lamps containing fluorescent and other mercury. It even covers their components, consumables, parts and spares. Conspicuous by their absent from this list are several popular consumer electronic / electric equipment, such as, music systems, heating systems, irons, DVD players, cameras, etc. Whether this omission is intentional or an oversight is something which time will tell?

Responsibilities of various entities
The Rules lay down responsibilities for different entities in relation to e-waste:

(a)Manufacturer – must collect e-waste generated during manufacturing of any electronic / electrical equipment and channelise it for recycling or disposal. It must also maintain and file prescribed information returns. The Return includes information on category and quantity of e-waste generated / stored/ recycled/transported /refurbished /dismantled /treated and disposed. The channelisation could be to authorised dismantlers or recyclers.

(b)Producers – must provide an Extended Producer Responsibility (EPR) for equipment produced by them covering the channelisation of e-waste generated by their products. This could also be through dealers, collection centres, buyback arrangements, etc. EPR means a responsibility of any producer of electrical or electronic equipment, for channelisation of e-waste to ensure environmentally sound management of such waste. EPR may comprise of implementing take back system or setting up of collection centres or both and having agreed arrangements with authorised dismantler or recycler either individually or collectively through a Producer Responsibility Organisation. The Central Pollution Control Board will grant an EPR Authorisation for managing EPR with implementation plans and targets outlined therein.

Every producer must make an application to the Central Pollution Control Board for EPR Authorisation within a period of 90 days from 1st October, 2016. Any producer who has been refused an EPR cannot sell any electronic or electric equipment. This is a very important requirement for producers.

The producer must also create mass awareness of recycling. The Deposit Refund Scheme is another way of doing so in which the producer charges an additional deposit at the time of sale and returns the money back with interest when the product is returned for recycling. Various returns are to be filed by a producer also.

(c)Dealers – they can act as collection centres for producers’ products. They must ensure that e-waste generated is safely transported to recyclers or dismantlers.

(d)Refurbishers / Dismantlers / Recyclers – Their facilities must be in accordance with guidelines laid down by the Central Pollution Control Board. They must maintain records and also obtain an authorisation from the State Pollution Control Board.

(e)Bulk Consumers – bulkconsumers of specified electrical and electronic equipment shall ensurethat e-waste generated by them is channelised through collection centre or dealers of authorised producer or dismantler or recycler and they shallmaintain specified records of e-waste generated by them. Further, they must ensure that such end-of-life electrical and electronic equipmentare not admixed with e-waste containing radioactive material as are covered under theprovisions of the Atomic Energy Act, 1962.

(f)Consumers – the responsibilities for consumers of specified electrical and electronic equipment are the same as those enlisted above for bulk consumers, except that they do not have to maintain any records.

(g)Storage Responsibility – Every manufacturer, producer, bulkconsumer, collection centre, dealer, refurbisher, dismantler and recycler may store thee-waste for a maximum of 182 days and shall maintain arecord of collection, sale, transfer and storage of e-wastes and make these recordsavailable for inspection. The State Pollution Control Board can extend this period to 365 days if the waste needs to be stored for recycling or reuse. Transportation of e-waste must be carried out after maintaining the prescribed documentation.

Penalties
No specific penalties are provided under the Rules but they do provide that the manufacturer, producer, importer, transporter, refurbisher, dismantler and recycler shall be liable for all damages caused to the environment or third party due to improper handling and management of the e-waste. They further provide that the manufacturer, producer, importer, transporter, refurbisher, dismantler and recycler shall be liable to pay financial penalties as levied for any violation of the provisions under these rules by the State Pollution Control Board with the prior approval of the Central Pollution Control Board.

The Environment (Protection) Act, 1986 provides a general penalty for anyone who fails to comply with or contravenes any of the provisions of the Act, or its rules. The penalty is, in respect of each failure or contravention, an imprisonment of up to 5 years and / or a fine of up to Rs. 1 lakh. In case the failure or contravention continues, then there would be an additional fine which may extend to Rs. 5,000 / day during which such failure or contravention continues after the conviction for the first such failure or contravention. If the failure or contravention continues beyond a period of 1 year after the date of conviction, the offender shall be punishable with imprisonment for a term which may extend to 7 years.

Responsibilities of Companies
Companies would be either bulk consumers or consumers. Depending upon their classification they need to comply with the provisions of the Rules.

Conclusion
This is one more Regulation which businesses need to comply with. However, this is a welcome legislation which would help reduce the environmental pollution. One only hopes that this does not turn out into another means of red tapism and corruption.

shailesh.kwebmaker

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